Michael Cullen’s poisoned chalice
Sir Michael Cullen, the former deputy prime minister, knows a thing or two about politics, and capital gains tax. Before the Tax Working Group chairman began explaining the recommendations of its report, which could represent the biggest tax reform since the 1980s, he made a telling, if rather weird, statement.
During his 17 years as Labour finance spokesman (including nine as finance minister), he never made a single statement supporting a capital gains tax (CGT). Why? ‘‘Not all good ideas get mentioned in politics, because not all good ideas are politically popular,’’ he said.
Despite appreciating that support for a tax on capital gains is, at best, mixed, the proposals released on Thursday did not appear to be designed with political palatability at the front of mind.
The much-anticipated report on tax reform not only proposes a broad-based CGT, it includes few of the concessions of other countries. As well as being charged at the marginal tax rate of the individual, there would be no discount for inflation.
Rather than making assets liable for capital gains tax only after they are sold, the tax will apply after a designated ‘‘valuation day’’, meaning every asset covered by the tax will have to be valued by a given date.
This is easy for land and buildings, but much harder for businesses. While Finance Minister Grant Robertson and Revenue Minister Stuart Nash wrote to the working group suggesting some form of exemption for small businesses, the idea was rejected.
Beyond the proposal for CGT, the report gives ideas for a string of environmental taxes, such as congestion charging, waste levies and charges for water extraction.
The sweetener is that what is raised in terms of revenue from the tax could be largely offset by cuts in income tax, meaning that many taxpayers will be net winners from the changes. However, according to the report, tax cuts would probably only come into effect in 2023.
While the report is not in any way binding, the Government is left with a serious headache. It has already said it would not make a substantive response to the report until Labour, NZ First and the Greens had formed a consensus on the way forward, at some point in April.
‘‘I’m not ruling anything in or anything out today,’’ Robertson said just after the report was released.
For the next two months, the Government will be unable to meaningfully build the case for wide-ranging tax reform, which may not be popular, but will be open to all forms of attacks from the Opposition.
Cullen urged the public to ‘‘calm down and have a sensible discussion’’ about CGT, which he quickly admitted was probably a ‘‘forlorn hope’’. He was right.
‘‘This Tax Working Group report is an assault on the Kiwi way of life,’’ National leader Simon Bridges boomed. ‘‘I will fight it every step of the way.’’
Cullen reckons that the mood may have changed for CGT, but he does not have to sell it.
The Government has a broad range of opinions on many issues, and taxes on capital will be far from an exception. NZ First leader Winston Peters has made numerous statements in the past against CGT, and while he was sticking to the Government line on Thursday, it seems foolish to believe his party will not use its position to demand concessions.
Robertson and Nash gave little away, but the finance minister made one telling point. Buried in papers released as part of the report was a short report from three members of the working group who refused to support the bulk of the recommendations, but made one suggestion.
BusinessNZ chief executive Kirk Hope, with former Inland Revenue deputy commissioner Robin Oliver and former Bell Gully partner Joanne Hodge, said the cost and complexity of a CGT outweighed the benefit. But the report did acknowledge that there ‘‘might be a case’’ for taxing residential rental property.
Asked about the minority view, Robertson said it was ‘‘probably worth looking at it the other way around’’. Rather than being the minority, Robertson said, the argument for focusing on residential rentals was something the entire working group agreed on.
Even supporters of CGT usually acknowledge that, while it raises revenue and usually taxes the rich rather than the poor, it also tends to discourage the type of investment we want: namely saving and entrepreneurialism.
Building a case for taxing the owners of rental properties is much easier, even if a shortage of housing will not be solved by any new tax.
Cullen has given the Government proposals for a CGT that he obviously never believed the public wanted.
Labour should give serious consideration to pushing for a more modest but still meaningful reform which achieves something, and has fewer of the drawbacks, but without risking the type of political fallout he was too smart to commit himself.