The political ifs and buts of a capital gains tax
By Richard Harman (author)
Even Sir Michael Cullen hinted at his own caution about a Capital Gains Tax yesterday.
"I had a brief period as finance spokesperson for the Labor Party for some 17 years," he said at the launch of the report of the Tax Working Group (TWG).
“You will not find a single comment by me publicly advocating a capital gains tax.
“You might draw your own conclusions from that fact.”
Sir Michael’s comments came at a press conference in the Treasury briefing room across the road from the Beehive.
Finance Minister Grant Robertson who usually makes the trek across the road for Treasury releases like Economic and Fiscal Updates, remained in the Beehive, venturing only as far as its Theatrette to put his reaction to the report on the record.
But he didn’t just put physical distance between himself and the report; his press conference was riddled with qualifications. Within the first minute, he had twice said: "if there is legislation."
"We're taking a measured approach to the report taking our time to study the recommendations and understand the consequences of them,” he said.
“We will now be working to achieve a consensus among the parties that make up the government, and we will work together among those partners over the coming weeks.”
A measure of how challenging that might prove to be came during Question Time in Parliament yesterday when National's Deputy Leader, Paula Bennett, reminded NZ First Leader, Winston Peters of some of his previous statements opposing a capital gains tax.
These included gems like: "They won't work in this country. They won't work in any other country. They never have worked.”
But there wasn’t actually anybody yesterday in Parliament who expressed any real enthusiasm for the Tax Working Group’s proposal.
And if there was scepticism about the Capital Gains Tax, there were raised eyebrows in the Beehive at some of the Environmental Tax proposals which had already been specifically ruled out by the coalition agreement between Labour and NZ First.
The TWG included Victoria University academic, Marjan van den Belt who is an ecological economist and describes herself (on the TWG website) as a sceptic of economic growth as the primary societal goal.
Presumably under her influence, the group has come up with a series of environmental tax proposals. Aside from the Capital Gains Tax, the environmental section is the most comprehensive in the report.
They have proposed:
- A reformed Emissions Trading Scheme (ETS) and recommended it be made more ‘tax-like’ – specifically, by providing greater guidance on price and auctioning emissions units to raise revenue --- as recommended by the Productivity Commission.
- That all emissions face a price, including from agriculture, either through the ETS or a complementary system.
- A greater use of tax instruments to address water pollution and water abstraction challenges if Māori rights and interests can be addressed.
- Further development of tools and capabilities to estimate diffuse water pollution to enable more accurate and effective water pollution tax instruments.
- The introduction of input-based tax instruments, including on fertiliser, if significant progress is not made in the near term on implementing output-based pricing measures or other regulatory measures.
- Expanding the coverage of the Waste Disposal Levy.
- Congestion pricing.
- Allowing employers to subsidise public transport use by employees without incurring fringe benefit tax.
Some of the big stuff in this list --- the use of tax to deal with water pollution and bringing agriculture into the ETS --- was ruled out in the coalition agreement.
So Robertson simply kicked those issues into the future.
"What I think the section on environmental taxation does is provide some interesting insight into the way you might make decisions in the future about those issues," he said.
In other words, nothing is going to happen in the current term of the government.
The proposals run counter to what Environment Minister, David Parker is currently doing which is proposing to use regulatory powers under the Resoruce Management Act to clean up rivers.
Sir Michael shrugged this off.
"I don't see what David's saying around using the RMA as inconsistent with also using some economic security around water and nitrates, and I'm not sure that his mind is entirely set one way or the other.,” he said.
"We're not a government. We're an independent working group.”
As to the proposal for what would be a fertiliser tax, Sir Michael, shrugged again: “Well it's a recommendation.”
"You know there's a two-word answer to no doubt for a number of these recommendations that may come from the government.
“And again I go back to processes.
“One should not assume our recommendation is what's going to happen.”
And that comment might also well apply to the Capital Gains Tax as well.
Cullen has presented the Government with what might be called a stripped down racing version of a capital gains tax, applying only to non-residential property and residential property that is not a family home; farms (but with substantial exceptions); small businesses and financial investments.
Along with the family home, personal art collections, boats and “household durables” would also be exempt.
It would be levied at marginal income tax rates, and the capital gain would be based on a value increase from a "Valuation Day" sometime after the legislation was passed. There would be no adjustment for inflation.
But even this short list poses political challenges; most notably farms.
Speaking on "The Country" on Wednesday Winston Peters said, “I can’t imagine any government anywhere in the world would apply a capital gains tax to the farming community.”
Peters emphasised the inter-generational dimension to farm ownership.
And NZ First MP Mark Patterson has recently said NZ First wanted family farms protected from a capital gains tax.
There is an avenue already to achieve that in the TWG report with a proposal that farms that were bequeathed to family members would have their capital gains tax liability rolled over and it would not be payable unless or until the farm was finally sold.
Federated Farmers have raised a host of technical questions about how the tax might apply and pointed out the difficulties of defining what is a family home on a farm or lifestyle block.
Opposition Leader Simon Bridges, called the TWG report an attack on the Kiwi way of life. He particularly referred to the capital gains tax on baches.
But it didn’t take long for Sir Michael to find a response to that.
“We don't all have baches,” he said.
“We never did.
“Nobody around where I lived in Christchurch had a bach.
“The ordinary middle-income middle class average hardworking Kiwi does not own an expensive bach at Omaha Beach.”
This is where National is vulnerable; if Labour decides to portray the capital gains tax as a tax, not on middle New Zealand, but on the very wealthy who currently pay a disproportionately small share of total taxation.
The TWG report said the distribution of net wealth was concentrated in the top 20% of households and was even more concentrated when owner-occupied housing was excluded.
“This indicates that the distribution of untaxed capital gains is also likely to be quite skewed,” the report said.
“Evidence from countries with capital gains taxes indicates that high-income people derive a much greater share of their income from capital gains than low- and middle-income people.”
And Sir Michael pointed out that the rates of income tax paid in New Zealand were very flat; thus the tax system did very little to redistribute income and contribute to fairness.
“The bottom decile pays twenty-three per cent of their income in tax the top decile pace 31 per cent of their income in tax.,” he said.
“ Our tax system by international standards is very flat indeed.
“It's only the welfare payments which actually provide any redistribution.”
That will be the core of the Government’s argument in favour of a tax; that our current tax system is unfairly stacked in favour of the wealthy.
One senior Minister has told POLITIK that he believed that any campaign in favour of a capital gains tax should not be afraid to use the language of class warfare.
But the Government also controls the Budget, and though the capital gains tax will be slow to bring in the eventual $6 billion a year the report promises it could generate by 2030, it nevertheless offers opportunities to reduce personal income tax.
The TWG, sticking to the fairness theme, proposes they could start by raising the threshold below which no tax is paid on income. Obviously, that would have the greatest impact on low paid workers.
Sir Michael offered a cynical response to the question as to whether it would be wise to pay out tax cuts before the capital gains tax revenue had really started to flow.
“Wisdom does not always operate when you're thinking about possible ballot box implications," he said..
Ultimately, though, this report is all about the Capital Gains Tax, and the big question now is first whether Robertson can get Peters on side to support it and then whether the Government as a whole judges that the public might support it.
Only then would we be likely to see legislation introduced into the House, to be passed before the election but implemented probably in April 2021.
Yesterday, Robertson wasn't making any promises.
“I'm not ruling anything in or anything out today,” he said.
“What I would say is again that there is a package here or series of packages that have been put forward and we have to look at what will help us create the fairest possible tax system on what we can generate consensus around. “