Labour’s Clayton’s Capital Gains Tax policy

Labour have a Clayton’s Capital Gains Tax policy – the CGT policy you have when you don’t want one before an election.

And Jacinda Ardern can claim clarity and transparency all she likes, but that won’t make her sound clear and transparent.

Labour needs a way of funding additional spending signalled in their policies (and that’s before policy demands and costs from NZ First and Greens are taken into account).

For the last election they proposed a Capital Gains Tax. When he took over the leadership after the election Andrew Little ruled a CGT out, saying it was unpopular (that’s debatable, Labour leaders had been unpopular).

This campaign new leader Jacinda Ardern won’t rule out a CGT, saying one would be considered if their proposed Tax Working Group recommended one

“I think we’ve given a huge amount of clarity and transparency over this. We’ve made it very clear we’re not campaigning on a Capital Gains Tax, and we do not believe on Capital Gains tax or  anything similar applying to a family home.

“But at the same time we’ve also acknowledged that we don’t think there’s fairness in our taxation system. We’ve proposed a review which we hope to hold in government, which we will hold in government.

“I’m not pre-empting what that review will find, in the same way that the Government when they campaigned in 2008 did not pre-empt the work that their 2010 taxation report would find.

“But I am maintaining our right and ability to act on it’s findings and do the right thing when we’re in  government.”

So if Labour lead the next Government and appoint a taxation review group that recommends a Capital Gains Tax then they may act on that.

“We’re yet to know what that will be though.”

Not exactly clarity for now.

“I’ve been very, very transparent on this. We do not think that assets are treated fairly, relative to other forms of taxation in New Zealand. The fact that someone can go out and work a 40-hour week and pay tax on that, someone can own multiple homes, flick them off for capital gain and is often not treated in that same fair manner, is something that needs to be addressed.

“Most countries have. New Zealand sits on its own in that regard. But I’m not going to pre-determine what that working group will find, and how it suggests we resolve that.

She clearly supports a CGT. And makes it fairly clear what she wants the working group to recommend and not recommend.

Question “What if the working group finds that the capital gains tax should apply to the family home, haven’t you just pre-determined that?”

Ardern: “Oh we’ve set out some expectations, and any government would say that there are particular values and things that it holds important and dear, so it’s good that we be clear with that group before we go in what our expectations are.”

That’s waffle that can be taken to mean that Labour want a CGT to be recommended by a Tax Working Group, they want family homes exempt, but don’t want to campaign on implementing a CGT this election.

More from interest.co.nz: Labour leader Ardern maintains ‘right and ability’ to introduce Capital Gains Tax if working group suggests it next term; Would exempt ‘family home’

 

recent study by economist Andrew Coleman would indicate that not imposing a CGT on the family home would continue to encourage home-owners to invest in lifting the value of their property by renovating for value uplift and building larger homes, rather than potentially putting that money into other savings schemes that currently face greater tax hits than property.

A CGT exempting family homes is also a tad Claytons – the CGT you have without having a comprehensive CGT.

 

Tax is likely to be a key election issue

There have been major distractions in politics over the last two weeks, with the fall of Andrew Little followed by the euphoric rise of Jacinda Ardern, plus the self destruction of the Greens which included the end of two MPs and the effective end of Metiria Turei’s political career.

Amongst that earlier this week there were two polls that showed a shrink in support for the greens and NZ First, and the likely return of a head to head battle between National and Labour.

And in a debate on The Nation yesterday between Steven Joyce and Grant Robertson the battle lines were drawn.

Robertson: So, under Labour’s package, every family earning $62,000 or less will be better off than under National’s package. What I don’t want is for Steven and me to get a $1000 tax cut when we’ve got families living in cars and garages, when we’ve got a health system that’s not coping. What we’re saying is we’ll get the money to the families in need, but we’ll get the money that Steven wants to give to us as tax cuts – to wealthy people like us – we’ll get that money, and we’ll make sure it’s invested in public services that have been run down.

Joyce: Well, it’s not actually about me – or about Grant, actually. It’s about those people who are on the median wage who are currently facing a 30-cent-in-the-dollar tax rate, and we have to change that. And the only way we change that is shifting the thresholds. Now, Grant’s allergic to actually reducing taxes and allergic to adjusting thresholds. He’s about increasing taxes.

