Labour threw what appeared to be a grenade into the debate around tax this week, but a capital gains tax is not the economic shock or disaster that John Key has portrayed it as.

The Tax Working Group spent much of 2009 considering tax reforms for income, land and capital that would change the structure of our economy. This group of experts from academia, the bureaucracies and the accounting industry recommended a capital gains tax, possibly a land tax, a GST increase and income tax cuts.

They argued that distortions in the tax system in favour of property were a driving factor in the boom in house and land prices from 2002-07. The scale of the damage shouldn't be underestimated.

The surge in foreign debt that came with this boom drove up our currency and hammered our export sector. It accelerated the need to borrow and sell more assets.

This boom created a generation of wealthy property and farm owners, yet created a legacy of foreign debt that young New Zealanders will have to repay.

It also drove house prices in our biggest cities beyond the reach of those young people. It's no surprise many are leaving for a clean start elsewhere.

Many of these experts were deeply disappointed that Key decided to cherry-pick the income tax cuts and the GST and leave the capital and land taxes on the shelf.

He was effectively saying he had no real intention of addressing the structural imbalance that is killing our economy. Changes to rules for depreciation and loss attributing qualifying companies made a difference, but only at the margins.

In the wake of the collapse of finance companies and the slide in bank deposit rates, investors are just as keen to put their money into housing in the hope of making tax-free capital gains.

House prices are rising again, particularly in Auckland. Since Key ruled out a capital gains tax or land tax in February, housing loans have risen by $3 billion to $172 billion.

The currency has risen from US70c to US83c, in part because of foreign borrowing and relatively higher interest rates caused by this pro-property imbalance.

The Prime Minister's refusal to consider a land or capital gains tax reflects a political decision to favour a generation of property owners over the long-term interests of those young Kiwis who don't own property and will inherit the debts of their parents.

Key is at least consistent in refusing to take advice from experts to consider raising the age for NZ Super.

Key is not governing for the nation but in the interests of property owners and the elderly who created our crushing debt load.

Labour's decision to try to break the political impasse should be welcomed but it doesn't go far enough. A capital gains tax will raise a relatively small amount, although it will fire a potent shot across the bow of property investors.

The best way to make a difference is to impose a 0.5 per cent land tax with a relatively high tax-free threshold and the ability to defer payment until a property is sold.

It would raise about $2.3 billion a year and should be used to reduce government debt and pressure on the exchange rate.

If we don't move urgently to cut debt, push down our currency and encourage productive investment, we are sending a big signal to our young to visit an airline website to buy a one-way ticket.