What Should We Read into the Apparent 'Volte-face' on the Capital Gains Tax, and What Now?

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The commentators at the funeral of the CGT were almost as numerous as those at its birth and death. A regular line up of doomsters while the voices of those supporting the tax, the renters, unions and Greens, were hardly heard at all.

The NZ Property Investors Federation, NZ Real Estate Institute and the mysteriously-funded NZ Taxpayers' Union said it would make renting and the housing situation worse; business said small business would go bankrupt; Federated Farmers talked of a drop in agricultural production, and lifestyle block owners cried foul. National, ACT and the right wing think tank NZ Initiatives made predictable noises, with National later claiming credit for its demise.

Much quoted right winger journalist Duncan Garner said a proposed CGT was another sign that government had no real policy or understanding of the economy, adding to other instances of ineptness: the KiwiBuild fiasco, backdowns on free trade, no impacts on child poverty, homelessness, carbon emissions worse than before, GDP down and a slowing economy. Abandon hope all ye who enter here.

Many said the CGT was too complicated and costly to run.

Left-winger Mike Tween in the Daily Blog wondered why government had instructed the Tax Working Group to come up with something tax neutral when what we needed is major tax reform to create more fairness, equality and government revenue. The answer, he said, could be a Wealth Tax on those earning over $5m. He thought that while the CGT was fairer than the present tax system it would have done little to reduce inequality.

His Wealth tax would target those with assets over $5million, and he would borrow funds from the ACC (that now stand at $40 billion, far more than the expected $3 billion from the CGT) to fund urgent health, education, welfare and housing needs. He also looked forward to learning what will happen to the other recommendations of the TWG — perhaps there is some hope there.

Others wondered why Jacinda had ruled out a CGT "as long as she led government." The younger 18-35 year old age group was generally more in favour of the tax, being more concerned about fairness and more affected by costly housing to buy and rent — and their increasing number would favour Labour in the 2020, 2023 and 2026 elections.

Winston Peters has long opposed a CGT, and the need for his support was probably one reason for Jacinda's about face. But NZ First relies heavily on the support of older voters, most of whom probably opposed the CGT, and the population proportion of the older voters is shrinking. Given present sentiment and the changing demographics Labour could rule alone in 2020, and Winston and even NZ First may then be a thing of the past. At present they are polling under the 5% threshold.

So why did Jacinda rule out a CGT after 2020, and what does it say about her government? To hold the coalition together? To distance herself from the Greens? To claim the middle ground and win the next election? Who knows,  but in doing so she abandoned a plank of Labour policy  that's been there —sort of—  for over three elections.

Stacey Kirk said Labour had abandoned its values for pragmatism and made a call to win the next election. Others said Simon Bridges was now safe as National's leader. Judith Collins would let him lose the 2020 election and then make her bid for power.

Duncan Garner wrote that the CGT was Jacinda's "socialist nirvana". Nothing could be further from the truth. 

Jacinda is a centralist in the Labour camp and there is little that can be called socialist in any of its policies. Welfare socialism, yes, but nothing more. Her step down on the CGT will not stop the rich getting richer, do nothing to help the poor, or re-establish NZ as the relatively egalitarian society it once was. But neither  would the tax which even the left-leaning Daily Blog saw as costly, inefficient and unlikely to achieve its stated aims. Their ideas on where government should go now are outlined below.

As for the media in this sorry tale, it has been the undertakers, grave diggers and pall bearers. All it didn't do was cry over the corpse. I see this as an abuse of its influence. They should be there to inform and explain, and their comments should be fair and balanced. 

Too often their information was dis-information; they did nothing to really explain the tax to their readers and viewers; they interviewed the "man in the street" who only knew what he had read in the media about the tax, and the small businessmen who thought it could adversely affect them.They were light on alternatives. This left the wider stage to the organized "doomsters." The media's selection of source and comments revealed their biases.

Media freedom indeed! Defending our democracy!  More like media licence. Why are we subjected to the likes of Mike Hosking and Duncan Garner?  Is there no one there who can give us fair, informed commentaries?  

But perhaps I'm a little too harsh. After  the announcement two commentators never known to support Labour offered their explanations, and for once, I think they're correct.

Heather du Plessis-Allan argues  "Labour gave up on this policy long ago. They euthanised it through neglect. If they really wanted to introduce a capital gains tax, they would've fought for it."

And David Slack in Stuff writes of our  supposedly "transformational government... yeah, nah, not going to do that."

The left-leaning The Daily Blog doesn't regret the death of the tax. They thought it unworkable and unlikely to achieve its goals.   Dr Susan St John asks What now after the CGT?  Read the full article here or the extract below.

-- ACW

                   "Grasping the chance to to it better"

EXTRACT. So the Government’s CGT decision is not a ‘get out of jail free card’. They must now examine ways that would be much more effective in achieving government’s aims.  For starters the existing bright lines tests must be strengthened, extended and properly policed to catch short-term speculation. Then policies need to be enacted to extract more tax from the undertaxed owners of expensive real estate and residential land.

While two million dollars was spent on devising the rejected CGT almost nothing has been spent on the simpler yet feasible approaches of the risk-free rate method (RFRM) or net equity approach. This requires each person’s total equity in housing and residential land after deducting registered mortgages, to be aggregated and treated as if it was earning interest, say in a bank term deposit. The implied taxable income would then be taxed annually along with other income.  Such a net equity approach has an inherent logic, investment in property should return at least as much as having the same money in the bank.

A fixed per person exemption of say $1 million would mean that the vast majority of homeowners have nothing to pay and the young are protected.  Unless they have been the beneficiaries of inheritance, younger owners of high-priced homes are likely to have mortgages that reduce their net equity to below the exemption ($2 million for a couple).

Compared to intractable CGT problems, objections to the RFRM such as Landlords will “just load up their properties with debt”, or “put their houses in a family trust” or “can’t pay if there is no cash flow” are easily dealt with.  Valuation is simple: the rateable values are readily available and regularly updated. No daunting valuation day is needed and over time, if house values increase for whatever reason, the rateable value will increase and it with it the tax base of net equity.   

Compared to a CGT, the housing stock would be better used, and the overuse of scarce resources to build larger and more elaborate homes discouraged.  Property would stop looking like a sure-fire way to investment riches. Empty houses currently held for capital gains might actually be rented. Houses might be fixed up to keep good tenants. Accountants’ fees to manipulate the profits and loss of renting along with negative gearing would disappear. Good landlords may find in fact, they are rewarded with higher returns than before, meaning there is no justification for rent rises.

The government must use the time it has bought to show it really is serious about workable alternatives to the unworkable capital gains tax that is now dead and buried. If they use the 2020 year to prepare well they could then be ready to act decisively and confidently in the first months of the first year of their second term.