Labour have pushed the anti-tax cut for rich people since National’s tax cut package was announced in the budget in May.

But it doesn’t just reduce tax or ‘rich people’, it reduces tax for all workers who pay PAYE:

Increases the $14,000 income tax threshold to $22,000, and the $48,000 threshold to $52,000. This provides a tax reduction of $11 a week to people earning $22,000 or more rising to $20 per week for anyone earning $52,000 or more.

https://www.budget.govt.nz/budget/2017/family-incomes-package/index.htm

That’s $1,000 less tax per year for everyone earning over $52,000 (affecting ‘rich people’ of course but also the majority in wage earners).

Of all the polices announced this one directly affects me the most. Labour would scrap it, and that has to be a significant factor in deciding who to vote for.

More on possible tax changes;

Lisa Owen: Capital gains tax — are you ruling it out in the first term absolutely, if you’re in in the first term?

Robertson: We’ve got a tax working group. I can’t pre-empt what they’re going to come back and decide.

Lisa Owen: So you can’t rule it out? Could come in the first term?

Robertson: I can’t pre-empt what that group says, but here’s the important point — right now today we have something called the bright-line test that the National Party brought in. It says that if you sell a house that’s not your family home within two years, you’ll pay tax on it. Steven has a form of capital gains tax.

Lisa Owen: I’ll give you the chance to talk about your policy, Mr Robertson. So a capital gains tax is still on the table? You’re not taking it off?

Robertson: What we’re going to the election with is a commitment that if you sell a property that is not your family home within five years, you’ll be taxed for that.

Robertson clearly avoiding stating a position on a Capital Gains tax, something he has favoured in the past but Little took off the table. It appears to be under consideration again.

Joyce: I think there’s a problem there for the Labour Party, because they’re dodgy on tax. They’re refusing to say about the capital gains, they’ve mentioned a water tax last week, but they won’t tell us how much it is, and then, of course, they’ve got a regional fuel tax they won’t talk about where it goes beyond Auckland.

Expect National to hammer the uncertainty over what additional taxes a Labour government could implement.

Labour are trying to avoid details by deferring to a future tax working group (on CGT) and an ‘expert panel’ (on water taxes).

Lisa Owen: So top tax rate — can you rule out lining yourselves up with the Greens and having 40 cents over 150 grand? Are you going to go for that?

Robertson: No, I don’t think we will be going for that, but what we will do…

Lisa Owen: …but you are not ruling out raising that tax rate.

Robertson: I’m not ruling it in; I’m not ruling it out.

On a water tax:

Lisa Owen: What about your water levy? What’s that going to be?

Robertson: The water levy? Look, what we’ve said there is for every thousand litres of water that’s used in irrigation, perhaps one or two cents.

Lisa Owen: One or two cents. There you go, Mr Joyce. That’s not going to make a huge difference, is it?

Joyce: This is the problem is that he’s not telling.

Robertson: One or two cents, Steven. How big a difference?

Joyce: Well, hang on. Don’t ask me; ask the farmers, because I’ve seen some figures that even at those levels, you’re talking about 50,000 a year per farm. So I think it’s beholden on the Labour Party to actually come a bit more clean on their tax stuff, because they’re being very dodgy.

Robertson: We’ve been completely upfront.

Joyce: You haven’t, actually. So you’ve got a water tax that you won’t tell anybody—

On the Panel discussion on The Nation:

Patrick Gower: I actually think that Grant Robertson probably got in a few more jabs in…however in terms of actual overall damage I think some of the talk about tax there that Steven Joyce, in terms of long term damage beyond the debate, in terms of that capital gains tax is back on the table.

The capital games tax is back baby. Labour were going to go to the next election with that, but that could come in next term.

Lisa Owen: Jane, are they doing themselves a disservice by not putting numbers on stuff now.

Jane Clifton: Absolutely. They’re their own worst enemy. This week alone with the water tax issue, because finally we’ve got a figure for irrigators and wineries and so on of one to two cents, although David Parker said three.

…but yeah, just get your ducks in a row, announce them all, don’t leave room for speculation about $18 cabbages and $70 on a bottle of wine…

The Newshub video cut Gower off at the end, but he pointed out a significant power shift in Labour. When Andrew little took over the leadership in 2014 he put a number of Labour policies on ice, including the CGT.

