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Corin Dann: The debate about capital gains tax

opinion Corin Dann

By Corin Dann ONE News Political Editor

Published: 10:40AM Friday July 08, 2011 Source: ONE News

  •  (Source: ONE News)
    Source: ONE News

Labour's decision to include a capital gains tax (excluding the family home) in its election year manifesto is a major shift in the economic debate in this country.

For years now economists from Treasury, the OECD, and the IMF have all called on New Zealand to introduce a capital gains tax.

The argument has always been that a CGT would help to temper the amount of money (mostly foreign borrowings) flooding into property investments at the expense of investing in the country's productive export sector - a trend that was particularly bad during the boom years of 2000 to 2007.

Generally speaking I think politicians and economists from all sides agree that there is, or has been at least, a problem with over investment in property and that more needs to be done to grow the export sector.

The recent tax working group certainly felt that was the case, although it should be noted it recommended a broad-based land tax rather than a CGT as part of its solution.

To National's credit, while it didn't adopt the land tax call, it did at least try to tackle the issue by removing some tax loopholes for rental properties.

But to call for a capital gains tax crosses a major line in the political sand. The conventional wisdom has always been that it would be political suicide.

This is partly because in the past it has been portrayed by some as an envy tax on the rich. I guess for some it will always be that.

But mainly it's because of the emotional attachment Kiwis have to home ownership.

The house is usually the major asset of Kiwis; and it is also often a key way of funding retirement.

Tinkering makes people nervous

Any tinkering with the tax treatment on housing is going to make people nervous. So why has Labour moved now to introduce a CGT?

Well firstly there is that important caveat. Labour's policy will not include the family home. This significantly cuts down the number of people to be impacted to about 200,000.

So most voters (in particular core Labour voters) will probably not be affected, or so the theory goes. Although that doesn't take into account those who may be aspiring to own on a second home.

Anyway a CGT fits the bill in a number of ways for Labour.

Firstly, it needs revenue to fund its election spending promises as it can't bank the billions National's already included in its forward budgets from the partial sale of assets.

And while we still need to see the details to be sure, a fairly wide-ranging capital gains tax (one that includes property shares for example) along with an increase in the top tax rate, could provide a substantial amount of the missing revenue.

This at least means when it goes into the election campaign it can argue that it has a creditable alternative plan for the economy that is funded.

This is very important as Labour cannot afford to have a weak budget and be portrayed as a borrow-and-spend party in this tougher economic climate.

Bold move for Labour

Secondly, a CGT is a bold move.

Whether you like the policy or not, it does send a strong message to the electorate that Labour is not afraid to at least try to solve one of this country's biggest underlying economic problems, even if it costs it some votes.

However there are some big risks for Labour.

Firstly, it still has a big sales job to do to convince the average punter that they won't be going after the family home.

It would be foolish to just assume that people are going to listen to all the details of the plan this far out from the election campaign.

And secondly it will have to work hard to convince the average punter that introducing a new tax of any kind will actually help the economy.

For many Kiwis, a new tax is bad full-stop.

No effect on Australian property boom

Then there are the other arguments, for instance that a capital gains tax has not curbed a property boom in Australia, and that it takes a long time to recoup revenue from the tax given it is collected at point of sale.

John Key has already had a field day putting some of these arguments forward in the absence of Labour's full announcement.

I think there are good arguments both for and against a CGT.

But in the end I am glad Labour has made it a live issue and one that can be debated in the campaign.

And here's why: New Zealand needs to ensure that we don't have another debt-fuelled property boom like the last one.

When the economy takes off again (fingers crossed) it needs to be on the basis of strong revenue from exports, not household borrowing.

We need something, be it a CGT, a land tax or tougher bank lending criteria to ensure we don't get caught out again in five years' time.

Just raising interest rates to quell housing booms doesn't work. As the Reserve Bank itself said repeatedly during the last boom, monetary policy needs friends like a CGT.

One thing is for sure, another debt-fuelled boom will not be sustainable, given our already large private debt pile.

A CGT policy being advocated by a mainstream party in New Zealand - whether it is flawed or not - in my view sends another strong message to Kiwis that the obsession with investment property really has to end.

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  • William Jobson said on 2011-07-22 @ 15:46 NZDT: Report abusive post

    When the alternative to CGT is tax cuts for the rich, non payment of tax on capital gains, cutbacks in education ,health and public services ,third world wages, and bankruptcy Greek style then voting for Labour and CGT is a no brainer.

  • TroySkees said on 2011-07-20 @ 14:57 NZDT: Report abusive post

    I really just have a couple of questions I was wondering if anyone could answer. 1) With the CGT at 15% will share traders and property developers who currently pay tax on their capital gains at 33% (If it is sold within one year I believe) be paying 15%, 33% or 48% CGT? 2) A Farms primary residence is exempt but not the land. So everyone elses primary residence (including the land) is exempt, why not the farmers? Just seems rather un-fair if they live on the farm. Would a fairer CGT not be to place a 15% Tax on every capital gain not to mention a hell of a lot easier to implement and monitor?

  • William Jobson said on 2011-07-17 @ 21:13 NZDT: Report abusive post

    Claims that the latest Colmar Brunton Opinion poll is reflective of Labours CGT policies are rejected as spurious in that the opinion poll predated the policy's release and its contents cannot be considered as having been disclosed to or considered by voters prior to that date.

  • baboosh23 said on 2011-07-16 @ 11:12 NZDT: Report abusive post

    I said my vote goes to the party that introduces CGT, last year, and I stand by it now.

  • radar832004 said on 2011-07-16 @ 11:08 NZDT: Report abusive post

    the price of milk and lamb are the highest they have ever been and national is in power

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