By Bernard Hickey
Prime Minister John Key has said a Capital Gains Tax is one of the 'third rails' of politics in New Zealand and anyone who touches it will be instantly killed in political terms.
This week Labour touched that rail and only got an invigorating tingle rather than the shock of their lives.
This is good because it shows New Zealanders can look beyond the initial headlines to the underlying need for structural reform that reduces the tax subsidies for property investment.
The debate is welcome, but Labour could have done much better.
Labour should be trumpeting how such a tax would shift investment into more productive export industries and create higher value-adding and higher wage jobs to keep young New Zealanders here.
Instead it has watered down that message by proposing a Capital Gains Tax that is full of exemptions and then used the revenues to shuffle tax from the very rich to the poorest.
A Capital Gains Tax is a good way to change the incentives for investors and reduce our appetite for foreign debt-funded domestic consumption. But it would be even better if it raised significant amounts of tax and was difficult to avoid. The exemptions for the family home, for residences in family trusts, for Maori land, collectables and gambling winnings will be welcomed with open arms by budding tax accountants and lawyers all over the land. See Cactus Kate's views on the exemptions here.
These will be high paid jobs, but they're not the sort we want.
A land tax would have been much more efficient, simple and lucrative. The idea put forward to the Tax Working Group in late 2009 by Motu economist Arthur Grimes for a 0.5% land tax with a NZ$50,000 per hectare tax free threshold and the ability to defer payment until sale would have raised around NZ$2 billion a year. Labour's CGT would initially raise just NZ$18 million in its first year and take 10 years to get to NZ$2.3 billion a year.
A CGT also does nothing to rectify the intergenerational wealth transfer created by the doubling of house prices in the property boom from 2002 to 2007. That created more NZ$300 billion in wealth for a generation of property owners and means the generations to follow will have to take on massive debts to afford a family home, particularly in Auckland. The property boom has effectively shifted wealth in the form of future debt repayments by the young into equity gains now for the old.
A CGT that is not retrospective effectively locks that shift in place and actually punishes future generations for any capital gains they make. The exemptions for small businesses also means those baby boomer business owners wanting to sell to younger generations will get to keep those capital gains tax free.
But the biggest problem with Labour's tax package is not the tax. It's a lack of spending cuts or any real and new reduction in foreign debt. Labour's deficit and debt track is little different to National's and any gains from the CGT and the 39c tax rate are being redistributed to low income earners rather than being used to repay debt.
Labour makes a lot of noise about 'owning the future', but hasn't addressed the need to reduce borrowing.
That is the major reason why New Zealanders are getting poorer directly through interest payments to foreign creditors. High borrowing by our government and property owners also makes us poorer in the long run through a ruinously high currency that hollows out the value-added jobs needed to keep our younger generations here. See more here in this piece on the Foreign Drain.
Labour needed to press harder on that third rail to get a bigger jolt.
(Updated with David Cunliffe double shot interview)
We welcome your comments below. If you are not already registered, please register to comment
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.