But with Little dropping to the ranks and Ardern taking over the leadership Gower said that this meant also a significant rise in influence of Robertson – he and Ardern have been close allies for a long time. We are already seeing glimpses of what that may change in Labours tax policies.

Gower followed up on Twitter:

So expect tax to be a prominent issue in the election.

It may have a significant effect on the outcome of the election. Labour will need to be much better prepared for the inevitable attacks from National.

Ardern will need to be well prepared for the leaders’ debates with Bill English. She will likely have a ready response to a ‘show me the money’ type line (Key used that to devastating effect against Phil Goff in 2011), but she is likely to get challenged over and over if she remains vague of what taxes a Labour government may impose or increase.

And tax could also have a significant impact on the outcome of coalition negotiations. Both Labour and National will have to try and find enough partners to support their tax (and spending) plans.

Personally a water tax or a CGT or a fuel tax in Auckland won’t affect me.

But I will be seriously taking into account whether National’s income tax cuts might be reversed or not when I decide who I will vote for.

A Capital Gains tweak

NZ Herald reports PM makes major move on housing profits and foreign buyers. Is it a major move?

A capital gains tax on residential property sold within two years of buying it is being seen as a step in the right direction, but not far enough, with few expecting the new tax to have a big effect on Auckland property prices.

Prime Minister John Key announced the plan this morning as part of the Budget package.

The exemptions to this new bright-line test will be if the property sold is the seller’s main home, if it is part of a deceased estate or inherited, and or if it is transferred as part of a relationship settlement.

The tax will be on the seller’s normal income tax rate.

Is it a major move? Or will it little more than symbolic in practice?

Labour leader Andrew Little said this afternoon the moves were “weak measures to rein in the astronomical profits property speculators.”

Little thinks it’s a weak move. It’s debatable whether a major increase in capital gains criteria would do much to alter the property market anyway, as property markets that have more stringent capital gains taxing have similar price surges to Auckland.

IRD have already been tightening up on taxing capital gains on property speculation see Improving tax compliance on capital gains.

This change may be little more than a tool to help IRD more clearly define what property sales should be subject to tax. But that may be a good thing.

Tweaks are often the best may to change things, incrementally rather than monumentally.

Major tax changes can create as many problems as they solve, especially if they cause major market shifts.

Improving tax compliance on capital gains

In the past Labour MPs have repeatedly claimed and implied that property speculators don’t have to pay tax on capital gains. A year ago then leader David Cunliffe and finance spokesperson David Parker both pushed this fallacy. From Cunliffe and Parker repeat claims on property speculation:

David Cunliffe in a speech to Young Labour:

We have too many children who are getting sick because they live in cold, damp, cramped houses with black mould growing up the walls. Sometimes owned by speculators who just push the rent up while getting rich on tax-free capital gains.

David Parker on The Nation:

“You need to tax the speculators….capital gains tax”
“Loan to valuation ratios would not be needed if they were taxing speculators and building affordable homes.”
“National Party, despite the fact that we had 40 percent house inflation, they’re not doing anything about it. Not taxing speculators…”

Presuming they must have known that IRD does pursue compliance on taxing the capital gains of speculators this looked dishonest.

It’s good to see that Andrew Little seems to be either more informed or more honest. He recently suggesting that the Reserve Bank target speculators as reported in Focus on spec buyers: Little

 Mr Little said the Government must take action on property speculators who were damaging the housing market.

Mr Little is known to not favour the introduction of a capital gains tax, something Labour had campaigned on in the last two elections and lost.

Mr Little said there were several options the Government could take to prevent property speculators building up large housing portfolios and pushing up house prices.

First home buyers, or those who wanted a rental property for retirement, were being shut out of the market by lending restrictions that should be targeted at property speculators who sometimes owned 10 to 20 houses and sat on them, he said.

”The solution needs to focus on Auckland. There is no point in a family trying to buy a house in Wanganui, where prices are dropping, being subject to lending restrictions designed to lower house price inflation.”

Another solution could be those buying multiple properties needing a higher level of equity for subsequent purchases, he said.

But the most important action was to build more houses to increase supply.

He’s on the same page as National in seeing the need to increase the supply of houses. And I’d expect him to agree with Bill English in his approach in IRD to clamp down on speculators.

