Labour may be preparing to shelve major tax reform, but is it really 'last chance saloon'?

Friday, 7 December 2018

Sir Michael Cullen forecast in 2018 that it might then be 'now or never' for a capital gains tax.

OPINION There are signs Labour may already be preparing to shelve a capital gain tax worth the name.

But Tax Working Group (TWG) chairman Sir Michael Cullen is pessimistic to fear – or many would say 'hope' – that it really is 'last chance saloon' for such a big change to the tax system.

The TWG appears to have been set up with the expectation it would design a capital gains tax (CGT), and that was pretty much spelt out by Finance Minister Grant Robertson after the TWG published its rather inconclusive interim report in September.

Yet last week, when Cullen announced a 'clear majority' of the working group had agreed on a 'central package' setting out how such a tax could work and was on the track to complete its work a month early in January, Robertson did not appear to be celebrating.

Finance Minister Grant Robertson has been clear in his instructions to the Tax Working Group, but is keeping his options open on what the Government's response to its final report may be.

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His solitary comment was that the Government had not received the final report from the TWG 'and no decisions have been made'.

Labour is unlikely to say much more than that now.

Protesters in Paris have been raising the issue of tax reform the hard way.

But there are many plausible explanations for why its mood may have changed.

Perhaps it has concluded that coalition partner NZ First won't support legislation paving the way for a CGT, which would be zero surprise given what a powerful election differentiator that could be for the minor party.

It may also believe Labour 'going it alone' would be a major vote-loser.

Labour's will may have been chipped away by a stream of critics who have warned – with some justification – that a CGT risks pushing up rents, forcing people to sell their baches and sending Kiwi companies overseas, and would cost billions to implement.

The Tax Working Group aims to publish its final report next month.

Since the Government can't hit back until the TWG publishes its final report, much of that criticism has gone unanswered.

If Labour does 'give up' on major tax change, it will have to face the wrath of its own disappointed, core supporters.

It has made mistakes. It was probably unwise to rule out an inheritance tax and to tie the TWG's hands on other fronts, as well as to make a big play out of a CGT potentially improving housing affordability when that is very dubious at best.

It may have placed too much faith in semantics, thinking it might help to characterise what was being considered as extending income tax to more types of capital income, rather than a completely new tax.

Effective politics isn't about word play but about persuasion – working hard to change people's minds on big issues.

Each failed attempt to change the tax system probably makes it a bit harder next time around, and one lesson from the TWG's work so far may be that it is easier to sell a redistributive tax change that is more simple.

But it's not last chance saloon for that.

Cullen argued at a seminar last week that it might be now or never for a CGT, because the politics of introducing more taxes on capital gains will get harder as the population ages and becomes less likely to vote for such a change.

But it is not that simple.

It is true that older people tend to be richer and derive a greater proportion of their income from investments than younger people, so might be less likely to vote for a CGT.

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But it does not necessarily follow that if the population as a whole ages, people would derive more of their income from investments rather than working.

A study published in the British Medical Journal in 2016 found strong evidence that tall people could expect to earn more than short people. Each extra centimetre turns out to be worth about an extra $350 in annual income on average.

But if everyone was a foot taller it is unlikely everyone would be any better off, on average.

It is not 'being tall' that makes you wealthier, it is being taller than other people. Similarly it is not perhaps being old that makes you wealthier, but rather being older than other people.

Can we as a nation expect to sit back, earn more money in real terms on investments as a population, and do less paid work as we collectively age, while maintaining the same standard of living?

That appears to be Cullen's vision but it seems implausible to me.

Certainly, if the global population aged at the same rate as in New Zealand, it would make no sense to argue we would all automatically get richer from our collective returns on savings and investments.

Separate to that, if the mild trend towards greater income and wealth inequality continues, it may be that pressure for a more redistributive tax system will grow – rather than decline – even as the population ages.

Any drop in real incomes that flows from our efforts to battle climate change and other environmental woes could be expected to add to that pressure.

France has more older people than New Zealand, but in the streets of Paris last week activists were rioting for – among other things – the toughening-up of its wealth tax.

The tax debate in New Zealand has been more restrained than on the streets of Paris, assisted by the approach of the TWG whose members have gone about their task with a high degree of transparency and good humour in the face of the inevitable flak.

If they end up writing a report that is destined to sit on a shelf, it will no doubt be dusted off and lessons learned, soon enough.

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