Labour, Capital Gains Tax, ‘fairness’, 2020 election

Labour have promoted a more comprehensive Capital Gains tax for years, and set up the Tax Working Group 14 months ago with a CGT as a major focus. However they have ruled out some capital gains from being taxed, particularly ‘family homes’.

Labour seem to be caught between two forces – a stated desire to reform the fax system and make it ‘fairer’ (which in reality means taxing some people less and some people more), but also an obvious wish to get re-elected next year. They have said they will campaign on whatever tax changes they come up with in the 2020 election to get a mandate to implement them.

Labour’s tax policy: https://www.labour.org.nz/tax

Hamish Rutherford (Stuff):  Is capital gains tax a hill that Labour is willing to die on?

National wants Labour to go into the next election proposing a capital gains tax because the Opposition believes such a move will be something close to political suicide.

After close to a decade in the wilderness, during which Labour continuously preached about the inherent unfairness of New Zealand’s tax system, the largest Government party must ask itself: is this a hill worth dying on?

Although supporters tend to oversimplify the case, there is a strong, possibly compelling, argument for capital gains to be taxed.

If a person is taxed for what they earn from their work, it seems only reasonable that they also be taxed for what they receive from their assets.

Equality writer Max Rashbrooke went so far as to suggest capital gains tax should be called a “fairness tax”.

But the problem is, no-one is proposing the type of tax which this implies.

Labour has already ruled out a capital gains tax on the family home, and  an inheritance tax. Both exemptions have massive implications for how much the tax would raise and the extent to which the wealthy can manage to avoid it.

Both are also political promises which have implications for whether the tax is, indeed, fair.

Whatever is promised by the Tax Working Group report will leave Labour in an invidious position.

Capital gains taxes are inherently complicated and New Zealand’s existing tax system is designed around not having one in place.

During the election campaign in 2017, Labour was constantly on the back foot amid an intense campaign by National’s “let’s tax this” attack advertising.

Jacinda Ardern was eventually forced to rule out major changes before the 2020 election, but, according to pollsters, the damage was done.

Unless Ardern and Finance Minister Grant Robertson are ready to continually make the case for whatever changes are proposed, the Government’s proposed capital gains tax will be whatever National says it is.

So far NZ First has remained silent on its policy on capital gains tax, but if Winston Peters can be convinced to support it at all, he is certainly unlikely to do so without extracting some tangible win for the party to promote to his supporters.

All of this comes amid high uncertainty about what a capital gains tax would raise in the coming decade, in an environment where low interest rates have pushed asset valuations to levels which may not be sustainable, especially if the economy slows.

For all of its belief that there is a major problem in the tax system which could be fixed through a change in mindset, the reality is likely to be dawning that the tax will be politically challenging unless major changes are made, which will undermine how much is raised as well as how much “fairer” the tax system will become.

It will also be so easy for its opponents to demonise that the Government must wonder whether it’s worth the risk of trying.

But if Labour decide that progressive tax reform is ‘not a priority’ they will be demonised as well, for talking up tax reform and a CGT and then backing down. They have to come up with something substantive on tax reform.

John Cuthbertson (Stuff) – Capital gains tax: What’s fair for one person may hurt another

In the 14 months since the Tax Working Group terms of reference were published, there has been a lot of talk about fairness, particularly the fairness of a capital gains tax (CGT), but not much talk about balance.

Fairness means different things to different people. It can mean a different thing to an individual at different times depending on their situation.

To keep as many people as possible happy, and tax revenue flowing, over millennia, tax authorities have come up with a number of, often competing, tests of a “good” tax system, including fairness, efficiency, certainty, minimising avoidance and compliance costs, coherence and last, but not least, raising enough cash to meet the Government’s needs.

At the same time, taxpayers have developed one simple principle – not in my backyard. If the tax collector is to reach into my backyard, then the pain and the gains should be equally shared relative to ability to pay.

That expectation gap – as old as tax itself – is one the working group is hoping to balance with its proposal to tax capital gains on assets not already caught by the tax net, what some are calling a new capital gains tax.

Its interim report warns that inconsistent taxes on gains from sales of capital assets, which favour the wealthiest, make our tax system less fair and risks undermining public acceptance of the system.

So consistently taxing capital gains will make our tax system fairer, right?

Well, it might not be that clear cut.

A truly fair approach would be to tax all asset classes, however, as the Government has told the working group that the family home must be exempt, this broad approach is hamstrung from the get-go.

Chartered Accountants ANZ’s view is that if introduced, a CGT should include land, residential investment, commercial property and farms, shares and business assets.

The Government has told the working group to have specific regard to housing affordability. If this is the case, we question the outright exemption of the family home given the strong prevalence (65 per cent) of owner-occupied housing in the overall housing market.

An alternative approach would be to include a dollar-value exclusion threshold and only tax gains above this threshold – targeting overcapitalisation. This approach has been used successfully overseas and would minimise distortions.

The working group’s key question is whether “the fairness, integrity, revenue and efficiency benefits outweigh the administrative complexity, compliance costs and efficiency costs” of introducing a CGT.

A CGT is a particularly complex issue and CA ANZ’s recommendation to ministers and to the Tax Working Group is to ensure policy designers have enough time to strike the right balance between what assets are included and what roll over relief is available when the asset changes hands and, at the same time, fully integrating changes with existing income tax legislation and stakeholder systems.

Our tax system has got to be perceived by taxpayers as broadly fair to achieve their buy-in.

It must be easy for people to comply with and difficult to avoid. It also must ensure the tax base is sustained and broad enough to support our health system, national infrastructure, schools and social assistance.

Labour has to try and balance the tax system so that taxpayers see it as broadly fair. But taxpayers are also voters, and next election may come down to how fair they see Labour’s tax proposals, versus National’s.