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.

Q+A – Michael Cullen on the Capital Gains Tax and TWG

Chairman of the Tax Working group, Michael Cullen, was interviewed on Q+A last night on Capital Gains Tax and water.

He was also interviewed on the Nation on Saturday.

Scoop: On Newshub Nation: Simon Shepherd interviews Tax Working Group Chair Michael Cullen

  • Sir Michael Cullen says there’s currently under-taxation at the top end of the income and wealth scale, and under his working group’s recommendations “people who have substantial capital assets in one form or another” would end up paying more.
  • Sir Michael disputes the effect Labour’s capital gains tax policy had on the party’s 2011 and 2014 election losses: “There was no real sign, actually, that that had any great impact in shifting votes around.”
  • He says some charities getting tax breaks might not be using their income for charitable purposes: “Some of those charities – at least on first examination – appear to not be passing on much of their income out to the supposed intended beneficiaries.”
  • Sir Michael says proposed environmental taxes on things like waste dumping would be aimed at changing behaviour, not increasing revenue: “Hopefully behaviour changes, so that the amount of money that you collect at the end of the day may not be much more… there’s just a lot less waste going to landfill.”
  • He says tax cuts for lower income earners would be an effective way to offset increased user-pays charges: “Actually reducing the bottom tax rate, or having even a tax-free area at the bottom, is more effective in compensation.”

Full transcript (Scoop)

The Q+A panel on Cullens interview and tax.

 

GDP and Tax Working Group announcements today

Hamish Rutherford (Stuff): Prime Minister’s mix-up could have led to a much more brutal economics lesson

Jacinda Ardern’s confusion over two sets of figures is understandable, given the volume of material crossing her desk, as well as never-ending negotiations with her governing partners.

But with her control of the Government coming under scrutiny, it was exactly the kind of simple mistake she did not need.

On Tuesday, Ardern was asked a clear and straightforward question about her expectations for “the GDP numbers on Thursday”, economic growth figures due out in two days

Although her answer hinted that she and host Mike Hosking were not exactly on the same page, she acknowledged “the GDP numbers” – listeners would probably believe she was giving a hint that the figures were good. “I’m pretty pleased.”

Instead, she was talking about the Crown’s financial statements – the Government’s books – which are not due to be released for about three weeks, and which few people outside Parliament or bond trading circles care much about.

To some it will seem like a meaningless mistake, but the integrity of market-sensitive information is critical to New Zealand’s reputation as a transparent economy.

No-one gets the inside word, or at least, no-one should, even though lots of people want it. Ardern’s comments left the impression that she not only knew, but that she had not kept the secret.

Whatever the economic growth figures do show this week, they will almost certainly move the currency and other parts of the financial markets, amid speculation that new Reserve Bank governor Adrian Orr is prepared to cut interest rates if the economy slows.

The speed with which Ardern’s office acknowledged the mistake underlines how important it was that the comments were not amplified without clarification.

Peter Dunne: It’s time to bury the capital gains tax

All of which raises the question as to why the capital gains issue keeps getting raised, especially since the arguments in favour from both a revenue gathering and efficiency perspective are not that strong.

After all, given both the long and variable lead times involved between the purchase and sale of taxable assets, a comprehensive capital gains tax is at best likely to be a somewhat unreliable and unpredictable contributor to annual revenues. Advice I received when Minister of Revenue was that it could be over a decade from the time of introducing a broader based capital gains tax until it produced any significant revenue gain for the Government.

Also, it has been long accepted that the family home would have to be exempted from any such regime, further diminishing its likely impact. Even in the rental sector, the impact would likely be negative for tenants, with landlords boosting rents to offset any negative tax impact when those properties are sold.

 

Cullen confirms CGT will not be addressed in interim TWG report

Michael Cullen, chairman of the tax Working Group, has confirmed that the interim report due to be released this month will make no recommendations on a Capital Gains Tax.

Stuff: Absence of tax recommendation means ‘more uncertainty for longer’, says National

The Tax Working Group will not recommend whether or not New Zealand should get a broad-based capital gains tax, in an interim report due out this month, chairman Sir Michael Cullen has confirmed.

Stuff had previously reported that any recommendation on the controversial tax would be deferred until the working group publishes its final report in February.

Cullen said on Wednesday that he was “happy to confirm that”.

Finance Minister Grant Robertson has played down the implications, saying the work the Tax Working Group was involved in was “always supposed to be a two-stage process”.It seems remarkable that one of Labour’s most prominent policies and their big tax policy, CGT, would not be addressed on the first report.

Surely for a tax package to make any sense it would include the major components, in general terms at least.

