Labour Party narrows in on capital gains tax as policy announcement looms - Thomas Coughlan

Labour leader Chris Hipkins and finance spokeswoman Barbara Edmonds are expected to unveil the party's tax policy in a few weeks. Photo / Mark Mitchell

THE FACTS

• Labour has committed to announcing a tax policy this year.
• The party has in the past campaigned on a capital gains tax, but each time ran into trouble explaining it.
• Labour’s finance spokeswoman used questions this week to prosecute Finance Minister Nicola Willis over the Reserve Bank scandal.

In a few weeks, Labour will finally unveil its tax policy for the election.

This will be the opposition’s first serious policy offering. So far, its slate is little more than a scrapbook of reversals – many of them (Three Strikes) a legislative hokey-tokey of reversals of reversals.

Tax, however, can no longer be avoided. At present, a Labour vote is little more than a middle finger to the coalition and its economy. Labour has nicked the “small target” strategy deployed by its Australian and British counterparts: say as little as possible, expose nothing to attack. And why not? It’s easy to agree that things are grim and that “something must change”.

But Labour’s microscopic target is about to get ever so slightly bigger. “Something must change” is about to become “change to what?”

The tax plan is not finalised. Labour’s critics (some of them internal) are not correct in saying the policy process is a sham designed to recommend the leadership’s preferred tax, although the leadership does seem to be able to exert an almost gravitational force upon discussions, which are taking place between policy committees, the party council and the caucus.

A capital gains tax (CGT) is, it’s true, winning the argument. A rearguard action is being waged in favour of a wealth tax. This action looks set to lose.

But within the CGT, there’s a very real, very open-ended discussion about what’s in and what’s out. Big decisions have yet to be made, so anyone who says they know what’s going to happen is kidding.

Those decisions not only need to be made, but they also need to be signed off on by different parts of Labour’s bureaucracy.

The party needs to balance the need for revenue with the political imperative that any tax policy is show-me-the-money-proofed.

Labour’s work currently consists of adumbrating what’s in and what’s out. Tax speculators on the profit from a mouldy rental? Absolutely. But what about a pedigree dog in a trust – complete with deductible vet bills? The line between policy and parody is perilously thin.

The pressure to save this version of the tax from the fate that swamped Labour’s last two attempts has narrowed minds on a narrow tax – again, it must be stressed, this is one option of several.

It has drawn on a group of politically aligned tax experts to help design the tax.

It’s less formal than a new Cullen Tax Working Group (which is what National MPs describe it as – they’ve got wind of the group but not its members). In fact, it’s better described as a collection of Labour-aligned experts lending their expertise to the party.

A non-exhaustive list of members includes Andrea Black, who advised Grant Robertson and the Cullen Tax Working Group, and was a former principal adviser on tax at Treasury and Inland Revenue (IRD), Toby Moore, also an adviser to Robertson and member of Labour’s Policy Council, and Terry Baucher, a tax consultant and author of a book Tax and Fairness co-authored with Labour’s revenue spokeswoman, Deborah Russell.

Beyond them, Labour tapped at least two outsiders for discreet counsel.

Sir Michael Cullen discussing the findings of the tax working group. Photo / Mark Mitchell

Enter Geof Nightingale and Robin Oliver, both Cullen working group alumni, who were asked to give some advice to the party on a couple of options.

Oliver, though he is close with finance spokeswoman Barbara Edmonds, is perhaps the most curious recruit. The ex-IRD deputy commissioner of policy scorned some of Labour’s tax ideas last term (including the interest deductibility policy Labour has spent so much time defending this term).

Oliver dissented from the majority on the Cullen Tax Working Group, and his minority report is said to be where we should look for clues on what Labour is proposing – although again, it must be stressed, nothing has yet been decided.

That minority report agreed there was a “strong case” for taxing capital gains on residential property, but “only to the extent that benefits clearly exceed costs”.

The rest of the opinion was sceptical of extending this approach to capital gains wider to include things like companies and other assets.

Cullen himself, while voting with the majority on the group, later confessed to coming around to Oliver’s view, his Damascene conversion recorded in his memoir and very recently republished in a presentation on a CGT co-authored by none other than Nightingale and Joanne Hodge, who herself co-authored the tax working group minority report with Oliver.

“I voted with the majority,” Cullen wrote, “but came to view the essential change as a CGT on land.”

So if Labour takes the trust of Oliver’s critique as the germ of the tax, what would it mean in practice?

