Scoop Election 08: edited by Gordon Campbell

On the capital gains tax debate

July 7th, 2011

Illustration by Tim Denee – capital gains tax
Illustration by Tim Denee – www.timdenee.com

The fact that, at last, one of New Zealand’s major parties has embraced the kind of tax on capital gains common in every other developed country on the planet marks a turning point in the country’s economic history. If they were smart, National’s leadership should embrace the idea as being compatible with a centre-right agenda. Among other things, a capital gains tax could enable income taxes to be lowered, by broadening the base of what is to be counted as taxable income.

Labour’s idea is not exactly revolutionary in any respect. Apparently, Labour will be advocating a capital gains tax set at only 15% – half the top income tax rate. That’s hardly draconian, and such a policy could enable the centre-right to argue for reducing income tax rates overall… but no, the Key government seems to have locked itself into knee jerk rejection mode at this point.

Here’s another centre-right maxim that a capital gains tax fits like a glove : the level playing field. There is a fairness issue involved. Why should income earned by the sweat of one’s brow – via wages, and productive labour – be taxed, while income derived from accumulated capital gain (often via financial or property speculation) is exempted?

As mentioned above, almost every other developed country treats this bizarre distinction that we continue to perpetuate – a ‘yawning gap’ in our tax system as the Australian economics reporter said on RNZ this morning – as intolerable. For decades, New Zealand has suffered the consequences.

Yet it isn’t simply a fairness issue, important though that principle may be. There is also an efficiency argument, even before we get to the revenue gathering aspect. The lack of a capital gains tax has been a vastly inefficient hole in our policy framework in that it allows ( or even encourages) investment money to be sucked into housing speculation and other unproductive activities, and not into the enterprises likely to grow the economy.

In addition, having a capital gains tax would also free the NZ government somewhat from its narrow dependence for its sources of revenue on income tax and on GST – both of which, as we have seen recently, are highly subject to the downswings of the business cycle. Again, National could be embracing a capital gains tax as being entirely compatible with a long term strategy of channeling our scant supply of domestic investment capital into less parasitic forms of activity.

Instead, what we’re getting from the government are the usual scare tactics of fear and ignorance – that this is a tax and spend, grow the government measure etc etc. Laughably, concern is also being expressed that the capital gains tax net will be spread widely beyond housing speculation and into other forms of capital gain.

Excuse me – isn’t that supposed to be the advantage of GST that it is wide ranging and allows for no exemptions? Similarly, the capital gains tax needs to be wide ranging in order to deter tax engineering and avoidance. A buck is a buck is a buck, as the Aussie reporter told RNZ – and the income earned should qualify for its fair share of tax, regardless of the method by which it has been earned.

BTW, taxing capital gains would also take some of the speculative steam out of house prices, long term – and not leave New Zealand vulnerable to the next economic upswing, and the next inevitable speculative housing bubble that will come in its wake. Ditto for farm prices. In essence, Labour is on a potential game changer here, going into the election – especially if, as indicated, it can successfully counterpose the capital gains tax to the government’s policy of state asset sales.

All in all, it is quite a potent argument to put before voters. Do you continue to vote for a programme that (a) consists of income tax cuts that disproportionately benefit the rich (b) exempts their speculative activities from tax almost entirely, while taxing your wages (c) cuts back social services and (d) sells high earning state energy companies to make up the shortfall…? Or do you keep the assets (and reap the dividends and strategic planning benefits involved) and treat the income earned from speculation and capital gain in the same way that you treat the income earned from wages? Who’s the freeloader here, and who is intent on defending the freeloader?

As an aside, the capital gains tax debate has followed exactly the same trajectory as the climate change debate. Back in the 1990s, when the Greens were calling for action on climate change that issue was seen as being marginal, naïve, extremist stuff. It is now mainstream politics here and elsewhere, and the climate change deniers have been consigned to the sidelines.

Four years ago, when the Greens first began to publicly advocate a wide ranging capital gains tax, action along those lines was similarly seen as desirable – for decades, New Zealand’s lack of a capital gains tax has been lamented by economists – but too idealistic, in that the Beltway wisdom had decided it would be politically impossible to implement. Too many powerful forces have stood to lose too much for such a tax to ever be seriously contemplated.

Well, that ground has now shifted – and only partly because of the patent failure of the old neo-liberal prescriptions still being followed by the current government. Labour has picked up the Greens policy position on capital gains and plans to run on it in November as a defining issue.

Finally, we have the potential for an election that can be waged on policy – and not on whether John Key or Phil Goff is the more likeable fellow on television. For an international perspective on capital gains and a darn good primer on the subject, this morning’s RNZ Morning Report interview with Sydney Morning Herald economics correspondent Peter Martin is absolutely essential listening.

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Content Sourced from scoop.co.nz
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