19 Apr 2019

Shamubeel Eaqub: Good riddance to Capital Gains Tax and a (slightly) fairer system

12:55 pm on 19 April 2019

By Shamubeel Eaqub*

Opinion - The government has prudently abandoned its ambition to implement a Capital Gains Tax. The political calculus simply did not work.

Good riddance. The government should be working on policies that will make a real difference to New Zealand and will be enduring.

The Government has canned the $1000 KiwiSaver kickstart programme.

The Government has canned the $1000 KiwiSaver kickstart programme. Photo: 123RF

The CGT would have been a small revenue gatherer, likely canned at the next change of government and would have cost significant political capital, weakening Labour's ability to implement other policies for the remainder of its term.

It just didn't measure up.

A theoretically pure, broad-based capital gains tax makes a lot of sense. All types of income, whether from labour or capital, should pay tax. A broader base of taxes could have made current taxes on work, spending and profits lower.

A CGT may have encouraged more investments to flow into the real economy, rather than houses. Most importantly, it would have made the tax system fairer across generations (more taxes on older, wealthier folk and less tax on younger, renting folk).

But CGTs around the world raise little revenue, and are full of exemptions and out-clauses.

Shamubeel Eaqub

Shamubeel Eaqub Photo: Supplied

The process was also hamstrung from the beginning. It would not be a theoretically pure CGT - the family home, and no doubt other assets over time, would be exempt. The Tax Working Group was to be revenue neutral and the CGT would have only raised small amounts of money. Hardly worth the bother given the cost and complexity to set up a new system of tax.

The supporters and opposers were polarised in their vehemence. But international experience shows CGTs don't do that much.

They do not stop housing bubbles or speculation. At typical tax rates applied internationally, I reckon it would have reduced house prices by about 3 percent. Australia has a CGT (with the obligatory holes) and they had a housing bubble even bigger than ours.

CGTs don't raise that much revenue because, let's face it, the rich have very good tax advisors and are politically active.

Nor do they cause spikes in rents, or widespread slumps in asset values and business sentiment. Most OECD countries have some form of CGT and they seem to function without some sort of CGT induced paralysis.

Enforce the one we have

The previous National government implemented something like a CGT in the Brightline test for residential property, set at two years, which Labour extended to five years. So, you pay tax if you sell an investment property within 5 years.

Instead of trying to find new ways to tax property speculators, the government should beef up enforcement of this tax.

A little piece of me was sad

But at one level I was sad because it cemented my growing belief that as a nation we are not yet ready to make any sacrifices for change. We will not do without today, for the benefit of our children and grandchildren.

If we cannot countenance a small tax that is minimised by a good accountant and swiss-cheesed by bit of political lobbying, how can we deal with really big existential crises like climate change?

No distraction

By burying the CGT distraction, the government can focus on its upcoming 'Wellbeing' Budget. It will need to have some blockbusters to show progress from working groups to actions.

A soaring road death toll, a ballooning waitlist for state housing and continued pressures in our health system are just some of the symptoms of the mammoth tasks at hand.

With the distraction of the CGT gone, which knotty problem will this government spend its political capital on? It should be on something that works and will last through political cycles.

* Shamubeel Eaqub is an economist and partner at Sense Partners, a boutique economic consultancy. He is one of the authors of a stocktake of New Zealand's housing sector, which was commissioned by Housing and Urban Development Minister, Phil Twyford, and released in February.

Get the RNZ app

for ad-free news and current affairs