Bryce Edwards: The best arguments for the capital gains tax

Bryce Edwards: The best arguments for the capital gains tax

During the last decade, there has been an explosion of concern around the world about economic inequality. Here in New Zealand there has been a growing debate about how to deal with this, and virtually all parts of the political spectrum now pay attention to this problem. It is in this context that the Tax Working Group’s proposal for a relatively comprehensive capital gains tax (CGT) has been produced – as an attempt to help rebalance inequalities in New Zealand, and improve our society.

The best arguments in favour of introducing a comprehensive CGT revolve around inequality, and Michael Cullen, who chaired the Tax Working Group (TWG), has been clear in his defence of their proposals that they are fundamentally about fairness.

He’s pointed to the great economic inequality that exists in New Zealand and suggested that a CGT would help ameliorate that, because it would result in the rich paying more tax based on their wealth and income. He has argued that it is wrong that wage-earners are taxed on their full income while the wealthy “can earn income from gains on assets and not be taxed at all”.

The proposed CGT would have a 33 per cent tax applied to rental properties, baches, company shares, farms and other businesses. Cullen has argued that the additional $8bn that might be raised from the new tax over the first five years would allow tax cuts for the poorest New Zealanders.

Straight after the release of the report on Thursday, leftwing blogger No Right Turn elaborated on this: “At the moment we have a situation where ordinary New Zealanders are taxed on every dollar they earn, while the rich are not. And that is simply wrong. Income should be treated equally and taxed no matter what the source – and that means taxing capital income. If it has the side effect of removing distortions in our economy – the housing bubble, or farmers farming for capital gains – then that is a bonus, but fundamentally it is about fairness and making the leeches pay their fair share for once” – see: For a capital gains tax.

For a more in-depth discussion of the inequality driving the CGT agenda, see Max Rashbrooke’s Capital gains tax: A test of our national myths and Labour’s mettle. In this he says: “most of all the proposed tax is a test of the stories we New Zealanders like to tell about ourselves. Fairness and egalitarianism are supposedly our touchstones. Yet we have allowed inequality in income – our salaries and wages – to soar to such a point that we are among the developed world’s most unequal. When it comes to wealth – the assets we own – our wealthiest tenth have 60 percent of all assets while the poorest half of adults have just 4 percent. At the moment, that vaunted egalitarianism looks a lot like a myth. But a capital gains tax could make it something more real.”

Reinforcing that the CGT is all about dealing with inequality, John Armstrong also argues that the case for such a tax has been well made by the Government and the TWG: “They have made it their mission to address inequality. The means of doing so has now been laid out in detail in front of them. For Ardern in particular, the implementation of a capital gains tax is the ultimate test of her willingness not just to talk about doing the right thing, but to actually do the right thing. And without question, it is the right thing to do. Taking into account the current inconsistencies and anomalies in the way assets are treated, the logic for the introduction of a capital gains tax is compelling. The economic logic in terms of removing distortionary factors impeding investment decisions is similarly persuasive” – see: Failure to deliver capital gains tax would see Ardern reduced to a laughing stock.

Similarly, according to The Press newspaper, the debate “is about fairness. Is our tax system as fair as it could be? If your definition of ‘fairness’ boils down to the reduction of income inequality, then the answer is no… But we have heard little about fairness since the report was released on Thursday” – see: The pains and gains of tax reform.

The editorial condemns opponents for “political hyperbole” that has become “absurd”, especially the suggestion that “ordinary New Zealanders” are going to be worse off under the proposed new tax: “The reality is somewhat different. Rather than the ordinary Kiwi battler, it’s the wealthiest 10 per cent who would overwhelmingly be affected by the proposed capital gains tax. It is bizarre to hear hokey lines about the mythical Kiwi way of life trotted out by politicians who own as many as eight properties.”

Another newspaper editorial, in the Whanganui Chronicle, says that the CGT is an appropriate response to the growing divide in society between renters and landlords, and can help “correct an economic imbalance that threatens to tear our society apart” – see Simon Waters’ editorial: Why shouldn’t you pay tax, the rest of us do?

The editorial argues that the CGT should be implemented despite pushback from those negatively impacted by it: “We have become a nation of landlords. And tenants… Half the country is now crying like children who’ve had their candy fix taken away by mum. The other half, the tenants and the ones who can’t get on the property ladder because the investment frenzy has driven house prices too high to afford, wait. They wait to see if the Government has the gumption to turn those recommendations into reality. Will it cost Labour votes? Most likely. Would it be a politically savvy thing to do? Nope. Is it the right thing to do? Absolutely.”

For TVNZ’s Jack Tame, the deciding question is whether we “value fairness” in society. He supports a CGT and points out that perhaps it’s not in his interests to do so: “I work hard. I don’t sleep much. I work six days a week. I have sacrificed a lot in my life to get ahead. And I earn a lot of money. Most accountants would agree, a capital gains tax is absolutely not in my personal interest. But I do think it’s fair” – see: Why I think a capital gains tax is ‘fair’.

Tame says it’s all about consistency: “why if we value fairness, do we have an economy where every form of income is taxed tax, except one? Where, if someone buys a property, rents it out for a decade to cover the mortgage, then sells it for $400,000 more than they bought it for… that person gets to keep every single cent of that profit, while you working down the street and slogging away in a job, lose as much as 33 cents on the dollar.”

Even bank economists seem to agree that the CGT proposal is a positive step in dealing with inequality. For example, Jarrod Kerr and Jeremy Couchman of Kiwibank told The Spinoff on Thursday that “This is at a time when the concentration of wealth is shifting to a declining share of the population, and if nothing changes, wage and salary earners will likely have to pick up an increasing share of the country’s tax bill” – see: Five commentators weigh in on the Tax Working Group’s recommendations.

Similarly, Salvation Army social policy analyst Alan Johnson explained: “The taxation of wealth is past due in New Zealand if we’re to address the inequity that income from labour – and especially the labour of wage and salary earners – is taxed comprehensively, while the taxation of income from capital is taxed lightly”.

Another important part of the argument for introducing a CGT is the simple fact that most other similar nations have them. For a discussion of the various international tax rates and configurations, see Zane Small’s Capital gains tax proposal: How it compares to the rest of the world.

Cullen has been keen to push this line, and appeared on The AM show on Friday to say: “Everybody else has [a capital gains tax]. The United States, the United Kingdom – these rabid ‘socialist’ countries like the United States have a capital gains tax… France, Germany, the Nordics – they all take it for granted. Many of them have higher productivity than we do. The world doesn’t collapse with the introduction with a capital gains tax” – see Dan Satherley’s Judith Collins says capital gains tax will ‘make Simon Bridges the Prime Minister’.

On the question of whether it is fair to include cribs or baches in the CGT, Cullen also said: “Let’s be real about this – most families in New Zealand don’t own holiday homes. We never did – most families never did. We certainly don’t now. Holiday homes now are often bigger than the houses most people live in, in the cities. And if they’re not taxed, then it’s unfair to tax the ma and pa investors in rentals.”

Finally, so far National’s major attack-line against the proposed CGT was Simon Bridges response that the recommendations “are an attack on the Kiwi way of life”. For responses to this, see Megan Harvey’s Kiwis roast Simon Bridges on social media for his ‘Kiwi way of life’, and Hayden Donnell’s Once more unto the beach house: Simon Bridges and the Kiwi way of life.