Ardern should break capital gains tax pledge
In 2010 Prime Minister John Key did something unusual, promising to do what National governments rarely do: lift taxes. It seems like an age ago, but as part of the government’s plan to protect the economy against the lingering impacts of the global financial crisis, Key and his finance minister Bill English lifted GST from 12.5 to 15 per cent.
In any other year, the left and centre would probably welcome a plan to lift taxes, acknowledging the need to grow the government accounts. But in 2010 the GST rise came with a catch – it would help pay for tax cuts for the richest people in the country (who also happen to be the National Party’s base). Top tax rates were cut for the highest income earners, and company taxes were cut for business owners.
It was a transparent sop to the richest, and it came at the expense of the poorest. Low and middle-income earners spend relatively more of their income on goods and services attracting GST – for example, food – than high-income earners. That meant the increase in GST was disproportionately a tax increase for the poor.
So, in the end, this isn’t so unusual for a National government. Wealth isn’t so much trickling down as it is bubbling up. The rich get richer and the poor get poorer, etc. But what was particularly controversial is that, two years earlier, Key appeared to rule out any increase to GST, telling a press conference in 2008 that ‘‘National is not going to be raising GST. National wants to cut taxes, not raise taxes’’.
Politicians breaking their promises is hardly new. As the old joke goes, it doesn’t matter who you vote for because a politician always gets in. But in all seriousness, it’s admirable if politicians can change their thinking in response to new circumstances. Perhaps it did make sense to lift GST in 2010, when it didn’t make sense in 2008.
This seems particularly apt for incumbent Prime Minister Jacinda Ardern, who famously – or infamously – ruled out introducing a capital gains tax under her leadership. It was a very precise promise because, two years later, Ardern’s finance minister, Grant Robertson, implemented an almost capital gains tax, extending what’s called the bright-line test to capture investment properties sold within five years.
It was an urgent and necessary change, but perhaps falling short of a comprehensive capital gains tax. The bright-line test applies only to residential investment property, such as rental homes, bought and sold within a specific time period. This will help put a leash on property speculators, taxing their gains on income and capital at 39 per cent.
Yet a comprehensive capital gains tax applies when you sell an asset that’s increased in value over any time period. Those assets can include shares, artwork, boats, jewellery, and small businesses. In 2014 and 2011, Labour was promising just such a comprehensive tax, but setting the rate at a modest 15 per cent and building in a good number of exceptions (such as for artwork or furniture or retirement savings payouts).
In 2014, Labour was estimating that this comprehensive capital gains tax would realise $1 billion a year by 2021. In the context of the pandemic, this seems like a luxurious number, helping bolster the government accounts when public debt levels are (rightly) increasing. This would help with further investments in the health system, education system, the productive sectors of the economy and so on.
And yet it remains off the table. Perhaps Ardern should, like Key before her, take stock of the circumstances and acknowledge that tax changes are necessary to protect the Government and the public’s economic and social position.
Those tax changes could take the form of a comprehensive capital gains tax. Or they could take the form of changes to the company tax rate or, say, to the income tax thresholds (the $70,000 threshold seems like it could be increased for some relief for middle-income earners). This wouldn’t just help strengthen the Government’s Covid position, but it would also possibly help take some of the heat out of inflation and ensure that everyone – the wealthy included – is paying their fair share of tax.
New Zealand risks developing an increasingly regressive tax system in the absence of major reforms, some of which have been suggested by the Government’s own tax working group and welfare working group. John Key, of all people, perhaps provides the political model for it.
It’s admirable if politicians can change their thinking in response to new circumstances.