As Amy Adams says, this won’t do anything to address uncertainty in the business community.

It seems to confirm that what the TWG would like to recommend on a workable CGT is outside the parameters given them, or Labour have indicated is not something they want to hear at this stage.

 

Tax Working Group throwing CGT football back at Labour?

It is reported that the Tax Working Group may throw the Capital Gains Tax football back at Labour, deeming a decision on it being too political for them. Perhaps it is more of a hot potato.

While the CGT was a prominent part of Labour policy the WTG was limited in what they could recommend. For example they were instructed to exclude family homes from any CGT recommendations, which complicates things substantially.

And it appears that, again, the Government is asking for (forcing?) amendments to media articles after they are first posted.

Tom Pullar-Strecker (Stuff): Capital gains tax debate not over, Grant Robertson suggests

The Tax Working Group is understood to have stopped short of recommending a broad-based capital gains tax, in an interim report due out within days.

The working group chaired by Sir Michael Cullen was tasked with designing a capital gains tax for consideration by the Government, but is expected to push back any firm recommendation to its final report which is due to be published in February.

It had been widely expected that the Tax Working Group (TWG) would recommend a broad-based capital gains tax on the likes of sharemarket and property investments as the centrepiece of tax reforms on which Labour would fight the next election.

However, doubts began creep in earlier this year that the Government would ultimately back the plan, amid concerns the new tax would be unpopular and would cause rents to rise without delivering much in the way of extra revenue for at least a decade.

Paul Drum, chief executive of accounting body CPA Australia, said in a newspaper column that “a close reading of the tea leaves” suggested the “highly important and politicised” issue of the capital gains tax “is probably to be parked for further consultation and input”.

Sir Michael Cullen hinted that was on the money, saying he had “not reacted strongly to that comment”.

Interestingly, the headline was changed some time after that article was posted online. The original article name:

CGT in doubt as bid to outsource political decision hits snags

Now:

Capital gains tax debate not over, Grant Robertson suggests

Some content was also changed. Earlier:

The Tax Working Group is understood to have stopped short of recommending a broad-based capital gains tax, in an interim report due out within days.

Now:

The Tax Working Group is understood to have stopped short of recommending a broad-based capital gains tax in an interim report, but Finance Minister Grant Robertson has played down the report’s significance.

I think this has been added:

Robertson confirmed the Government had received the interim report which he said would be released soon.

But he said the work was “always supposed to be a two-stage process” and commentators were “getting a bit ahead of themselves”.

And some content has been edited out.

It looks like Labour is a bit sensitive about the Tax Working Group in relation to the Capital Gains Tax.

Considering their obvious influence over media coverage (the Prime Minister’s office jumped into media coverage of Jacinda Ardern’s misleading over the Clare Curran resignation last Friday), I wonder how much Robertson and Labour may be trying to influence Cullen and/or the Tax Working Group?


Also, from Newsroom:  Capital Gains Tax looks less likely

Prime Minister Jacinda Ardern said on Monday that she had not “set expectations” about what the working group currently considering tax reform would recommend to the Government.

Ardern and Finance Minister Grant Robertson established the working group in March with terms of reference including, “whether a system of taxing capital gains or land (not applying to the family home or the land under it), or other housing tax measures, would improve the tax system”.

But Labour’s plan to de-politicise the CGT appears to have failed, with reports now circulating the working group intends to push a recommendation on a CGT back to the Government.

Ardern said she would allow the group to do its work and would not prefigure what it would produce — outside of the parameters established in its terms of reference.

But Robertson is actively trying to influence the reporting.

Newsroom understands the interim report has recently been handed to Robertson and Revenue Minister Stuart Nash. Officials will then digest the report before releasing it to the public.

So the ‘leaking’ of the CGT information could have come from a number of places, for a number of reasons.

The group’s final report is due in February. Labour will then choose tax proposals from the report to take to the electorate in the 2020 election. Should they win, the proposals would be implemented in April 2021.

So the Tax Working Group looks like a policy development exercise for Labour in Preparation for the 2020 election..

The Tax Working Group and ‘inequality’

The Tax Working group has just released a background paper with the lofty title of Distributional analysis

This focusses on the distribution of tax in relation to ‘inequality’.

Inequality of income? Inequality of living standards. Inequality of taxation?

 

Purpose of discussion – the background paper is for the Group’s information. It provides:

  • an overview of distributional information on household income, wealth and consumption; and
  • a preview of initial distributional analysis using household income, expenditure and wealth data.

