If the Labour Party had any illusions about the fight it will face to bring in a capital gains tax, it knows now. Within 24 hours of the public receiving the recommendations of Sir Michael Cullen's tax working group the hostility was almost drowning out support for the proposal.

The governing parties had the report weeks ago — plenty of time to time to form a response for announcement with the report's release as often happens. But only the Greens greeted it enthusiastically.

It is already apparent that the whole raft of assets in the report is not going to be taxed, at least initially. The report suggests the tax could be phased in, asset by asset, starting with residential rental property. If the rest of the assets were put in to draw the fire of public opinion and let the Government "settle" for residential rental investments only, the ploy has been too obvious.


More likely the working group's tax experts were genuinely unable to justify treating property differently from any other business investment. On pure principles of economic there is no case for penalising one form of saving and thereby favouring others. But if it had followed that principle rigidly, the working group would have exempted owner-occupied houses for its capital gains net. People can invest heavily in improvements to their own home with their eye on a tax-free windfall one day.

In fact, that is one thing that will happen if rental investments become liable for capital gains tax whenever they are sold. That is not an argument against taxing rental property gains. There is a cost to taking capital gains out of your own home. It means buying a cheaper home which will either be inferior in some respects or in an entirely different location. The sale of rental houses carries no such cost, only gain normally.

Labour will need to start to assemble such arguments for a selective tax on rental property investment if that is what it hopes to salvage from the working group's proposals. The group's report offers little help on that score. Labour will also need to confront the group's view that taxing the gains would not have much impact on house prices. Logic suggests it would, especially if other capital investments do not face a gains tax.

Houses have become an asset bought predominantly for capital gains. Some are not even tenanted if the owners can afford to leave them in mint condition. The prospect of a tax would surely bring those homes on to the market, helping to alleviate Auckland's housing shortage and taking investors out of the auctions. First home seekers would have more bargaining strength and prices would surely come down to be within reach of more of these young people.

That is the case for a capital gains tax on property investment. It is much stronger than the argument for taxing the sale of other types of business which the seller may have started and built up at great personal effort and sacrifice in the early years. It is stronger than the argument for taxing shares where gains are more elusive.

It would be a pity if the strong arguments against taxing the gains from productive investments made the entire smorgasbord too hot for Labour to touch. It owes it to the younger generation looking for homes of their own, to do everything required to give them the Kiwi dream.