The day Jacinda Ardern crumbled on capital gains tax, announcing it wouldn’t happen “as long as I’m Prime Minister”, she dealt a bigger blow to progress than she probably knew.
Long ago, in the late 20th century, the words “capital gains tax” were peculiarly unspeakable in New Zealand. I remember uttering them in polite company once. It was 1986, economic reform was rampant. A new Herald editor had brought me back from Parliament to join the small team that wrote its editorials.
Topics were discussed in a daily conference and the temperature dropped the day this whippersnapper suggested we should tax capital gains. The senior leader writer, a man approaching retirement who took a lively interest in the sharemarket, shook his head.
“Why not?” I asked. “It’s not income,” he replied. “Yes it is.” I was probably squealing with incomprehension. “It’s money that comes to you when you sell some property or shares. How is that different from money you earn?”
“It’s capital,” he declared as though the distinction was obvious. I didn’t press the point. It was peripheral to the subject under discussion, probably the goods and services tax the Government was proposing that year.
Our editorials were supporting GST, reversing the paper’s previous opposition to a value-added tax whenever one had been recommended by reviews of the tax system. But capital gains tax was a step too far even for Rogernomics at that time.
Associate Finance Minister David Caygill, who was more resolute than Roger Douglas in some ways, had dared fly the kite in a speech the previous year and his colleagues had ducked for cover.
David Lange dismissed the prospect in a press conference and when we asked why, he boomed, “Because a capital gains tax is something you propose if you plan to lose the next election and the 20 elections thereafter.”
It is strange how something commonly accepted in many countries can become a “third rail” in another. Long after we adopted GST it remained too hot to touch in Australia - until it wasn’t. If politicians grasp a third rail very carefully they can survive.
Slowly, after the turn of the century, the subject became speakable. I like to think Herald editorials helped. If they didn’t quite advocate a capital gains tax, they noted its absence was contributing to the attractions of property investment as house prices rose out of reach of average incomes.
Slowly, after the global financial crisis, leading politicians began to edge towards the third rail. National’s Finance Minister, Bill English, drew public attention to a study that found half the country’s top income earners were not paying the top rate of tax. Some were using their assets to reduce their tax to less than 10 per cent.
Labour’s finance spokesman, David Cunliffe, convinced the party to go to the 2011 election with a capital gains tax in its manifesto. Under his leadership Labour kept the policy for the 2014 election.
John Key questioned Cunliffe’s policy on issues of detail but did not attack the principal of taxing capital gains, which was just as well, for in the subsequent term of Parliament National introduced a “bright line test”, making gains taxable for investment property sold within two years of purchase.
Technically it was not a new capital gains tax but nobody was deceived. The rubicon had been crossed.
When Labour came in, it invited former Finance Minister Michael Cullen to review the tax system and he recommended a capital gains tax on almost all assets, excluding owner-occupied houses, at the investor’s top income tax rate.
It was a scheme that gave Ardern plenty of scope for concessions but, probably to the surprise of protesting landlords as much as anyone, she caved completely. She blamed Winston Peters, though he was never going to support it. Her popularity, even before Covid, could have carried the project into a second term if she had kept her nerve.
It was quite a setback. Labour is extending the bright line test to five years and has removed tax deductions for mortgage interest among other impositions on rental property. But National is promising to rescind them all.
Revenue Minister David Parker looked a lonely figure this week as he picked up the baton Ardern dropped. His department’s survey of high-net-worth individuals has calculated their effective tax rate to be as low as English reported 13 years ago.
Parker, like English, had to deny his party is preparing the ground for another run at capital gains but he can make a stronger case now. With a tax on realised true wealth, they could lower the rates for all of us who pay our share.