Finance Minister Bill English yesterday rejected calls by the Reserve Bank to remove tax incentives for investment housing, which the bank has blamed for rising house prices in Auckland. But he said there was an ongoing discussion about whether the Inland Revenue Department could be doing more to enforce existing rules on property trading.

Mr English said there was already a tax in place for people who bought property with the aim of reselling it.

And with real estate agents and buyers reporting high levels of trading activity in Auckland, “there is a question of whether that should give rise to further enforcement activity”.

Speculators are already taxed, when the IRD can determine that they have been speculating.

At present, speculators have to declare that they are buying a house with the intention of reselling it. They are then taxed on the sale.

The IRD scrutinises property transaction records to make sure people are complying with this rule. In particular, it looks at how quickly a house is sold and the number of houses a person is selling.

Figures released by the IRD showed that $52.4 million was collected in 2013/2014 from speculators or traders – either from one-off speculative transactions or patterns of dealing. This figure is expected to increase in 2014/15. The IRD has already collected $63.2 million.

So IRD are addressing speculation and their tax take is increasing.

Any potential changes to the IRD’s resources would be announced as part of the Budget on May 15.

That suggests that the rules are seen as sufficient but that more resources may be provided to improve compliance with tax on capital gains when speculating.

Hickey’s housing slant

The official description of ‘Bernard Hickey’s Opinion’ column says that  ‘Bernard is an economics columnist for the NZ Herald’.

In his column today, Use that power, renters, Hickey has strong words about Auckland’s housing problems

Finally, Auckland’s Generation Rent has found someone who is talking about the elephant in the room – rampant speculative demand for housing by landlords.

Everyone worried about Auckland’s astonishing house prices should read Reserve Bank deputy governor Grant Spencer’s speech.

He spelt out in the plainest language yet that property investors are taking advantage of tax incentives to use cheap debt to buy as many houses as they can.

The Reserve Bank has exhausted its toolkit, having put up interest rates and set limits on high loan-to-value ratio (LVR) lending. It is looking to increase capital requirements for landlords’ mortgages, but it knows it’s not enough.

Exasperated, the Reserve Bank has asked for help to control the risks to New Zealand’s banking system, which relies on house values to back 60 per cent of its loans.

Spencer called for the Government to revisit the tax incentives for landlords.

Fair enough listening to and quoting the Reserve Bank Governor.

The Government’s top economic adviser has said landlords’ tax incentives should be reduced and central Auckland apartments should be built in defiance of the Nimbys controlling Auckland politics.

Council and Government politicians are refusing to take that advice.

What I find interesting about this is the apparent one-sidedness of Hickey’s column. It seems that he has used the Reserve Bank Governor to support a hobby horse.

Now this column may have been written before yesterday morning.

But at 9 am yesterday Hickey participated on a Twitter discussion for The Nation about their interview with Treasury Secretary Gabriel Makhlouf who has different views on housing than the Reserve Bank Governor.

Join our Twitter panel and at now!

Those alternatives weren’t mentioned at all in Hickey’s column – and he should have been well aware of them before listening to the Makhlouf interview.

On the panel Hickey displayed what looked like a pre-decided slant. He has a clear preference to Reserve Bank advice to Treasury Advice.

Here’s another view on China for ‘s Gabs Makhlouf to read after

He tries to educate Makhlouf on his angle.

Big gap there between @nztreasury & @ReserveBankofNZ. Gabs Makhlouf sceptical about CGT just 3 days after bank called for debate.

But Hickey doesn’t seem \want debate, he wants to promote his views which happen to side with the Reserve Bank advice.

Got a feeling the @ReserveBankofNZ would have liked a bit more support from @nztreasury on housing taxation than that.

Ok, he has ‘a feeling’ he and the reserve Bank are right.

In Muldoon era it was the @nztreasury offering the freest and frankest and most critical advice. Now it’s the @ReserveBankofNZ

Is that because it’s the freest and frankest? Or because it’s ‘most critical advice’ that happens to fit his opinion?

For #nationTV3 viewers wanting an alternative housing view, here’s the speech from @ReserveBankofNZ’s Grant Spencer http://www.rbnz.govt.nz/research_and_publications/speeches/2015/action-needed-to-reduce-housing-imbalances.html … …

Diverting viewers to something he prefers to the Nation interview.

