By Alex Tarrant
Labour will contest the November 26 election with a 15% capital gains tax on assets other than the family home, a 39% top personal income tax rate for incomes over NZ$150,000 and a tax cuts for the majority of taxpayers.
The task of winning the election will prove to be a hard one, with Labour languishing behind National in the polls - it sat below 30% before this package was announced - while Prime Minister John Key continues to trump Labour's Phil Goff in prefered Prime Minister stakes.
Labour is touting its new policy as a credible alternative to the government's economic plan, which includes NZ$5 billion-NZ$7 billion in proceeds in the next five years from selling off minority stakes in four state-owned energy companies as part of an attempt to reach a budget surplus in 2014/15 with net government debt remaining below 30% of GDP.
The policy released today was centred around a 15% capital gains tax on all capital assets bar owner-occupied housing from the 2012/13 financial year. The tax would not collect much revenue in the short-term. Only NZ$18 million would be collected in 2012/13, with annual revenues rising to NZ$2.27 billion per year in ten years time, according to research done for the Labour Party by BERL.
A 39% top personal income tax rate would be applied to those earning more than NZ$150,000 - a policy that would raise NZ$300 million a year. This would pay for Labour's policy of taking GST from fresh fruit and vegetables.
The new top tax bracket would affect the top 2% of income earners, Labour said, sourcing figures from the Inland Revenue Department.
Labour is also proposing to make first NZ$5,000 of all income tax free - a move that will cost NZ$1.3 billion a year. This would mean tax payers earning up to NZ$158,750 would receive income tax cuts, Labour said.
Labour will also bring farmers under the ETS from 2013 to pay for the resumption of R&D tax credits and try to stamp down on tax avoidence, in a bid to raise enough money alongside the capital gains tax to cover cost incurred by the NZ$5,000 tax-free threshold. However, figures supplied by BERL show net additional government revenue would be negative from 2013/14 to 2017/18, indicating Labour would have to borrow more money than National in the short-term.
From 2018/19 onwards, Labour is proposing net additional revenue would rise from NZ$238 million to NZ$2.515 billion by 2024/25. Proceeds would be used to repay government debt. Labour said it would look to reduce net Crown debt including the Superannuation fund to zero by 2022/23 - the same track as Treasury projections.
What's more, Labour says it is basing its assumptions around a lower GDP track than Treasury is expecting over the next five years, meaning it is expecting tax revenue to track lower than current forecasts before its changes are taken into assumption.
Capital gains tax
The new tax would apply to capital gains made from the point the tax is implemented at a rate of 15% with no indexation for inflation. The tax would be paid at point of sale. Labour associate finance spokesman David Parker said the tax being 15% instead of a person's marginal rate, effectively took away the need to index for inflation.
The family home will be exempt, as will all inherited assets. Collectables like art, books or jewelery would also be exempt - Labour says the tax would not apply to personal property. However if these types of assets were sold regularly by a professional trader, the tax would apply.
All share sales would be subject to the tax, unless the IRD regards the seller as a professional trader, in which case profits would be taxed at the trader's current rate, like the status quo.
There will be special concessions for small business owners and owner-operators aged over 55 who worked in their business and had personally owned the business for more than 15 years who sold in order to fund their retirement. The first NZ$250,000 of these people's capital gain would be tax free. Labour would set up an "expert panel" to determine what constituted a small business.
If a farm is sold, the value of the main farm residence will not be subjected to the tax, and surrounding land used for domestic purposes would also be tax-free. Wider land used for farming business would be subject to the tax.
Properties in the CERA zone in Christchurch would have a
15 5 year exemption from the tax.
Capital losses could be carried forward and offset against future capital gains.
How assets will be valued
Labour was going to be following the Canadian and South African-style approach, which was there would be a future date nominated as valuation day, probably a date sometime in 2013, finance spokesman Cunliffe said.
“At that date, all of the assets which qualify for CGT would have to have a valuation. Firstly, we would time it so that the QV property valuations were current, so it wouldn’t be a big deal about real estate – that would be done automatically. Secondly, there would be a choice of easy methods for people to value businesses, and shares of course are relatively easy because you can just take either the book value or the market value," Cunliffe said.
Assets would only be taxed on their capital gains from that date.
The details of those ‘ready- reckonem’ methods will be worked out by the expert tax panel, in the same way for example South Africa created a panel of experts to decide their three methods," Cunliffe said.
"It’s important to note that the taxpayer gets the choice of what suits them the best, what’s the easiest and most favourable to them [in terms of valuation method]," he said.
Here's the reaction from Finance Minister Bill English:
Just as the economy is gaining momentum, the last thing New Zealand needs is more taxes and more debt, Finance Minister Bill English says.
