Messy push for capital gains tax ends in surrender for Labour
Wednesday, 17 April 2019
OPINION: The Government's decision to give up on major tax change is more 'cock up' than conspiracy.
The first person to have convincingly forecast that the Government would abandon the idea of introducing a capital gains tax appears to have been British tax expert and former Tony Blair advisor Chris Wales.
He predicted more than a year ago that the Tax Working Group would recommend a capital gains tax, only for Prime Minister Jacinda Ardern to turn it down.
'If I was the prime minister I would want Sir Michael Cullen to recommend a broadly-based capital gains tax. I would also almost certainly not be intending to introduce a capital gains tax,' he told Stuff in March last year.
He viewed that as a clever policy.
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Setting up the Tax Working Group kicked the thorny tax issue into touch at a convenient time for the Government.
Then not seeing-through its main policy recommendation was likely to be a good political outcome for Labour that would prove popular with the public and show that it had listened, he argued then.
That seems too cynical, though.
Instead, ruling out a CGT represents a political failure for ministers, and Finance Minister Grant Robertson in particular.
They got off on the wrong foot by promoting a capital gains tax as a solution to New Zealand's housing affordability problems, when the evidence was that it would have raised rents and done little if anything to reduce house prices.
The Government then found itself trapped by the process it had established to pave the way for what could have been the biggest tax change in a generation.
The wobbles were starting to show in November, when serious doubts began emerging that Labour would see through a broad-based CGT.
While critics sniped from the sidelines, ministers had to watch and wait supposedly with a open mind until the 'independent' working group reported back with its recommendations in February.
By then, the opportunity for any sensible debate about the pros and cons of a CGT had long gone.
Pro-business lobbyists which had legitimate concerns about the Tax Working Group's proposals, found they could grab more attention by peddling misinformation.
An estimate by BusinessNZ that a capital gains tax would cost $5 billion over five years in compliance costs and 'deadweight costs' was to all intents and purposes plucked out of thin air.
The business group funded and promoted skewed polling to create the impression that opposition to a CGT was in most respects near universal.
Other opponents of a CGT claimed that the tax would fall substantially on 'middle New Zealand', when all the evidence is that about 80 per cent of the assets that would be taxed by a CGT were owned by the wealthiest 20 per cent.
Cullen has been quick to point the finger at NZ First leader Winston Peters, who he said had vetoed a CGT.
But Prime Minister Jacinda Ardern's decision to buckle and rule out a CGT under her leadership – even after future elections – shows it is not that simple.
If NZ First was really the only obstacle to a CGT, Labour should be relishing the opportunity to campaign on it at the next election as a policy that could only be delivered by an outright Labour/Green majority government.
Instead, Labour has walked away, and its leadership will need to take responsibility for that with its core supporters.
In November, Cullen argued it might be 'last chance saloon' for major tax reform, as the country's population aged and became, from his perspective, even more conservative.
But if the current mild trend towards greater wealth and income inequality continues, tax reform is an issue that will inevitably rear its head again.
Perhaps in some years' time we might see more of movement towards an inheritance tax, or a capital gains that did not exclude the family home and that might have a positive impact on housing affordability – both off-limits this time round for Labour.
But for now one thing is clear. It's show over.