Executive Summary

This paper provides an overview of distributional information on income, wealth and consumption. It provides a preview of initial distributional analysis of tax policy using household income, expenditure and wealth data.

The paper includes new analysis of household wealth and the potential incidence of capital income and wealth taxation. It uses household wealth statistics from Statistics NZ that were not available at the time of the previous 2010 Tax Working Group.

Some of the analysis has only recently been completed by the secretariat. The secretariat will refine its methods and undertake further quality assurance, which may change some of the results.

Further distributional analysis will be provided to the Group in future sessions through analysis of specific policies under consideration. A separate session on distributional analysis to inform the Group’s interim report is also planned in July.

This paper makes the following key points:

  • The Treasury maintains a model for distributional analysis of the existing tax and transfer system that focusses on household income. For potential new taxes on capital income or wealth, the secretariat will provide distributional analysis using available information on the distribution of wealth, although this will inevitably depend on assumptions and be subject to some data limitations.
  • Household wealth is distributed less equally than annual household income. Income before taxes and transfers is distributed less equally than disposable income and consumption.
  • Capital income and self-employment income is distributed much less equally than wages and salaries. Taxes and transfers reduce inequality in disposable income.
  • Household wealth is concentrated in the top twenty percent of households, which hold about seventy percent of total household net worth.
  • Average wealth rises with age, which is consistent with a life-cycle pattern where individuals smooth their consumption and accumulate savings for retirement. While lifecycle patterns and/or intergenerational differences are an important factor inexplaining differences in wealth, there is also considerable wealth inequality within age groups. There are also significant differences in average wealth by ethnicity.
  • The revenue from potential taxes on wealth or capital gains (excluding owner occupied housing) would be expected to be mostly paid by the wealthiest twenty percent of households in a given year. However, this is based on a one year snapshot of wealth data and does not take account of lifetime effects or behavioural responses to taxation.

‘Inequality’ generally refers to inequality of income and inequality of living standards, but inequality of tax is also an important factor.

Inequality of tax can refer to unequal taxing of income over asset gains, especially with property investments in the current New Zealand context.

It should also take into account inequality of taxing people overall – how much people at the bottom should be free of tax, and how much people at the top of the economic pile be taxed so their earnings can be redistributed.

Submission to the Tax Working Group

Summary of a submission to the Tax Working Group:

That was from

Here are the key points of our submission to the Tax Working Group. You can read the full document here:

https://d3n8a8pro7vhmx.cloudfront.net/taxpayers/pages/13/attachments/original/1525056499/20180430_tax_working_group_submission.pdf

I think these are all good points worth considering and debating.

Ardern: “the effect of any (tax) changes will not occur until after the next election”

Suggestions that the Government may raise fuel excise taxes to pay for things like rail, public transport, and cycleways and walkways, has raised questions about commitments made by Labour during last year’s election campaign on certainty over possible tax changes.

NZH (14 September 2017): Labour tidies up tax policy, will delay new changes until 2020

Labour has decided to delay any implementation of changes from its tax working group until after the 2020 election in a bid to stop any further political damage from its tax policy.

Finance spokesman Grant Robertson’s announcement…

…is a reversal of the previous position of leader Jacinda Ardern.

“We will involve the public at every stage of the Working Group, as well as Cabinet and Parliament’s consideration of any changes that arise from it.

“We know it is important to get this right, so we will balance the need for certainty and urgency by ensuring that any potential changes will not come into effect until the 2021 tax year.

“This gives multiple opportunities for public input, and a general election before any new tax would come into effect.

“To avoid any doubt, no one will be affected by any tax changes arising from the outcomes of the Working Group until 2021.

“There will be no new taxes or levies introduced in our first term of government beyond those we have already announced.”

Ardern said…

… it was her “captain’s call” to back down from introducing new taxes in a first term of a Labour Government because it was clear the public were concerned.

“I have been driving our campaign and I have taken political risks but I’ve done that because I feel so strongly around the urgency there is around tackling the housing crisis. But I needed to also balance that against certainty for voters.”

Ardern:

“This is about making sure that we are providing certainty to voters, but also there is still real urgency around tackling the housing crisis. So yes I will continue to undertake this work in government, but we have balanced that against the need for people to be certain when they vote around exactly what they will be doing.”

“We will still act on what comes from the Working Group, and that may be legislation or it may not. We’ll still act on the findings of the Working Group, we’ll go through a big process with both the public and in Parliament…

…but the effect of any changes will not occur until after the next election.”

Katie Bradford: “If you essentially delay taxes now, will you be able to afford your promises?”

