Capital gains tax: Gamble that may not be worth the trouble

A friend of mine who is mischieviously libertarian in his political leanings recently sent me a copy of Atlas Shrugged by Russian-born American author Ayn Rand.

The 1957 novel is said to be her most extensive statement on objectivism, a theory that’s been influential in libertarian and conservative circles ever since.

The story is set in a dystopian United States where wealthy citizens refuse to pay increasingly high taxes and shut down their vital industries. In doing so the characters hope to prove that destruction of the profit motive leads to the collapse of society.

I don’t know if he’s ever read Rand (and I wouldn’t recommend it, she’s a terrible writer) but Rob McLeod, the Australasian boss of accountancy firm EY, is definitely a laissez-faire capitalism kind of guy.

As the 2014 election campaign starts to warm up he has been turning his attention to the issue of a capital gains tax (CGT) and Labour’s unwavering resolve to introduce one.

McLeod, author of the 2001 McLeod Report which advised against a CGT, points out that accountants aren’t necessarily agin the tax as it would mean more work for them.

However, the extra fees notwithstanding, his position on the matter stands. He has in fact further developed his theories to a level only he and a handful of Treasury wallahs are likely to grasp.

Taxation policy is an esoteric subject at the best of times, and a chat with McLeod involves a degree of mental athletics not usually required with one’s morning coffee.

Suffice to say his argument goes something like: ‘‘ CGT is a great big gamble, because it relies on investors taking risks with their money for uncertain gain.’’

Labour’s arguments in favour of a capital gains tax may be more accessible but they are equally theoretical. The Centre-Left party plays the fairness card, arguing that the well-off get free increases in the value of their assets while those who rely entirely on their income face the tax burden.

Fair enough. The trouble is that implementing a capital gains tax comes down to practicalities far removed from any philosophical standpoint. CGT is complex and would inevitably give rise to a host of exemptions. It involves paying out deductions in the bad times when many capital assets lose value, and it distorts investment behaviour.

And because it involves the actions of private investors, calculating how much additional revenue it may bring in is largely a finger in the wind exercise. Likewise its ultimate effect on the Kiwi property market is unknown – Australia has a CGT and still experiences housing bubbles.

Implementing a capital gains tax to address inequality is a feelgood policy. It’s unlikely to be effective and its greatest achievement may be to line the pockets of legal and accounting professionals.

With New Zealand’s shiny economic recovery practically on the cover of Rolling Stone, Labour is forced to play up the tale of haves and have-nots to gain political traction.

However, as McLeod remarks, tax policy isn’t about achieving perfection but picking the least ugly solution.

There are already checks and balances on property investors – buying and selling for capital gain attracts existing CGT, and the current Government has been further nipping at the heels with measures such as removing the ability to claim depreciation.

When it comes to a comprehensive capital gains tax it doesn’t matter whether you are of the persuasion that the owners of capital should pay for that privilege, or if you’ve managed to get through an Ayn Rand novel. It won’t be a cure-all, and it may turn out to be an uglier solution than most.