Let’s have a talk about that tax
The developed world agrees capital gains tax is not a bad idea
I’ ve spent a bit of time around theatres over the years. Backstage, there’s an iron- clad rule you would break only if you had a death wish. In the labyrinth of corridors and dressing rooms, there is to be no mention of “the Scottish play”.
Utter the word “Macbeth” and you’ll face the ire of your entire company. And be marched outside to spit, curse and spin around three times before you’ll be allowed to enter the theatre again.
The term “capital gains tax” appears to be the political equivalent, although the spitting, cursing and spinning appears to be the domain of the Government, rather than the party that dared mention it — Labour.
Throughout the campaign the idea of a tax on capital gains has been presented by Bill English, Steven Joyce et al as something scarier than a family of pissed- off whitetails tangled up in one’s bedsheets, but the conversation around the issue hasn’t been particularly nuanced or enlightening. What’s needed is a civil conversation that doesn’t amount to scaremongering, although there’s fat chance of that happening in the middle of an election.
It has been suggested that the main problem is that Labour hasn’t set out what exactly would and would not be taxed, promising instead to assemble a working group of experts and act on its recommendations.
This way of thinking presents the issue as if the exemptions would be more important than the overall policy, which seems counterintuitive when you consider that a strong tax system ( such as GST) is one that has few exemptions. It also overlooks the possibility of an income tax reduction to accompany any new levies.
The idea of a working group is not, in itself, a bad one. If Labour was looking for an example to support the idea that it’s better to leave economics to the economists, it was handed to the party on a platter this week by none other than Steven Joyce. The bruise from the lashings of at least five economists and a slew of financial and political experts who suggested that the Finance Minister had made a simple accounting error is likely to smart for a while, but the real insult to injury is that Joyce demonstrated perfectly why Labour would be wise to entrust the tax discussion to a working group of experts. That, and the unfortunate way that the bullets he fired at Labour over supposed financial ineptitude somehow ended up lodged in his own foot.
The capital gains tax is also not a bad idea — and that’s not my own inexpert supposition, it’s the general consensus of the developed world. Few developed nations do not have a capital gains tax of some sort. The simple fact is that capital gains are income like any other, and currently those families who are locked out of the property market, for example, pay tax on all of their income, while those who own property don’t.
But it’s not just housing that has been swept up in this debate. The family farm and the family boat have been floated as emotive examples of income- generating assets that would supposedly be terrible to tax ( although I wonder how many everyday Kiwi families would own either). The reality — that farms are also businesses, that a capital gains tax would amount to only a small percentage of the profit earned from the sale of any asset and that any government implementing an unreasonable capital gains tax would be swiftly turfed out of office — has been lost in the tide of crocodile tears.
The capital gains argument has, however, been framed largely in the context of the housing crisis, and indeed a 2009 paper prepared by the Inland Revenue Department and Treasury seemingly foreshadowed our current situation. The lack of capital gains tax means that property is an “attractive asset for those on higher tax rates to acquire”, it remarked. “It can thus produce a bias in who owns land.”
The unfairness in this situation is obvious: whereas high- earning families have the opportunity to turn their income into assets that will increase in value until they are eventually sold for an untaxed gain, lower- earning families are locked out of any such possibility of getting ahead. Speculators, who have been buying up property in vast swathes in this largely unregulated environment, have been laughing all the way to the bank, while young families have been saddled with cripplingly high rents driven both by a low supply of housing and the greed of some landlords who’ve turned having somewhere to live into a punitive business.
It’s highly unlikely that a capital gains tax would solve the housing crisis on its own, although it would remove the tax incentive for people to become property speculators. The drivers of the crisis are far more complex, and include factors such as access to cheap capital offered by banks, people’s belief in the continued elevation in property prices, and scarcity.
The idea that a capital gains tax would kill the property market is farcical. The same argument was put forward when the Government scrapped tax depreciation on investment buildings in 2012 and look what’s happened since.
What a capital gains tax could do, however, is give a government the resources to invest in low- cost and social housing for those at the sharp end of poverty. With more than 40,000 people homeless in New Zealand, it’s difficult to argue against the need for the Government to step in and do something drastic.
The reality is this: if we take a 15 per cent capital gains tax as an example, a house sold for $ 1 million — let’s say for a profit of $ 500,000 — in Auckland would incur a capital gains tax of $ 75,000. The seller would still pocket $ 425,000 of profit. Hardly chump change.
The real question is one of fairness. Untaxed capital gains benefit only a few at the expense of many. I’ve even heard the situation described as welfare for the wealthy.
Is that really fair?