Ardern:

“I want to make really clear, our fiscal plan was never built around any potential revenue down the track from a tax working group, because we had not settled on what we would do in the future. So there is no requirement for any revenue off the back of that tax working group.

“Everything that we have announced in public is already able to be fully funded from the re-prioritisation that we have set out, and it’s all in our fiscal plan.

“I believe I can do the work, get it ready to go, and still provide voters a chance to vote on it before it’s implemented.”

This was in part referring to tax related to housing (Capital Gains tax), and to recommendations coming out of the Tax Working Group.

But Ardern went on to refer to Labour’s whole Fiscal Plan, and to “”everything that we have announced in public”, so i think that voters would consider it disingenuous if Ardern now claims that tax changes like fuel tax done outside the Tax Working Group don’t apply.

Ardern already sounded disingenuous yesterday saying the an increase in fuel ‘excise’ was not a tax increase – see Ardern: fuel increase not a tax, it’s an excise.

Previous Governments have increased taxes after promising not to – the National led Government increased GST after saying they wouldn’t. But that was a measure taken in reaction to a serious Global Financial Crisis they were landed with, and was more or less balanced by decreases in income tax rates.

I’m sure there are more examples going back further, but regardless of what past politicians have twisted and changed, that doesn’t give Ardern or the current Government a free pass for going back on their word.

Similar to ‘it’s not a tax, it’s an excise’, perhaps Ardern thinks it wasn’t a promise, it was an exercise in campaign rhetoric.

Or perhaps she will make another ‘captain’s call’ and defer any changes to tax, including fuel tax, until after the 2020 election.

However she could have an out in the fine print:

“Alcohol, Petrol and Tobacco Levies – will be adjusted as per normal government practice and as set out in Budget documents.” – http://www.labour.org.nz/tax

Will people be happy with that and paying more for their petrol to finance Auckland transport?

And – Labour’s Fiscal Plan, which Ardern clearly referred to, makes no mention of increasing fuel tax, and does not specify or mention at all the fuel levy in their costings.

Possible pressure on business tax plans

In October Jacinda Ardern said that the Government would consider lowering the company tax rate for small to medium business owners. NZH:  Jacinda Ardern to consider tax breaks for small businesses as minimum wage is set to rise

Prime Minister-designate Jacinda Ardern says she will ease the pressure of higher wages on small- to medium-business owners, including looking at a lower company tax rate.

As part of its deal with New Zealand First, the incoming Government will raise the minimum wage from $15.75 an hour $16.50 next year, and then to $20 by April 2021.

The increase is raising concerns in the business community and among farmers about meeting higher costs.

Speaking to Radio NZ’s Morning Report, Ardern said she wanted a tax working group to look at how Australia’s stepped tax regime operates.

“They have a slightly lower corporate tax rate for companies and businesses that have lower turnover. I’m interested in how we can ease the burden on small businesses in particular.”

In Australia, companies with turnover of less than $10 million a year pay a lower company tax rate.

“This is me foreshadowing that I do have a genuine interest in how we can support those who create jobs in New Zealand,” Ardern said.

“In large part, our small and medium enterprises – well over 40 per cent of our new jobs – are coming from our SMEs. I want to do all I can to work in partnership with them.”

But after Donald trump significantly lowered business tax rates in the US there could be pressure to lower all rates here if New Zealand is to remain competitive.

Stuff: Has Labour’s tax agenda just been Trumped?

Cutting tax for big business is probably the last thing Labour wanted to be on the agenda of the newly-established Tax Working Group.

 

The group will also consider a “graduated” company tax rate that would see big businesses pay tax at a higher rate than smaller firms.

But United States President Donald Trump’s decision to slash company tax in the US from 35 per cent to 21 per cent could be a spanner in the works, putting New Zealand under pressure to lower its company tax overall.

John Milford, chief executive of the Wellington Chamber of Commerce, says New Zealand’s 28 per cent company tax rate already stood out against the OECD average, which he puts at 22 per cent.

“It’s certainly overdue for another review.”

In Britain, company tax is 19 per cent and set to fall to 17 per cent by 2020.

Australian Finance Minister Mathias Cormann​ has promised to reduce Australian company tax from 30 per cent to 25 per cent by 2027, explaining Australia needed to be “internationally competitive”.

That in particular would put pressure on the New Zealand business tax rate.

Revenue Minister Stuart Nash is keeping advice he has received from Inland Revenue on the impact of Trump’s tax reforms under the lid for now.

But the Australian Treasury has warned that the US changes could come at a cost to the rest of the world that might include “reduced foreign investment, lower GDP and real wages”.

The Tax Working Group is being asked to look at improvements of the tax system to see whether it operates ‘fairly’.

