COMMENT:

The trenchant criticism over the Government's failure to agree on a capital gains tax is unwarranted and ridiculous.

The pile-on against Jacinda Ardern is coming from all directions.

There is the unrealistic left who believe Ardern should have beaten Winston Peters into submission, the arrogant right who believe the tax should never have been investigated by a Tax Working Group, and the opportunistic right who will construe any failure to reach agreement as a failure of her leadership.

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Then there are the New Zealand First clairvoyants who claim – usually after the fact - that it was always obvious what the party was going to do.

The criticism of the Tax Working Group chairman, Sir Michael Cullen, is mostly unwarranted as well.

He was a perfectly fine choice for the job. As someone who had rejected a capital gains tax in his role as a former Labour Finance Minister he was alert to the complexities of the case from both an economic and political perspective.

The only warranted criticism of Cullen was after February 21 when he switched from chairman of the Tax Working Group to Labour Party hack, albeit esteemed hack, to slap down National's objections as hard as he could to fill the void his party had left.

Labour refused to fight its own corner because of its self-imposed strictures. Labour and New Zealand First operate an unusual coalition in which they rarely acknowledge the other's existence let alone specific differences publicly.

They are "partners" who reach consensus or don't reach consensus.

That led to some bizarre behaviour on Wednesday when Ardern would not admit New Zealand First had blocked any extension to a capital gains tax.

Then we had the bizarre statement from Peters that he welcomed "Cabinet's" decisions not to implement any extension of capital gains taxation – as though he were having an out-of-body experience.

Many of the critics are conflating two separate decisions: first Peters' decision to block the capital gains tax extension and second Ardern's decision to not campaign on it while she is Labour leader.

Illustration / Guy Body
Illustration / Guy Body

Bizarre behaviour aside, it has been a perfectly reasonably process in most respects and both decisions are rational.

The gulf between theory and practice in this debate is vast. Purists portray a capital gains tax as the panacea to inequality but ignore the unintended consequences of a CGT.

By taxing every KiwiSaver's Australasian share on an accrual basis (the increase in paper value, not on realisation) it would have encouraged investment away from the New Zealand and Australian sharemarket in favour of global markets.

That would have made a laughing stock of Grant Robertson and Winston Peters.

A more limited CGT on residential rental properties was the most viable outcome and the minority report proposing such limits had been favourably received by New Zealand First in February.

Had it been considered in the midst of rampant house inflation, there would have been considerable pressure on New Zealand First to accept it, as there was on John Key in 2015 to impose a CGT on rental properties.

But house values are steady to falling and the tax group considered that while a CGT would lower house prices it would push up rents – making it harder for tenants to save.

Focus: PM Jacinda Ardern announces end to Capital Gains Tax plan, Bridges and Peters weigh in.

Even it had been applied to rental properties, the rules around flatmates, boarders, home offices and the like would have stretched the question of whether the complexity it added to collecting the tax exceeded the benefits.

There were more complexities on the negotiating table.

The Tax Working Group minority report suggested that the risk-free return method could be the way to provide a more steady revenue stream for the Government.

Originally proposed by Rob McLeod's tax group in 2001 (his wife was one of the authors of the minority report) it taxes net equity at a fixed rate each year, not on sale of the property. It is not strictly speaking a capital gains tax.

New Zealand First decided it had become too hard, too complicated and too dangerous in the hands of the National Opposition in an election campaign for which it would cop the blame.

Simon Bridges has been mocked for saying National killed off the capital gains tax but there is truth to it. Its potency in the hands of National was a risk Ardern was not willing to take from experience.

Having designed their own capital gains tax in 2011 and 2014, Labour decided the detail of the tax was killing them at the ballot box and it would be safer to defer the detail to a Tax Working Group.

That didn't work either. National found that having no detail of a CGT was a better weapon than a detailed tax because they could fill the void with worst-case scenarios.

The corollary of claims that Ardern has been a coward and secured herself a second term by giving away a principled position on CGT is that she should have been more than willing to be martyred on the CGT cross, and deny her party the chance to implement hundreds of other progressive policies.

A capital gains tax is not the only way to address inequality. Helen Clark and Michael Cullen rejected a CGT during their nine years in Government, opting instead for direct transfers of wealth through Working for Families.

If Labour wants to target rental property owners in the future, there is nothing to stop Ardern and Robertson promoting a tax policy to achieve that without it being a capital gains tax - such as the risk-free return method promoted in the minority report.

The most ridiculous criticism since the announcement that a CGT is dead is that Ardern has failed to control her coalition partner, New Zealand First. So last century.

There is no mandate for a capital gains tax. Labour got 36.9 per cent of the vote, the Greens 6.3 per cent and their 43.2 per cent combined is not a mandate.

Strictly speaking, there is a marginally higher mandate for no CGT, given that National got 44.4 per cent.

The last election result gave New Zealand First the power to decide the Government, and it gave a veto right by each of the three parties within Government.

New Zealand First has not been unreasonable in exercising that power.