Another example here of how NZ’s leaders today are pushing the costs of current consumption onto their kids/grandkids http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11433784

He’s not discussing the Makhlouf interview at all, he dismissed it and is linking to alternatives he agrees with.

Counter-factual for a CGT is what happened to Auckland house prices post-election after buyers realised no CGT. Up 20%

Has Hickey got any evidence supporting that ‘counter-factual ‘? House prices almost certainly didn’t go up 20% solely because the election result meant no wider Capital Gains Tax. Did it have any effect at all?

Unless Hickey can produce facts I will remain very dubious about that claim.

And I’m very disappointed he simply dismissed Makhlouf  and made no attempt to lead any discussion. In his The Nation panel tweets and in his Herald column he looks more like an economic activist than a balanced economic columnist.

Treasury Secretary – Capital Gains Tax won’t help Auckland

The Treasury Secretary Gabriel Makhlouf was interviewed on The Nation yesterday and said he doubted a capital gains tax would help the escalation in property prices in Auckland.

A CGT isn’t a quick fix and it won’t address the current problems.

Well, just this week the Deputy Reserve Bank Governor, Grant Spencer, is calling for a capital gains tax, or some kind of tax on investment. What do you make of that?

Well, I think what Grant Spencer was talking about was the need for us to address the housing issues in Auckland, and at the heart of the housing issue in Auckland is that we’re not building enough houses, and the Productivity Commission said a few years ago when it looked at this issue that building more houses is the answer. Looking really carefully at our planning regulations is the single biggest thing that will make a difference to how we build— how many houses we build in Auckland.

So you don’t think a capital gains tax or a tax like that is part of the solution?

I’m quite sceptical. If the issue that people are talking about is house prices, London and Sydney have got capital gains taxes and they’ve got similar issues as us. This is a phenomenon that’s actually playing out in large urban areas which are successful, right? And New Zealand is successful, Auckland is successful, so one of the consequences of that, as in Sydney and London and in Vancouver, is the current phenomenon, house prices. But we need to build more houses to actually meet the needs that we’ve got.

So in your view, it’s a supply side problem, then?

That’s the principal issue, is the supply side problem. And it’s not just my view; it’s the Productivity Commission’s view as well.

A Capital Gains Tax would do little or nothing to address the soaring property prices in Auckland.

A CGT (as proposed by Labour last term):

  • It would phase in very gradually so would have little immediate impact
  • It would not tax capital gains already realised
  • It would affect the whole country, not just Auckland
  • It has proven to not limit property inflation in other countries

So it’s a solution to a different problem, the broadening of the tax take. That’s a different debate with varying views on it’s worth.

Capital gains are already taxed on property speculation – where property is bought and sold with the aim of capital gain (according to IRD rules). Capital gains on share trading is also taxable.

Makhlouf is correct saying “building more houses is the answer” – building more houses in Auckland where the biggest demand is. For this to happen more land must be made available more easily. It’s land inflation that’s the problem, and that’s happening due to a shortage of supply and too many restrictions on higher density use.

Video: Interview: Treasury Secretary Gabriel Makhlouf

Full transcript (Scoop): Lisa Owen interviews Treasury Secretary Gabriel Makhlouf

Capital Gains Tax versus Land Tax

A guest post at Kiwiblog suggests a land tax would be more effective than a capital gains tax

However, a capital gains tax would do little to discourage the middle class from continuing to invest in rental properties. A capital gains tax is not payable until way into the future, if ever, in their minds so would cause them little immediate concern. Furthermore, with Labour’s version the CGT rate would only be 15%.

I think Labour’s reason for setting it at 15% was to allow for capital gain due to inflation.

A more effective way to make residential property less attractive and raise revenue would be to impose a tax that immediately hits the pocket and is impossible to avoid.

A land tax set at a small percentage of the value of land owned, payable annually or maybe quarterly, would do this. A tax free threshold of around $200,000 could exempt the land occupied by the average family home while discouraging the pouring of more money into low yielding property.

A land tax would be better at reducing inequality and do less to discourage productive activity than a CGT or raising income tax.

Other taxes on the stock of capital such as inheritance and gift taxes have similar advantages. Such taxes were used in the past to break up big estates and reduce inequality. Any party serious about reducing inequality needs to consider using them.

