Is capital gains tax a hill that Labour is willing to die on?

Tuesday, 15 January 2019

Sir Michael Cullen forecast in 2018 that it might then be 'now or never' for a capital gains tax.

OPINION: 'All I want for Christmas,' a festive National MP told me at the press gallery party back on December 19, 'is a capital gains tax.'

As strange as it may sound, it was not a surprise.

Another senior National MP said earlier on the same day that they were 'praying' for a capital gains tax to be put before Parliament in 2019.

To be clear, National most certainly does not want a capital gains tax.

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If it decides to push ahead with a capital gains tax, Labour's leadership must be braced to continuously make the case for it, or risk having National define what it means for Kiwis.

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Quite the opposite. Leader Simon Bridges has promised to repeal it if National forms a government after the 2020 election, as part of a sweeping 'no new taxes' pledge.

But as the release of the Tax Working Group's final report approaches, National's caucus appears to be crossing its fingers and hoping that Labour picks up and runs with whatever the group's chairman, Sir Michael Cullen, proposes.

Not because National expects to like what will be proposed, or even because the party wants Labour to be the party to take what many see as a responsible step, extending New Zealand's existing partial CGT.

National wants Labour to go into the next election proposing a capital gains tax because the Opposition believes such a move will be something close to political suicide.

After close to a decade in the wilderness, during which Labour continuously preached about the inherent unfairness of New Zealand's tax system, the largest Government party must ask itself: is this a hill worth dying on?

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Although supporters tend to oversimplify the case, there is a strong, possibly compelling, argument for capital gains to be taxed.

If a person is taxed for what they earn from their work, it seems only reasonable that they also be taxed for what they receive from their assets.

Equality writer Max Rashbrooke went so far as to suggest capital gains tax should be called a 'fairness tax'.

But the problem is, no-one is proposing the type of tax which this implies.

Labour has already ruled out a capital gains tax on the family home, and an inheritance tax. Both exemptions have massive implications for how much the tax would raise and the extent to which the wealthy can manage to avoid it.

Both are also political promises which have implications for whether the tax is, indeed, fair.

Is it fair that I enjoy whatever capital gains I receive from my home, tax free, while my friends are taxed on savings to raise a deposit for a home?

Whatever is promised by the Tax Working Group report will leave Labour in an invidious position.

Capital gains taxes are inherently complicated and New Zealand's existing tax system is designed around not having one in place.

The best way to implement one would be to develop it slowly and rigorously, with little political input, to minimise unintended consequences.

But though the Government might prefer not to talk about how a tax would work in practice, National will force it to.

During the election campaign in 2017, Labour was constantly on the back foot amid an intense campaign by National's 'let's tax this' attack advertising.

Jacinda Ardern was eventually forced to rule out major changes before the 2020 election, but, according to pollsters, the damage was done.

Unless Ardern and Finance Minister Grant Robertson are ready to continually make the case for whatever changes are proposed, the Government's proposed capital gains tax will be whatever National says it is.

Pressure for exemptions from any changes to the existing regime on gains, beyond what have already been announced, will be intense.

Although further exemptions will only undermine the efficiency and revenue of the tax, the horse-trading of coalition politics makes it almost inevitable.

So far NZ First has remained silent on its policy on capital gains tax, but if Winston Peters can be convinced to support it at all, he is certainly unlikely to do so without extracting some tangible win for the party to promote to his supporters.

A refusal to exempt baches will certainly upset wealthy New Zealanders, who were unlikely to vote Labour anyway, but also thousands of cashed-up bogans and others who certainly might.

All of this comes amid high uncertainty about what a capital gains tax would raise in the coming decade, in an environment where low interest rates have pushed asset valuations to levels which may not be sustainable, especially if the economy slows.

For all of its belief that there is a major problem in the tax system which could be fixed through a change in mindset, the reality is likely to be dawning that the tax will be politically challenging unless major changes are made, which will undermine how much is raised as well as how much 'fairer' the tax system will become.

It will also be so easy for its opponents to demonise that the Government must wonder whether it's worth the risk of trying.

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