It would probably look like a maximalist bright-line test: family homes exempt, farms also likely spared, but residential investment property and the family bach are all in.

Tax would be levied at realisation, not the once-favoured “deemed return” method, which is a wee bit too much like a wealth tax on people who aren’t always that wealthy.

Such a narrow, property-focused CGT will dismay Labour’s left. But the arithmetic of MMP is ruthless: keeping the defectors from National matters more than indulging purists.

Expect the announcement to be pretty clear on any loose ends: no wealth tax, no more GST tinkering, and likely no return to the ban on interest deductions for landlords. One can have a CGT or the ban, but not both – not without breaking the basic grammar of taxation.

After a slow start, Barbara Edmonds came into her own this week. Photo / Marty Melville

Expect Labour to bury the tax inside a suite of announcements setting out the party’s vision for a more productive economy. That works for the party, which knows that the public’s enthusiasm for taxation isn’t well aligned with that of party members.

Those members cannot be ignored – and nor can Labour’s progressive partners, the Greens and Te Pāti Māori, who have to find some accommodation with this new tax.

There’s a battle brewing over how progressive it’s possible to be. The darkest-before-the-dawn theory looks at the way the progressive Savage Government emerged from the ashes of the Depression – perhaps now is a time for similar change.

The Labour right is sceptical, wondering whether some in the party have simply swallowed too much opposition PR. Things are bad, but not Depression bad, and they’ll probably improve by the election.

Hipkins’ circle remember well Bill Shorten’s “unlosable” 2019 election in Australia – an election lost to hubris after party progressives saddled Labor’s slate with a wish-list of progressive policy.

Hipkins faces the same trap. Momentum has swung from the coalition. But nothing drains momentum faster than tax detail, and nothing could bring the coalition together (quite the feat) like the opportunity to shoot down a new tax.

The wealth tax v CGT debate has been well litigated. CGTs are globally orthodox; wealth taxes are not. Wealth taxes do raise a lot of revenue by taxing hardly anyone, CGTs raise less revenue but tax rather more people.

If Labour embraces the minimalist model sketched out in the minority report, it can argue – plausibly –that tax will shift away from housing speculation towards productive business. But that case is harder to make while fending off questions about dogs and artwork.

Trade-offs abound. Political saleability comes at a fiscal cost. Oliver’s paper reckoned his limited CGT would raise barely 39% of the broad CGT’s take – around $2.4 billion after 10 years. Not trivial, but still less in 10 years than Labour’s 2023 wealth tax would have netted in one. At worst, it could make Labour look unserious about tackling the alleged austerity it’s spent the parliamentary term prosecuting.

Some CGT advocates don’t actually mind the revenue shortfall. The argument they want to have is about productivity and the economy, not fleecing people for cash. A debate about revenue gives National the opportunity to argue Labour only needs the tax to fund its own profligacy – an argument it could furnish with examples of some undependable spending from the last Government.

Those hoping the tax will fund Labour’s promises, particularly the pricey pay-equity reversal, will be disappointed. The answer to that question will probably need to wait until the fiscal plan, published after Treasury’s prefu (pre-election economic and fiscal update) just weeks before the election. A clue here: Labour may repeat the trick it used in 2017, axing or tweaking expensive National policies (like the $6b Investment Boost) to free up cash.

It’s a mistake to think the lion’s share of Labour’s spending commitments will be paid for by new taxes – they probably won’t be.

Can they do it? Well, National loves to kill a tax – and it’s very, very good at that. Labour needs to be on top of the detail in a way this team often isn’t.

Hipkins bungled a question on the tax take in 2023, thinking it went down under Labour rather than up, Edmonds in 2024 circulated a chart that claimed debt had plunged when it had soared, and this week cracked open the door to raising the Reserve Bank’s inflation target – until Hipkins slammed it shut.

Yet this week, Edmonds finally managed to score some wins in the House. Dropping the scripted Question Time routine that has failed her for more than a year, Edmonds turned prosecutor in the chamber and for two days grilled Nicola Willis over the Reserve Bank scandal.

A lawyer by trade, Edmonds handled herself well and bested Willis both days.

They weren’t the only moments Edmonds showed her worth this week.

A staffer in the Ardern Government, Edmonds worked in the office of the Revenue Minister with senior Labour hand Kathryn Street.

The joke around the Beehive was that Edmonds’ and Street’s job was half policy and half keeping the minister out of trouble.

The minister was Stuart Nash, and this week the entire country saw the value of Edmonds’ efforts.

Pity you can’t tax it.