The probability of Michael Cullen's capital gains tax (CGT) ever being implemented is close to zero.

Labour's plan was that Cullen's Tax Working Group (TWG) would unanimously recommend a modest new tax, Parliament would legislate for it to come into force in 2021 along with compensating tax cuts, and the 2020 election would be a referendum on a done deal, proposed not by politicians but by so-called experts.

If it opposed the CGT, National could be smeared for allegedly standing with the rich against the combined wisdom of the nation's taxation establishment.


It hasn't worked out this way. Cullen has recommended the world's most severe CGT, with a rate of 33 per cent for those earning over $70,000 a year in their ordinary job.

Not unrelatedly, a quarter of the TWG rejected the proposal. The dissenters were perhaps New Zealand's most respected tax-policy guru Robin Oliver, well-regarded tax lawyer Joanne Hodge and Business NZ head Kirk Hope.

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The upshot is that when Jacinda Ardern and Grant Robertson make decisions in April, they cannot claim to be reflecting the unanimous advice of so-called experts. They will have to choose one side over the other.

This may be academic, because Ardern and Robertson will not get Cullen's CGT through Parliament this side of the election, or ever.

With his party well below MMP's 5 per cent threshold, Winston Peters has no intention of seeing his quarter-century project fail, let alone by backing a tax he has always opposed. NZ First will not vote for the proposal.

Ardern and Robertson cannot then go into 2020 saying the CGT is the combined view of all three governing parties, but only that it is Labour's policy.

Such vagueness invites National and NZ First to fill in any gaps but they need do little more than state the most obvious flaws in Cullen's plan.


The long-standing argument for a CGT is to rebalance investment away from unproductive residential property towards productive businesses and the capital markets.

Cullen's proposal does the opposite.

If Jacinda Ardern presses on with CGT, she'll be giving Winston Peters the issue which will differentiate NZ First from Labour. Photo / Getty Images
If Jacinda Ardern presses on with CGT, she'll be giving Winston Peters the issue which will differentiate NZ First from Labour. Photo / Getty Images

The one major asset class to be exempt from the new tax will be the two-thirds of residential properties that are owner-occupied. As the TWG itself noted, this risks a "mansion effect", with homeowners investing in their CGT-free homes, rather than in their businesses or the capital markets, to escape the new tax.

Other exempt assets are private art collections, jewellery and family boats, none of which seem especially productive compared with shares, investment properties, business assets, intellectual property, farms and other productive land, all of which would be included.

KiwiSaver is also caught, although the TWG has recommended complex measures to try to counter such an obvious new disincentive to save.

Cullen's plan also fails to meet the Prime Minister's fairness test, especially intergenerationally.

Baby boomers have enjoyed 40 years of tax-free asset-price inflation and are often cashed up, but can now look forward to the income-tax cuts on their superannuation payments that Cullen recommends.

The economic effect is that Gen X, Millennials and Gen Z will be paying new taxes on gains they make on their businesses, retirement savings and other investments in order to pay for their Boomer parents to receive higher superannuation payments.

The point of the income-tax cuts is to deliver the Government's promise that the CGT will be revenue neutral, but no such assurance is credible.

Cullen claims his tax will bring in $8 billion in its first five years but eventually over $3b annually. To be much more than numbers plucked out of the air, such forecasts require Treasury officials to have insight into how the value of non-owner-occupied residential property, privately-owned businesses, the NZX, and KiwiSaver and other managed funds will track in the decade ahead.

Not even Warren Buffett has such insight and it is fantasy to think it could be found in Wellington. As Cullen well knows, fiscal forecasting is notoriously difficult and it stretches all conceivability that revenue neutrality is possible even in year one.

The Opposition can choose to attack the proposal as either a tax grab or as risking a fiscal hole, with either more plausible than revenue neutrality.

Coalition realities and the CGT's political unsaleability give Ardern and Robertson an easy way out. If they proceed, Peters has his issue on which to differentiate or even split from Labour.

Off the back of the CGT, he can get above 5 per cent, again secure the balance of power, then put a stop to the CGT in coalition with either Labour or National.

Either way, Cullen's scheme is best judged dead on arrival.

- Matthew Hooton is managing director of PR and corporate affairs firm Exceltium.