Pains and gains of tax reform

In New Zealand, talk about tax quickly turns into talk about politics. Sometimes the political hyperbole becomes absurd, as in Opposition leader Simon Bridges’ claim that the introduction of a capital gains tax (CGT) would be nothing less than an assault on the Kiwi way of life. Will we fight them on the baches?

It’s all about framing. Bridges is evoking a Kiwi dream in which ordinary mums and dads save up to buy the kind of modest baches that were long ago replaced by milliondollar beach homes, or struggle to get a rental property, perhaps doing their own renovations on weekends.

Why, the thinking goes, should they not make a few extra bucks out of years of sacrifice?

The reality is somewhat different.

Rather than the ordinary Kiwi battler, it’s the wealthiest 10 per cent who would overwhelmingly be affected by the proposed CGT. It is bizarre to hear hokey lines about the mythical Kiwi way of life trotted out by politicians who own as many as eight properties.

Putting aside the rhetoric for a moment, the Tax Working Group’s Future of Tax report, of which the CGT is only one part that inevitably grabbed nearly all the attention, is about fairness. Is our tax system as fair as it could be? If your definition of ‘‘fairness’’ boils down to the reduction of income inequality, then the answer is no.

The report quotes OECD figures that say ‘‘New Zealand’s tax and transfer system reduces income inequality by less than is the case in Australia or, on average, across OECD countries’’.

Although comparisons are difficult, New Zealand appears to be the eighth least equal out of 35 OECD countries.

As the report notes, ‘‘A sense of fairness is central to maintaining public trust and confidence in the tax system. This is because a system that distributes the costs of taxation in a way that is perceived to be unfair will generate resentment and undermine social capital.

The inconsistent taxation of capital gains is unfair.

It means that people earning the same amount of income can face quite different tax obligations, depending on whether their income is earned as capital gains or, say, as wages.’’

It’s hard to argue with that. But we have heard little about fairness since the report was released on Thursday. And given the realities of politics, it is likely that any such talk would be largely hypothetical. In other words, is there any real chance that a CGT will come to pass?

There is a conundrum in that tax fairness and redistribution models that would benefit the majority of New Zealanders are still seen as political suicide. Again, this is about messaging. Voters would have time to evaluate a CGT, which would start no sooner than 2021.

But before that can happen, NZ First has to be accommodated, and that will be the hard part. NZ First leader Winston Peters is on record opposing a CGT.

His reluctance could give Labour, which seems lukewarm about much of the Future of Tax report, an excuse to quietly let it drop.

Conversely, a capital gains tax could be just the issue Peters needs to reassert his party’s independence ahead of an election.

Either way, politics will trump tax reform once again.

Is there any real chance a CGT will come to pass?