By Bernard Hickey
Labour Finance Spokesman David Parker and Associate Finance Minister Steven Joyce have gone head to head in a dress rehearsal of the debate around Capital Gains Tax expected before the September 20 election. The full exchange is in the video above.
Parker raised a report by Westpac Chief Economist Dominick Stephens (page 11) and a Treasury briefing paper from 2012 (Page 10) to argue in support of Labour's proposal for a Capital Gains Tax on investment properties. (See here for earlier article on the Westpac report.)
The Treasury paper on the taxation of savings and investment income was produced in September 2012 for Finance Minister Bill English and then Revenue Minister Peter Dunne after English asked if changing tax settings would materially improve economic performance.
The paper traverses a range of tax reduction ideas, including personal income tax cuts, corporate tax cuts and tax cuts on interest income. But it reminded English that Treasury continued to see a Capital Gains Tax as the best way to reduce distortions in the way capital was taxed.
Treasury noted that taxing capital gains on investment properties tended to reduce the amounts invested in housing, increase the amounts invested in interest bearing assets such as term deposits and bonds, reduce the price of housing and increase affordability of owner-occupied housing, increase rents and reduce the affordability of rental housing, increase economic welfare and reduce the level of foreign borrowing compared to the status quo.
"Treasury continues to see merit in a general capital gains tax or a land tax as possible revenue-raising reforms, and considers that a capital gains tax offers the best way of improving allocative efficiency by reducing economic distortions caused by gaps in the tax base," it said in the report.
Meanwhile, Dominick Stephens estimated a 15% capital gains tax on rental property could reduce the value of a property to an investor by 23%.
"Even if we assume a 10% lift in rents, the loss in net present value of the house to a landlord is still 15%," Stephens said.
"Similarly, removing the tax-free status of most capital gains would reduce the capital value of farm land," he added.
"How such a change in fundamentals would affect actual market prices is, of course, unknown. But our suspicion is that the mere announcement of a CGT would have a marked impact on farm and property prices."
Parker asked Joyce in his parliamentary question if the Government had seen the reports.
Joyce said Westpac and Treasury preferred a comprehensive capital gains tax that included the family home and that Treasury had advised the majority of its impact would be in raising rents.
"The Inland Revenue Department’s view, which was also reported by Treasury, was that the practical disadvantages were likely to outweigh the advantages," Joyce said.
He said Westpac had also commented that a capital gains tax would fall heaviest on lower priced properties, given they were more likely to be owned by landlords than upper-end properties.
"So, once again, the Labour Party, in its attempt to fiddle around with the economy, would lift costs on those members of society who could least afford that," Joyce said.
Joyce also said Westpac's broader analysis was that a change of government would slow economic growth and eventually force up interest rates because of increased Government spending.
Parker finished his argument with this question: "Why does he not stop the pretence and admit that National’s housing policy has been totally ineffective and adopt Labour’s comprehensive housing policy, which addresses both demand and supply by implementing a capital gains tax, excluding the family home, building 100,000 affordable houses, and restricting purchases by offshore buyers?"
Joyce went on to highlight a 2005 speech in which David Cunliffe (then Associate Finance Minister) said the disadvantages of a tax on capital gains outweighed the advantages.