A land tax is an interesting alternative. If it has a simple threshold it would be far simpler than Labour’s exemption laden Capital Gains Tax.

Local Body rates are already calculated off property values. It wouldn’t be difficult to use a similar system for gathering a land tax.

Despite persistent claims by Labour that a Capital Gains Tax would “fairly” clamp down on property speculators we already have a tax on capital gain for speculators. The difficulty is in ensuring it is not unfairly or illegally avoided. Inland Revenue has been working on improving compliance.

From Wikipedia:

Capital Gains Tax

The most common capital gains are realized from the sale of stocks, bonds, precious metals and property. Not all countries implement a capital gains tax and most have different rates of taxation for individuals and corporations.

Land Value Tax

There are several practical issues involved in the implementation of a land value tax. Most notably, it needs to be:

  • Calculated fairly and accurately,
  • High enough to raise sufficient revenue without causing land abandonment, and
  • Billed to the correct person or business entity.

Cunliffe trips over CGT and IRD

Labour leader David Cunliffe has been exposed again, apparently making things up incorrectly about something he should have known about.

On Radio Live yesterday Cunliffe claimed that Labour had discussed with Inland Revenue that they could handle a Capital Gains Tax.

Not only has IRD denied they discussed anything it’s been known for years – including to Labour – that the aging IRD computer system was unlikely to be up to handling it.

Did David Cunliffe tell me the truth yday when he said the IRD had told Labour it could handle a new Capital Gains tax? Drive

A little later later:

Cunliffe said to me he had run CGT past IRD to see if they could cope with it. IRD told me today NO discussions have occured.

Back in 2011, prior to the last election on interest.co.nz Government still eyeing savings tax break, but complexities and poor IRD computer systems stand in the way:

IRD systems in need of hundreds of millions – could be a problem for Labour’s CGT

Labour’s Revenue spokesperson David Clark in 2012 on Labour’s blog – IRD computer crisis:

The Inland Revenue Department has been pleading for a new computer system for years. Its current one (known as FIRST) was built in 1992 when the Internet was still in nappies. 

In February this year, the Prime Minister said tax policy was being held back because the computer systems “can’t actually support radical changes from Government.”  He also said “You don’t want to be in a position where Parliament is held hostage to a lack of technology.”

But New Zealand is being held hostage to this technology. Well placed sources tell me that the Government couldn’t currently implement a capital gains tax…

So two years ago Labour thought IRD’s computer coudn’t handle it.

NBR in May this year – Why a capital gains tax will be off the agenda

Despite the policy purity, it’s widely recognised a CGT will only raise revenue of any substance after an estimated at 15 years. One should also read between the lines; until Inland Revenue’s first mainframe computer system is finally upgraded, such a significant policy change would likely be the last straw to a full collapse of the current computer system.

Transcript from yesterday’s interview:

Duncan Garner: Inland Revenue’s, and you’ll know this because you’ve been a Minister, their tax administration system, their computer, is getting old and it’s aging…

David Cunliffe: Very old.

Garner: …and it’s being replaced. Can it actually handle a Capital Gains Tax, because my understanding is that it may not be able to?

Cunliffe: Um, it will be part of the rebuild and redesign that’s allowed for in the policy on-ramp. Um, and that’s why we’ve paced it as we have.

Garner: But has anyone asked the IRD if the can handle that tax, because it’s quite complex?

Cunliffe: Um yes that it was discussed ah when we first designed it, and ah we’ll update if we necessary if we need to when we’re in Government.

Garner: Right so has the IRD said they can handle the Capital Gains Tax to you?

Cunliffe: Yes, in principle they have.

Garner: They have personally said that to you?

Cunliffe: Ah well not in person to me I don’t work at that level of detail, I’m a party leader so I’m I don’t get down in the weeds like that but we have worked that through not only with um ah with the IRD folks but with Treasury folks when we were designing the system.

Cunliffe wasn’t party leader “when we were designing the system”, it has been said he was involved in designing the system.

It looks like Cunliffe has again been caught out making things up about something he should have known about.

Basic stuff. Balls up, again.

RadioLive Intervbiew – DAVID CUNLIFFE WHAT’S ACTUALLY HAPPENING WITH THE CAPITAL GAINS TAX?

