The proposed capital gains tax could do the opposite of what it claims

by The Listener / 28 February, 2019
Photo/Getty Images/Listener illustration

Photo/Getty Images/Listener illustration

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Kiwis want a fair system, but the proposed capital gains tax risks creating more social enmity than it eliminates by smiting those who are not part of the problem.

Economists can’t agree, the governing parties can’t agree – even the expert panel making the recommendations couldn’t agree. No wonder New Zealanders are in turmoil over the proposed capital gains tax (CGT) regime.

What’s on the drawing board is to tax all but the family home, art, jewellery and cars upon sale. The plan is that some of that revenue would fund income-tax cuts favouring lower-income people. And the mooted aim is to redistribute wealth and steer us away from non-productive over-investment in property.

Yet, this polarising proposal risks creating more social enmity than it eliminates by smiting too many people who are not part of the problem.

Without fine-tuning or exemptions, the regime will treat some differently from others, disadvantaging small businesses, entrepreneurs and the self-employed for no apparent reason other than systemic elegance. Rather than promoting productivity and urgent investment in New Zealand’s economy, it sends a message that you’re better to invest passively in US-listed shares, which are subject to a lower fair dividend rate of tax, and pour your earnings into a big, expensive, tax-exempt family home.

That the Prime Minister is already fretting aloud about the disproportionate potential effect on small-business owners and farmers suggests the Government is going cool on the idea.

CGT advocates still hail it as a magic bullet in wealth redistribution and housing affordability. Yet, in reality, most other developed countries that already have long-standing CGT regimes suffer the same perceived inequalities and distortions as our housing market: vaulting prices, over-investment, rental scarcity and affordability issues. There’s no evidence a CGT would fix those problems here when it hasn’t prevented them elsewhere. Rather, rental owners, already facing pending new regulations, predict an exodus from the already-stretched sector.

The tax’s bedding-in phase could be long and destabilising, and global uncertainties could change our economic landscape overnight – trade wars, a housing-price slump – rendering a CGT instantly less relevant, or even creating a new capital-loss avenue. There are no minimum cut-in thresholds and no discounts for inflation.

Nor will the tax simply hit perceived fat cats. The mums and dads who have invested in an extra property as a nest egg are rational, not greedy or antisocial. Property has for decades been among our most-dependable sources of investment.

Home-based businesses would be hit. KiwiSavers would be hit. Those who make farmland more productive would be hit. So would those sub-letting their own homes or taking in tourists to help pay the mortgage. These are not the tax-dodging moneybags most people would like to see caught in a tighter net.

It’s useful to ask: what do most taxpayers resent? Aside from tax dodging by multinationals, it’s property speculation, land banking and shoddy rentals. Targeting them more specifically would be popular, and fair. Yet, putting work-a-day New Zealanders – including the 2,926,821 KiwiSaver members – through the CGT upheaval will introduce new and arbitrary inequalities, without necessarily making a dent in existing problems, such as housing affordability. Even the Tax Working Group concedes it’s not going to make much difference to affordability and could actually raise median rents, already up $40 a week under this Government, making it more difficult to save for a first home.

Given Beehive smoke signals, the Government seems likely to decide the small and medium business sector, our biggest employers, cannot bear this extra burden; that farmers, too, already face enough new pressures from pending environmental imposts. With the housing shortage and now a second tranche of higher standards, the rental sector may also be judged too vulnerable to the extra deterrent of a CGT.

Then there’s New Zealand First. It has never supported a CGT, and, with National, has the numbers to stop it in its tracks. At 3% in the latest opinion polls, it has little weight to throw around. But it will be tempted by the irresistible rhetoric of “saving” New Zealanders from an “envy” tax.

The Government won’t risk a coalition bust-up. More likely it will nut out a more-targeted alternative, including extension of the existing “bright line” minimum-ownership period, a tax on undeveloped land and perhaps even a variation on Britain’s  Labour-mooted “mansion tax”.

Debate is always worth having. And New Zealanders want a fair, well-designed tax system. But no Government can afford political capital losses on this scale for a policy that might not even work.

This editorial was first published in the March 9, 2019 issue of the New Zealand Listener.

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