“The economy is really gathering momentum, as we saw in the encouraging GDP data today showing the economy grew significantly faster than expected in the March quarter despite the earthquake,” he says. “More taxes and more debt under Labour would put that at risk.
“New Zealanders have a clear choice: Labour wants to take New Zealand backwards with more taxes, more spending and more debt. National will take the country forward by growing the economy, getting back to surplus by 2014/15 and repaying debt.
“Labour has clearly learned nothing from its failed policies of the past. Having left New Zealand with forecasts of ever-rising debt and permanent deficits when he was kicked out of office in 2008, Phil Goff now wants to go back and do the same all over again.
“After making lavish spending promises over the past two years, it’s had to come up with a hodge-podge tax grab that will be good only for the armies of bureaucrats and tax accountants needed to administer it.
“Even on their numbers - and with no accounting for their spending promises - Labour would borrow more every year until 2018/19.
“It would also have six income tax rates, a GST that applies to some things but not others, a big gap between the company rate and the top tax rate and a capital gains tax on productive industries with a maze of exemptions that raises virtually no revenue in the first few years. All of this would encourage tax avoidance.
“Instead of more taxes, New Zealand needs more taxpayers. Instead of growing the Government, we need to grow the economy,” Mr English says.
And from ACT leader Don Brash:
It’s a sad day when the Labour Party retrieves and brandishes rusty old bludgeons from nasty old socialist dungeons, says ACT New Zealand Leader Dr Don Brash.
Responding to Labour’s proposals for a Capital Gains Tax of 15 per cent and increased personal tax rates on incomes above $150,000 announced today, Dr Brash says Labour has blown an opportunity to re-establish itself as a forward-looking party that is economically as well as socially liberal, as the Lange-Douglas Government was. It has addressed a real crisis with an unrealistic, unimaginative and unwieldy solution, fraught with exceptions and exemptions.
“What we need right now is to grow the economy, not the government,” says Dr Brash. “This is not a time to be introducing new taxes and raising existing ones. Labour’s CGT is quite simply a proposal to punish success. It is politics and economics as if envy mattered.
“A Capital Gains Tax means you are clobbered twice: once when you create or earn wealth, the second time when you dispose of it. The fact that we already have it in some form is no excuse for extending it.
“Yes, our fiscal situation is serious. But the main reason for that is the on-going failure of successive governments to bring their own spending under control. And the main reason for that is burgeoning monolithic government that would have even Michael Joseph Savage, Peter Fraser and Walter Nash rolling in their graves.
“These champions of the common man and woman would be ashamed of what Phil Goff is advocating. Imagine their reaction to taxing profits on the sale of family baches!
“Under Michael Joseph Savage in the late thirties, government spending was about 20% of GDP. Under Michael Cullen, in 2005, it was 29%. It is now around 36%.
“ACT proposes in the short term to reduce it to Michael Cullen’s level. Long term, we advocate a serious assault on both spending and taxes, with the former capped and the latter low and flat. We want an ethos where entrepreneurialism is celebrated and success rewarded. I’ll be announcing detailed policy in due course.
“Phil Goff has gambled that pushing the envy button will return Labour to the treasury benches. Every indication thus far is that he’s underestimated the intelligence and common decency of the electorate with this retrograde and unseemly policy,” Dr Brash concludes.
And the Green Party:
The Green Party today welcomed Labour’s formal adoption of a capital gains tax policy which will deliver a fairer tax system and create a more efficient and productive economy, Green Party Co-leader Dr Russel Norman said today.
“A comprehensive tax on capital gains, excluding the family home, is a critical component of rebalancing our economy, which is why we’ve supported it. Labour has had the courage to recognise and implement good tax policy and we congratulate them for that,” said Dr Norman.
“This shift in Labour’s policy will help lift our long-term economic performance and create a fairer, more progressive tax system.
“We have some concerns with Labour’s design of a capital gains tax and look forward to working with the ‘Expert Panel’ they propose to set up to look at design and implementation issues before the tax is ultimately adopted in 2013.”
Labour proposes raising a flat capital gains tax set at 15 percent while increasing the top income tax rate to 39 percent for those on incomes over $150,000. This leaves a significant tax differential between income earned from capital gains and income from other sources such as wages.
“Labour’s design for a capital gains tax leaves intact some incentives to continue to invest for capital gains rather than productive returns,” said Dr Norman.
“A fairer, more consistent approach would be to tax capital gains at the marginal tax rate of the seller while indexing any capital gains for the effects of inflation. This would make the capital gains tax more progressive while treating all income alike.
“But this is a detail we can address in open consultation with the public and experts alike.
“In the meantime, I congratulate Phil Goff for his adoption of complex but far-sighted economic policy that closes the largest single remaining loophole in our income tax system.”
(Updated with reactions, comments on valuations full release and link to Berl report)