Labour leader Chris Hipkins says the aim of a capital gains tax would be to both generate revenue and encourage investment in more productive assets. Photo / Mark Mitchell
Labour leader Chris Hipkins says the aim of a capital gains tax would be to both generate revenue and encourage investment in more productive assets. Photo / Mark Mitchell
THE FACTS:
Labour is proposing to impose a 28% capital gains tax on commercial and investment residential property.
Gains would be taxable from July 2027.
Treasury is concerned about the impact New Zealand’s ageing population will have on the Government’s finances.
Labour finally bit the bullet and decided to campaign on the introduction of a capital gains tax on commercial and investment residential property.
It is doing the right thing, but not entirely for the right reasons.
Asked by a journalist whether the aim was to generate revenueor incentivise investment in more productive assets, Labour leader Chris Hipkins said it was a bit of both.
The trouble is, Labour doesn’t want to use the extra tax take to get on top of the mountain of government debt.
Rather, it appears keen to think up new ways of spending the money.
It is clever politics for it to say the money raised from a capital gains tax would be used to fund three free GP visits a year for everyone.
But in the wake of former Finance Minister Grant Robertson’s unnecessarily large 2022 and 2023 Budgets, this kind of untargeted, lolly scramble-like promise is triggering.
With a price tag of nearly half a billion dollars a year, the policy is expected to eat into about half of the annual capital gains tax revenue expected by 2030.
This isn’t a crazy sum of money when you consider the benefits associated with nipping more health issues in the bud. There are much worse things to spend money on.
The problem is, it’s unnecessary.
Labour’s commitment to borrow money and invest it in, or lend it to, Kiwi businesses via the new “Future Fund” it wants to create is also unnecessary.
These things are nice, but are far from the best use of money at a time the country doesn’t have money.
Treasury issued yet another stark warning in its Long-term Fiscal Statement over the rapidly escalating costs associated with the country’s ageing population.
Look at this graph. It shows how on the trajectory we are on, government expenses as a portion of the economy are expected to soar, while the tax take is expected to trend down ever so slightly.
A graph from Treasury's Long-term Fiscal Statement.
This is expected to occur from a starting point that is materially worse than it was pre-Covid, in terms of government debt as a percentage of gross domestic product (GDP).
The Treasury document, which was overshadowed by the new Reserve Bank governor being unveiled on the same day it was released, highlights the trade-offs that need to be made.
Either we pay more tax and/or we receive reduced services and benefits, such as universal NZ Superannuation from 65.
To try to illustrate its point, Treasury said that if a government relied solely on tax to meet cost pressures, the average tax rate on labour income would need to rise from 21% to 32% by 2065.
Alternatively, the GST rate would need to increase from 15% to 32%.
Looking at it another way, Treasury said that to fully offset future superannuation and health costs, other non-health related expenditure would need to fall from about 13% to 5% of GDP by 2065 (and keep declining thereafter).
Labour’s capital gains tax wouldn’t come close to solving these problems.
But it is hard to see how stronger economic growth alone can prevent the Government’s finances from further deteriorating.
One could argue New Zealand isn’t alone in racking up a lot of government debt. The issue is, we are an isolated, trade-reliant, natural disaster-prone country, with high levels of household debt (because of our property obsession), so need to be particularly resilient.
If we start looking risky, investors will demand higher returns for lending to us. Ten-year New Zealand Government Bond yields are already high. This means higher borrowing costs for everyone.
Against this backdrop, it isn’t the worst idea to broaden the tax base via the introduction of a tax that’s internationally understood, and supported by the boffins at the Treasury, IMF and OECD, increasing numbers of accountants and business leaders, and those from across the political spectrum represented on Labour’s 2018/19 Tax Working Group.
Like anything, the devil is in the detail.
Labour needs to commit to continuing to allow residential property investors to deduct interest as an expense. Changing this would be an overkill. Property investors aren’t the enemy.
Labour should also refine its policy’s “main” home exclusion to recognise the reality that in modern society, people move around a lot.
You should not be treated as an “investor” (as you are under the bright-line test) if you’re unable to live in the only house you own because your circumstances change.
Another issue is that because the tax would be applied from 2027, it could see people who sold property for less than what they bought it for pre-2027 being taxed.
When you put the introduction of a capital gains tax alongside the other levers that could be pulled to get the Government’s finances on a more sustainable path forward, it is a good option.
But – and this is a very major “but” – people have no appetite for having their hard-earned money sprayed around by vote-seeking politicians. It’s simply disrespectful.
Labour needs to do a lot more to earn people’s trust.
As for the coalition Government, it needs to pick its poison. If broadening the tax base isn’t its solution to improving the fiscals longer term, what is?
Jenée Tibshraeny is the Herald’s Wellington Business Editor, based in the Parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
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