Liam Dann on business

Business editor of the New Zealand Herald, Liam Dann, discusses New Zealand and international financial matters

Liam Dann: Labour riding tail wind with tax initiative

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It is a lot harder to get people excited about tax policy than it is to get them chattering about naked teenagers running through the streets in the dead of night.

So by that measure, if nothing else, Labour made a big breakthrough this week as it leaked plans to campaign on a capital gains tax, grabbed headlines and set the internet alight with debate.

For three days running, capital gains tax was a trending topic (one of the top 10) for New Zealand Twitter users. Move over Lady Gaga, we've got Labour tax policy to debate.

Not a bad effort at all considering the party hasn't yet said anything on the record. It unveils its full tax policy on Thursday.

Prime Minister John Key and National moved quickly to dismiss the idea as more loony left ideology that would punish ordinary New Zealanders.

But this response rang pretty hollow as the debate unfolded at a level which was considerably more sophisticated than the usual reactive public discourse.

The beauty for Labour is that much of the support for a capital gains tax comes not from the traditional left but from those with a vested interest in growing capital markets, boosting the technology sector and from economists and tax specialists.

Labour's best chance of selling a capital gains tax to middle New Zealand is to tap in to the support it has with these unlikely bed fellows.

When unionists and others with unashamedly anti-bourgeoisie views call for a tax on capital gains it cuts less weight with those middle New Zealanders who have swung to the right of the political spectrum in the past few years.

But when academics, tax partners and stock market commentators do the same, it undercuts Key's ability to make light of the idea.

Take a look at these points made by the tech sector-focused Productive Economy Council - none of them involve eating the rich.

They argue - in a statement released yesterday - that a broader, lower tax base is desirable for both compliance and efficiency.

"Much of what was said in the Tax Working Group's paper was about the unfairness of the current tax system and its effects on compliance. A capital gains tax alongside other tax changes already implemented largely addresses those concerns.

"A capital gains tax sends the right signals for investors and means those choosing to take the path of unproductive property investment will have to pay their fair share of tax. While fairness in tax is good, the real long-term benefit is the chance to get more of our limited capital invested in making New Zealand more, not less, competitive."

In other words, they are saying we need this tax to balance the tax system and boost investment in the productive end of the economy.

Or, as stock market guru Arthur Lim told the Weekend Herald: "We need to steer investment into the productive sector and this preoccupation with property is not healthy." Lim advocates a gains tax that works on a sliding scale with the level of taxation falling the longer the investor holds the asset.

It is a compelling argument, although there are practical issues that may complicate things.

Many of the opposing arguments seem to be focused on the damage the tax would do to the property market.

Some say a policy that could cause house prices to fall (as investors exit the market en masse) is akin to a US presidential candidate declaring himself an atheist - political suicide.

But would they fall that far? It might depend on timing and probably there is no better timing for a capital gains tax than a market in which no one is making any capital gains. Many property speculators have already exited the market.

The problem of how you would fairly introduce and integrate a capital gains tax into the broader tax system is a more difficult one.

Any new tax structure has to be fiscally sound and generate enough revenue to cope with the international debt burden and (particularly for Labour) avoid the need to cut public spending. It also needs to be efficient and enforceable.

One rich seam of anti-capital gains tax argument relates to the fact that investors who make gains from trading properties or shares are already required to pay tax on gains.

The problem has been that this policy this has not been aggressively enforced. In that case, might a stronger line from Inland Revenue and more resources for enforcement achieve some of the goals of a capital gains tax without the need for complex overhaul of the system? Until Thursday these are all hypothetical issues - as they have always been in this debate.

Will Labour be able to successfully work this idea into a policy which is both fiscally responsible and which keeps a credible focus on economic growth? If it can, then it will have something to sell to a voting public which has proved it can handle the complexity of the debate.

twitter.com/liamdann

- NZ Herald

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