The Working Group will report to the Government on:

  • whether the tax system operates fairly in relation to taxpayers, income, assets and wealth
  • whether the tax system promotes the right balance between supporting the productive economy and the speculative economy
  • whether there are changes to the tax system which would make it more fair, balanced and efficient, and
  • whether there are other changes which would support the integrity of the income tax system, having regard to the interaction of the systems for taxing companies, trusts, and individuals.

Under Objectives in the Terms of Reference for the Working Group:

  • A system that promotes the long-term sustainability and productivity of the economy

The Working Group should consider in particular the following:

  • Whether a progressive company tax (with a lower rate for small companies) would improve the tax system and the business environment

With New Zealand’s tax rates being higher than average, after the US cut in business tax rates and a commitment by Australia to lower their business tax rates, the Working Group should be considering the long term sustainability of New Zealand’s business tax rates.

Terms of Reference for Labour’s Tax Working Group

Post by Mefrostate:


Yesterday we discussed the members of Labour’s upcoming Tax Working Group (TWG). They have also released the terms of reference. This map of pathways and forbidden forests will guide the noble Sir Cullen and his merry band of experts as they pursue their quest.

It begins by outlining the government’s overall objectives for the tax system. Many of these are bog-standard principles of taxation: efficiency, simplicity, fairness, equity. While these have long been the basis for New Zealand’s broad-base-low-rate framework, there are a few twists to fit the goals of this government.

No surprises, the left-bloc endorses a progressive tax and transfer system. But they also target revenue and expenditure at 30% of GDP, which is toward the low end of the OECD. They specify that the system should promote productivity. Finally, sustainability gets a mention, hinting at an environmental element.

Based on these objectives, they direct the TWG to report on:

  • Whether the tax system operates fairly in relation to taxpayers, income, assets and wealth
  • Whether the tax system promotes the right balance between supporting the productive economy and the speculative economy
  • Whether there are changes to the tax system which would make it more fair, balanced and efficient, and
  • Whether there are other changes which would support the integrity of the income tax system, having regard to the interaction of the systems for taxing companies, trusts, and individuals.

While the final bullet suggests alignment between the company, trust and personal tax rates, this was already a key recommendation of the 2010 incarnation of the TWG, and was largely achieved by the former National government. The top income and tax rates are 33%; companies pay 28%.

Getting more specific, the TWG should consider in particular:

  • The economic environment that will apply over the next 5-10 years, taking into account demographic change, and the impact of changes in technology and employment practices, and how these are driving different business models,
  • Whether a system of taxing capital gains or land (not applying to the family home or the land under it), or other housing tax measures, would improve the tax system.
  • Whether a progressive company tax (with a lower rate for small companies) would improve the tax system and the business environment, and
  • What role the taxation system can play in delivering positive environmental and ecological outcomes, especially over the longer term.

All signs seem to point at the potential for a tax to stymie rising house prices. Grant Robertson confirmed this when announcing the TWG: “At the moment the tax system appears unfair – for example, it doesn’t treat income from speculation in housing as it does income from work “. It will be good to combine this with a consideration of the role of automation in workplaces, and capital’s increasing share of income.

The TWG are directed to report on the idea of having a progressive companies tax, with lower rates for smaller firms. SMEs enjoy exemptions in many countries, but I’m not aware of any with an explicit set of brackets which vary with company size. While this could boost competition, it would seem ripe for exploitation.

There is an explicit mention of using the tax system to deliver environmental outcomes, and one of the members is Marjan Van Den Belt, an ecological economist. We can expect some interaction with the upcoming Zero Carbon Act and the climate commission, which are being developed concurrently.

All-in-all this seems a pretty comprehensive set of issues for the TWG to grapple with. However, I’m more concerned by the laundry list of forbidden areas which are outside of the scope:

  • Increasing any income tax rate or the rate of GST
  • Inheritance tax
  • Taxation of the family home or the land under it, and
  • Interaction with the transfer system

In my view it is absolutely ridiculous have a full review of the tax system that completely excludes increases to tax on income, consumption, inheritance and owner-occupied property. What is the point in gathering a diverse set of experts if they can only work with their hands tied? This seems to stack the deck for Labour’s long-cherished capital gains tax, and will completely undermine the value of the final report.

This could be a big problem for Labour if they use this TWG to take a capital gains tax to the next election. I can just imagine English (or his replacement): “Labour have basically gathered some master chefs but only given them dough and tinned spaghetti, so I don’t think anyone’s surprised that they’ve cooked-up a capital gains tax.” And I’d have to agree.