Labour’s alarming ignorance about their CGT

Labour have been embarrassed by their lack of detailed knowledge of one of their flagship election policies, Capital Gains Tax.

This blew up in Tuesday’s leader’s debate and “David Cunliffe was flummoxed and admitted yesterday he was unsure of the CGT policy details – even though he wrote it”.

The information on CGT on Labour’s website was sparse. They added a link to more details yesterday.

Stuff reports in Gotcha politics replaces dirty politics.

The row was sparked by Tuesday night’s Press/stuff.co.nz leaders debate when Prime Minister John Key claimed that under Labour 300,000 Kiwis with homes in family trusts would have to pay a capital gains tax. He also said a Labour-Green government would introduce five new taxes.

Opposition leader David Cunliffe was flummoxed and admitted yesterday he was unsure of the CGT policy details – even though he wrote it.

Labour fired back, saying Key was wrong, and re-issued the policy, first announced in 2011. 

As well as ignorance about their own policy Labour have been misleading (deliberately or through ignorance) about tax and property speculators. They have often claimed their policy will target speculators but that is already subject to tax and Labour’s CGT would actually halve the amount of tax payable by speculators.

Dene McKenzie covers this at ODT in Capital gains policy stumbles.

Labour’s capital gains tax policy is starting to unravel as accountants and politicians take aim at the major party policy following a slip-up by Labour leader David Cunliffe.

Cunliffe was caught out twice in tax questions during a leaders debate on Tuesday with Prime Minister John Key.

Mr Key was adamant New Zealand had a capital gains tax in place and then threw a question at Mr Cunliffe about family homes being held in trusts which the Labour leader could not answer.

The question was whether a family home held in a trust would be subject to Labour’s capital gains tax. Labour advisers later said it was exempt although the policy says: ”We will ensure trusts are not used as a means of avoiding a CGT”.

Mr Mason said an interesting point was Mr Cunliffe seeming to suggest CGT would deal to speculators. If that was true, they would be getting a tax cut. At present, they pay tax on the full profit at their marginal rate of say 33%. Under CGT, the tax rate was reduced to 15%.

”I suspect he just doesn’t quite understand how it works at all, as even Labour’s website says: `Assets currently taxed at the individual’s marginal or at the business tax rate will continue to fall under the existing regime’.”

More from Crowe Horwarth tax principal Scott Mason on the CGT:

As to the detail of Labour’s proposed CGT, who would know, he said.

Despite being Labour’s policy for more than three years, the party had released very little detail, instead saying some experts would design the final policy.

”The policy on their website does specifically say they will attack trust structures, so I can see why Mr Key felt concerned and asked the question. Mr Cunliffe’s lack of response during the debate makes one wonder whether the later clarification was policy on the run.”

Perhaps the party did not want the detail released until after the election, Mr Mason said.

Finance Minister Bill English said nowhere in Labour’s CGT policy did it exclude family homes owned by trusts.

Labour was trying to say the test for whether a capital gains tax applied was not whether a trust owned the property but who lived in it.

That would require Inland Revenue to confirm the living arrangements of householders in deciding whether the law would apply.

Ownerships of trusts and ongoing living arrangements can be complex – but not according to Labour’s housing spokesperson Phil Twyford in a Herald video.

“Our policy is plain and simple, it always has been. If it’s the family home, capital gains tax doesn’t apply.”

Twyford is contradicted by Labours policy detail which states:

Trust law is complex though, so how we manage this will be decided once we get advice from our Expert Panel.

And Twyford acknowledged that Cunliffe didn’t know a key part of their policy, and Twyford admits needing to be briefed about it for the Herald interview.

Why couldn’t your leader answer ‘no’ last night like you just have when I asked you about Capital Gains Tax, why wasn’t he as knowledgable about that and as definite as you’ve been?

Twyford: Well, it won’t surprise you that I got briefed on that very issue before I came in to see you this morning.

It surprises me that Twyford would have needed briefing on a key part of Labour’s housing related tax policy.

Twyford: You know there’s a lot of policy detail here. The fact is that in that debate John Key was wrong. Our policy is clear, it’s in the manifesto.

Detail wasn’t in the manifesto until after Key raised the issue.

It’s excluding the family home.

Twyford: Absolutely. John Key was wrong. Yeah I’m sure David wishes he’d answered ah more quickly...

