Capital gains over a wealth tax: A choice Labour may come to regret

Sunday, 3 August 2025

Vernon Small is a journalist and former Labour Government advisor.

OPINION: Labour has taken a step closer to endorsing a capital gains tax (CGT) as the centrepiece of its tax reform for next year’s election.

It’s a choice it may come to regret.

Insiders say the party’s policy council, by the narrowest of margins, has given the nod to a CGT over the alternative; a wealth tax akin to that prepared for the 2023 Budget by former finance minister Grant Robertson and former revenue minister David Parker.

Since the 2023 election Labour leader Chris Hipkins, who kiboshed the wealth tax plan, has opened the door wide to a tax on the income from assets. That sparked an arm-wrestle within Labour over whether a wealth tax or a CGT would be the preferred course, or perhaps some hybrid of the two.

The policy council’s view is not quite the end of the matter. It will need to be endorsed by the party’s ruling council and there is likely to be a rearguard action by enthusiastic supporters of a wealth tax. But while the party’s conference in Christchurch late last year could not resolve the issue, passing the parcel to the policy council, it has always been odds-on that a CGT – seen as Hipkins’ preference – would prevail.

So why the possible regrets?

Well, a CGT would deliver much less revenue initially, whether it is to fund government programmes or a tax switch towards wage and salary earners. And it takes a long time to build revenue, if applied only to realised gains.

Then there is the difficult sales job, as National and its allies whip up a smorgasbord of concerns over the devilish details with a side salad of misinformation.

The issue is not so much the principle; that capital income should pay its share rather than leaving the burden to wage earners and consumers. That battle has largely been won, with IRD research showing the mega wealthiest 300 New Zealand families pay an effective tax rate of less than 10% while the average wage and salary earner pays twice that rate.

Most international economic bodies, local economists, and professional organisations see the need for New Zealand to adopt such a tax – the latest on Friday from certified public accountant body CPA Australia which represents 3000 accountants in NZ.

National’s criticisms have tended to veer away from principle towards dire warnings of its economic impacts, out-of-control politicians taxing and spending and the dark uncertainties of its impact on individuals. Would a house held in trust, then inherited, and then sold, be subject to the tax even with a family home exemption? How will this affect the family bach? Is it the thin end of the wedge?

Successive Labour leaders – David Cunliffe was the most obvious – have tripped over relatively minor details that made a CGT look draconian or sneaky. And if middle income and aspirational voters think it is coming to tax them more, then Labour will have a problem.

By comparison, a wealth tax should be an easier sell. It can be tightly targeted to just the very wealthiest, with a generous threshold that exempts several million of assets, making it easier to define who will be in, and who out, of the tax net.

The biggest bug bear with a wealth tax – and one that clearly resonated with Hipkins and his inner circle before his 2023 “captain’s call” to abandon it - is the fear of capital flight.

It is over-wrought, but it can be used to raise fears that some of the best entrepreneurs and wealth creators will leave the country and take their cash and ideas – and jobs – with them. In a faltering economy, those concerns will be amplified.

Treasury expected it to be a relatively minor issue, with only about 3% of the wealthiest leaving the country to avoid it. Moreover, if the diamond-heeled do take their cash overseas they would likely face a CGT or some form of asset tax in most places they would want to go.

A wealth tax would have the added advantage of being the preferred option of Labour’s potential coalition allies the Greens and Te Pāti Māori – making a post 2026 fiscal policy that much easier to agree.

Also, because income from a CGT is slow to accumulate, it would be easier for Labour’s opponents to reverse, without much short-term fiscal fallout, compared to the immediate loss of up to $4 billion a year that a wealth tax might deliver.

If it’s easy to attack, easily portrayed as threatening and easy to repeal, you have to wonder why Labour would take the risk, but it seems the dice are all but cast.

That will bring a smile to the face of National party strategists, who are lying in wait for Labour to commit to a CGT, believing it will help them change the direction of the polls and reverse the opposition’s growing advantage in attitudinal surveys.

That doesn’t mean that the flip side – a tax cut – will be an easy sell in 2026.

In the United States, both the Democrats and the fiscally-dry Republican Right are united in their dislike of President Donald Trump’s One Big Beautiful Bill; whether because it favours the wealthiest who get the lion’s share of the tax breaks, at the cost of social services, or because it will drive a huge increase in debt.

National would have its problems here too.

The 2024 tax cut package has clearly not offset a resurgent concern about the cost of living, even though inflation is now less than half what it was towards the end of Labour’s term in office.

The policy that turbo-charged the Government’s plan, the Family Boost rebate on early childcare costs, has failed to deliver as promised, and is being increased and expanded to more higher paid households in an attempt to rehabilitate it.

Tax cuts good, new taxes bad is no longer the one-way political bet it has often been.

Even so, Labour will have a fight on its hands to again try to sell its stop-start plans for a CGT.

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