COMMENT:

Jacinda Ardern has learned that blathering about "fairness" will take her only so far. She is said to be in shock over the overwhelmingly negative response to Michael Cullen's recommended capital gains tax (CGT).

Is anyone surprised?

This is a Prime Minister who has publicly confused GDP and the Crown operating balance and who couldn't provide a rough precis of the nation's founding document.

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She has no private sector experience and her only known contributions to policy over nine years in opposition were proposing working-group-type processes on issues in the news.

It is extremely unlikely she has ever pondered the complexities of implementing a CGT, its risks of perverse outcomes or its profound intergenerational unfairness to Gen Xers, Millennials and Gen Zers compared with cashed-up Baby Boomers.

Her plea for the debate to be based on facts is deeply ironic given the vacuity of her own communications style.

We have since learned from Finance Minister Grant Robertson that the Government has yet to think about how a CGT could be implemented, including the feasibility of a mass "valuation day" of every asset that might be caught.

Robertson might have been better to have had the bureaucracy consider such matters before appointing Cullen and his Tax Working Group (TWG) to begin their navel-gazing exercise.

As it turned out, eight of the TWG came up with a politically implausible recommendation which, bizarrely, would also have the economic effect of transferring investment away from productive businesses, KiwiSaver accounts and the capital markets towards residential property, private art collections and iwi organisations, which would be CGT-free.

To be fair to the TWG, that too is mostly the fault of Ardern and Robertson's lack of basic economic nous.

A CGT covering all assets and all gains and losses, realised and unrealised, could make sense if balanced by cuts to the company and top income tax rates.

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It was the Government's ban on the TWG considering the so-called "family home" or income tax rates that made the perversity of its recommendations inevitable.

The Government's only realistic political path is now to limit a CGT to residential rental property. Robertson is already positioning the TWG outcome not so much as an 8-3 split decision, but a unanimous recommendation in favour of this more limited option.

In practice, this means no more than extending the bright line test for rental properties from the current five years to any time at which they are sold, and perhaps catching those who get help paying their mortgage from flatmates or by renting out a spare room through Airbnb.

The problem is that this would massively cut the estimated $3 billion a year Cullen's CGT might raise, so any compensating tax cuts would approach zero.

Worse, the very wealthy, with well-diversified investment portfolios, would largely escape the effects of a more limited CGT, while the "family home" exemption would continue to allow land-banking under the guise of putting in a swimming pool and tennis court.

In contrast, those with a single rental property to fund their retirement, including some of NZ First's remaining supporters, would be hit with the full force of Cullen's proposal.

The upshot is Labour going into the next election promising to hurt a significant chunk of voters but without offering benefits to anyone else. No one is any longer under the delusion a CGT would cause a material fall in house prices.

Still unanswered is how valuations would be satisfactorily established.

CGT supporters claim a single valuation day would be no different from local government rating valuations.

They overlook the fact that the difference to a rates bill if a council valuation is out by a couple of hundred thousand dollars is immaterial, compared with the difference it would make to a 33 per cent CGT. Lawyers would be the only winners as final valuations were tied up in court for years.

An alternative to a single valuation day is to not apply any CGT until after a property has been sold twice after the new regime comes into force, which would massively reduce litigation risk but also further slash revenue.

Even the more limited CGT proposal in the minority report therefore carries very significant political risks but without any economic, housing or tax-cutting upside. It is far from a done deal.

Still, taxpayers might not want to celebrate the demise of the CGT too quickly.

Ardern and Robertson continue to insist their Government will be transformational, not incremental, including on its central theme of "fairness".

If they can't use a CGT to drive redistribution, all that is left to them is hiking the top tax rate, cutting the bottom rate and further increasing transfer payments like Working for Families. Don't say you weren't warned.