Labour's proposals will make things a lot worse for exporters, writes Bruce Wills.
The best translation I've found for Te Tari Taake, IRD's Maori name, is "the department which takes". "Taking" is the existential truth about taxes, including Labour's proposed capital gains tax. Given taxes take money off people after they've earned it, is it possible taxes can directly grow an economy? Of
course not.
While taxes support economic and social endeavours, economies grow by people taking risks and being rewarded for those risks. Right now, we need to grow our economy and that means exporting goods and services. The challenge we all face is how to expand the economic cake so that everyone can get a slice, whether that's a farmer, a factory worker or a primary school teacher.
What's now before us all is a clear choice. In the "red corner" Labour has gone where David Lange and Michael Cullen feared to go. Lange was blunt, saying a capital gains tax "is the sort of tax you introduce if you want to lose not just one election, but the next three".
Over in the "blue corner" is the partial privatisation of state assets and a gradual reduction in the Government's overall size. Perhaps Chris Trotter was right when he suggested we are a nation of socialists, but it's also a question of degree.
Even Labour voters own properties, businesses, shares and even farms.
For farmers, the prospect of yet more asset taxes on top of taxing agriculture's biological emissions is fairly unattractive.
Farmers are already included in the Emissions Trading Scheme (ETS) and like everyone else are paying extra for fuel and energy.
Labour's plan to fast-track agriculture into the ETS is something else, though. While New Zealand may be the odd one out in the OECD for not having a capital gains tax, this logic equally applies to the ETS; New Zealand is the "odd one out" for bringing biological emissions into such a scheme. Strangely, all this talk about gleaning tax income through the ETS seems to have skipped right past its intended purpose, to reduce emissions.
A capital gains tax, central to Labour's revenue model, doesn't raise much money until 2018. To meet what could be seven heavy budget deficits, the choice is either to borrow more or to cut spending. Greece, which has a capital gains tax, remains "Exhibit A" as to why borrowing is extremely risky.
Meanwhile, a close examination of government spending is notably absent from Labour's policy.
We also hear much talk from politicians about building an entrepreneurial culture but, to do that, risk-takers need to be rewarded for those risks they take.
No capital gains tax and reasonable personal and company tax rates are big positives in attracting people, ideas and capital to New Zealand. Shouldn't we be extolling this internationally?
This proposed capital gains tax includes foreign currency transactions making it like a financial transactions tax on exporters.
Labour's proposed tax will make things a lot worse for exporters already struggling with a high kiwi dollar. It will hit them hard, whether that's a dairy company or a movie studio.
Exporters buy currency hedges in order to smooth exchange rate volatility and their overall financial risk. Taxing this is baffling and will only increase risk when exporters least need it.
The United States also has a capital gains tax and while it benefits accountants and lawyers, it did not prevent or minimise the sub-prime-fuelled real estate bubble.
As the fallout from this continues today, all a capital gains tax does is create added compliance costs and complexity. In a financial version of "Whac-a-Mole", regulators move on one side while an army of expensive advisers counter that move on the other.
So perhaps the biggest question voters need to ask themselves is one of trust. If a capital gains tax is introduced by any party, there's absolutely no guarantee a future government won't widen its scope. As the GST increase shows, a proposed capital gains tax of 15 per cent is not cast in stone.
All it takes is a regulatory amendment. With more loopholes than Swiss cheese to make it electorally palatable, it seems more like a bureaucratic throwback to the 1970s.
Rather than believe a tax will save the economy, it is time to have a discussion about growing the economic cake for all New Zealanders. On current evidence, that is the one discussion we're not having.
Bruce Wills is president of Federated Farmers.
