By Bernard Hickey
Labour threw what appeared to be a grenade into the debate around tax this week, but a Capital Gains Tax is not the economic shock or the disaster that John Key has portrayed it as.
The Tax Working Group spent much of 2009 considering various tax reforms for income, land and capital that would change the structure of our economy. This group of experts from academia, the bureaucracies and the accounting industry recommended a capital gains tax, possibly a land tax, a GST increase and income tax cuts.
They argued distortions in the tax system in favour of property were a driving factor in the boom in house and land prices from 2002 to 2007. The scale of the damage shouldn't be under-estimated. The surge in foreign debt that came with this boom drove up our currency and hammered our export sector lower. It accelerated the need to borrow even more and sell more assets.
This boom created a generation of very wealthy property and farm owners, yet created a legacy of foreign debt that young New Zealanders will eventually have to repay. It also drove house prices in our biggest cities beyond the reach of those young New Zealanders. It's no surprise many are choosing to leave for higher wages and the prospect of a clean start elsewhere.
So many of these experts were deeply disappointed that Prime Minister John Key decided to cherry pick the income tax cuts and the GST and leave the capital and land taxes on the shelf.
He was effectively saying he had no real intention of addressing the structural imbalance that is killing our economy. Changes to rules for depreciation and Loss Attributing Qualifying Companies (LAQCs) made a difference, but only at the margins.
In the wake of the collapse of finance companies and the slide lower in bank deposit rates, investors are just as keen to put their money into housing in the hope of making tax-free capital gains. House prices are rising again, particularly in Auckland. Since the Prime Minister ruled out a capital gains tax or land tax in February 2010, housing loans have risen by another NZ$3 billion to NZ$172 billion. The currency has risen from 70 USc to 83 USc, in part because of the foreign borrowing and relatively higher interest rates caused by this pro-property structural imbalance.
The Prime Minister's refusal to consider a land or capital gains tax reflects a political decision to favour a generation of property owners over the long term interests of not just the economy but those young New Zealanders who don't own property and will inherit the debts of their parents. His refusal to take advice from his economic experts on the property sector is at least consistent. He is doing the same thing by refusing to even consider delaying the age of NZ Super. The Prime Minister is not governing for the nation. He is governing in the interests of property owners and the elderly who created our crushing debt load.
Labour's decision to try to break the political impasse should be welcomed, but it doesn't go far enough. A capital gains tax will be complicated and raise a relatively small amount, although it will fire a potent shot across the bow of property investors. The best way to raise revenues and make a long term difference is to impose a 0.5% land tax with a relatively high tax-free threshold and the ability to defer payment until a property is sold. It would raise around NZ$2.3 billion a year and should be used to reduce Government debt and reduce pressure on the exchange rate.
If we don't urgently move to cut debt, push down our currency and encourage productive investment we are sending a big signal to our young to visit an airline website to buy a one way ticket.