Cunliffe didn’t answer until after he was briefed after the debate.

…but these things happen in politics.

Being ignorant of a key part of a key policy that you helped write is not a good thing to happen during an election campaign.

Twyford repeated that Key was wrong – but how could Key or anyone else know what Labour’s leader and Labour’s housing spokesperson seem tonot have known. Labour is leaving it up to an ‘Expert Panel’ to advise them on the complexities. How can he expect Key to know what they might decide?

At the time of the debate the flummoxing of Cunliffe was called a mistake but not as bad as Goff’s “show me the money” hiccup in the last campaign.

Key has highlighted two important things.

He has injected a contentious policy into the election debate, one that Labour has promoted strongly but is vulnerable on, especially when serious doubts have been raised about how it might be applied.

It’s not just an issue regarding family homes, a CGT will impact significantly on small business owners and farmers. It may also apply to shareholders including many Kiwisaver account holders.

The flummoxing of Cunliffe was an unexpected bonus.

But there’s another aspect of a CGT that I haven’t seen addressed – how much impact introducing the tax will have on both the housing market and and on business.

Labour promotes and defends the CGT on the basis that most OECD countries have one (and those countries still have problems with housing markets).

But I haven’t seen any information presented on what impact the introduction of a CGT might have on a modern economy. Australia has had a CGT for 25 years and has significant property inflation right now (I know someone in Brisbane who has just had their property revalued)

How many countries have introduced a similar type of CGT in the last decade? How has that impacted on their housing markets and their business environment?

Won’t a CGT be too complicated to understand and complex to administer?
All but three OECD countries have some form of a CGT. There is a wealth of international experience to draw on and we will learn from the work other countries have done. Labour will also get advice from our Expert Panel to ensure the system is easy to understand and to administer.

“We will learn” – Labour are promoting a policy they have had for two elections and they hope to learn about it? Shouldn’t they they had already learned about it before committing to their proposals?

Shouldn’t they have got Expert Panel advice already so they could “ensure the system is easy to understand and to administer”?

What if their future Expert Panel advises them the system they have proposed will be complex, difficult to understand and difficult to administer?

Labour’s ignorance about key parts of their policy, their ignorance of how their policy will be applied and their seeming ignorance of what impact their CGT will have on housing, business, and investments and savings including Kiwisaver is quite alarming.

More alarming than ‘show me the money’ – Labour are showing us their ignorance.

Labour uncertainty on Capital Gains Tax

Labour don’t seem to be on top of their numbers with their proposed Capital Gains Tax, and they don’t even list it as a policy on their website.

Bloggers with close connections to National and Labour, David Farrar and Rob Salmond, have exchanged fire over David Cunliffe’s claim that Labour’s Capital Gains Tax would increase tax by $4-5 billion per year. This has raised uncertainties about Labour’s numbers and their CGT policy.

David Cunliffe speaking on Q & A on Sunday:

By the way, a capital gains tax which at full running is going to bring in 5 billion dollars a year, close to, 4 to 5 billion is the single biggest change to New Zealand tax policy in decades and it’s one that I’ve personally championed for years.

I questioned this amount in Capital Gains Tax – how much more tax? I quoted Labour’s  Fiscal Plan:

This policy will raise an additional $25 million in its first year, growing in outyears to reach $1 billion a year by 2020/21.

Salmond has now posted on this – DPF on DC on CGT. He provides a table of estimated revenue that shows:

  • $1.419 billion by 2020
  • $3.669 billion by 2028

That is neither $1 billion by 2020/21 nor $4-5 billion at all – Salmond concedes “David Cunliffe probably shouldn’t have used “$4-5 billion,” given these estimates”.

Salmond says “This was modelling work BERL did in 2011 for Labour’s CGT policy, which I think is pretty much unchanged in 2014.”

As the revenue in the table starts from 2013 it must have changed, a CGT won’t begin until 2015 at the earliest.

Labour seems to be all over the place with their figures. They introduced this policy in 2011, they should have the numbers sorted out by now.

And while Cunliffe promotes it as “the single biggest change to New Zealand tax policy in decades and it’s one that I’ve personally championed for years:

For such a major part of Labour’s revenue plans their knowledge of the numbers and their lack of readily available information on their website is very strange.