Bryce Edwards: Defeat looms for the Government on the CGT

Bryce Edwards: Defeat looms for the Government on the CGT

The capital gains tax debate is a huge political issue, and a great deal rides on the outcome – especially the chances of the Labour-led Government being re-elected next year. So far, it’s not looking great for the Government. At this stage it appears very unlikely that they will be able to implement the full capital gains tax that Labour and the Greens clearly want. Instead, at best, a watered-down capital gains tax (CGT) compromise seems likely.

Writing on the RNZ website today, outgoing Morning Report co-host Guyon Espiner – who will be replaced on the show by Corin Dann – has expressed his disappointment at what is shaping up to be a less than satisfactory new tax, saying a compromise might help the governments re-election chances but “it’s not the transformational government we were promised” – see: Politics punches holes in the tax net.

According to Espiner, “already Jacinda Ardern is buckling” on the issue, and appears to be positioning the public for a likely back down on how comprehensive any new capital gains tax will be. Reporting on the Prime Minister’s Monday press conference, he says “her main goal was to soften the ground for exemptions” to the tax, with farmers and businesspeople likely to be allowed to continue without paying such a tax. He says “It sounds as though after all the pet constituencies are protected we may end up with a CGT on residential investment properties only.”

Espiner makes the case that providing lots of exemptions to such a tax weakens it, to the point where it may end up almost meaningless: “we can run into real trouble by granting concessions in the tax system in order to please constituencies. Fairness and kindness are subjective concepts so tax systems have to have strong and consistent principles underpinning them. That’s why GST works. No exceptions. Even drug dealers pay GST, as David Lange famously observed… We are heading into that territory now with the CGT where you puncture the IRD’s net with such large holes that it becomes useless.”

Other commentators are also critical of providing too many exemptions to the CGT. For example, Newstalk ZB’s Mike Hosking: “Do remember the more they cut out of this, the more people they exempt, the less sensible a CGT is. If you’re taking farms and businesses out, you open the Pandora’s Box of the fast burgeoning industry that is tax avoidance. Not to mention the fact the more you exempt, the less you actually raise. And the less you raise, the more questions are asked about the cost of compliance and chasing the returns” – see: Capital Gains Tax a train wreck driven by a naive Government.

Hosking suggests the Tax Working Group process simply didn’t work out, and now the Government is in disarray over the whole project: “The working group was specifically tasked with finding a way to make a CGT work, they couldn’t. They told the Government they couldn’t, they were then told to go away and try harder. All the while the Government stalled, pretending they hadn’t made up their mind. They’re still stalling, pretending they haven’t made up their mind and in that is the naivety, they’re taking their issue, and making a complete and utter hash of it.”

Newstalk ZB’s political editor Barry Soper argues that Ardern has miscalculated the whole CGT strategy, and only now is she “wide awake to the political damage it’s doing to Labour” – see: Prime Minister Jacinda Ardern in state of shock at reaction to Capital Gains Tax plan.

Certainly, there will be plenty of disappointment if Ardern and her government backs down on the CGT. For example, Anna Connell says that a back down on the CGT would indicate that this government isn’t really going to deliver: “I hope the CGT stays if only to signal that Labour isn’t crippled by short-termism and that working groups can effect change. Because we have a lot of them and while I applaud rigorous thinking in decision making, at some point we’re going to need to see some transformation from this government. They have already spooned out a lot of transformative rhetoric and backed working groups to do a lot of the heavy lifting for them” – see: Capital gains tax – should we care?

A back down would be reminiscent of Ardern’s earlier CGT retreat during the 2017 election campaign when she first promised the new tax would be implemented and then changed her mind and promised no such tax would come in during the next parliamentary term.

According to RNZ’s Tim Watkin, back in 2017, “Having made the hard political decision, she choked”, and he can see her doing this yet again – see: Capital Gains Tax – now it’s a numbers game.

Here’s his main point: “This is a weakness for Ardern; the sense that she can talk the talk, but is timid when it comes to the walk. She has consistently talked about a CGT as a “fairness” issue, implying that the current regime is not fair. Will she balk again? If she does, there is a serious risk that a narrative of timidity will begin to form around her. I’m not sure she can afford to do the all groundwork – again – and then not ride into champion the fairness she has indicated she wants.  The kindness doctrine she aspires to comes with a cost – political and fiscal. At some point she needs to stop just humming the tune and start paying the piper.”

Such a back down on CGT by Ardern and her finance minister is simply not tenable according to John Armstrong: “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” – see: Failure to deliver capital gains tax would see Ardern reduced to a laughing stock.

Armstrong says that “having declared 2019 to be the year in which Labour will deliver, the failure to deliver a capital gains tax would see Ardern reduced to laughing stock.” He thinks this is unlikely though, and that there “will have to be tempest-level tumult from all parts of the electorate… for Labour to abandon the working group’s key recommendation…The reality is that even if their nerves get the better of them, Ardern and Robertson no longer have the option of engaging reverse gear.”

Perhaps, however, Ardern and Labour never had any intention of introducing a full capital gains tax, and the whole exercise has been a face-saving one in which the party manages to signal its virtue to its supporters without actually intending to burn up any political capital. This is the argument from Heather du Plessis-Allan, who says the exercise is “all talk. There’s no chance it’s going to happen” and she says Labour is actually relying on New Zealand First to veto anything substantial – see: Big tax shake-up or big PR job?

She explains why the Government has gone through the motions with the CGT exercise: “A CGT was a Labour election promise. It’s all about making the tax system fairer. It’s a Government looking after the poorest Kiwis. Robertson and Ardern have both spent too much time repeating that message to now walk away from their one chance to fix the system.”

And then Peters and his party can be relied on as “Labour’s get-out-of-jail card”, because Labour can “happily drop a CGT and blame it on him. They could trot out the old you-win-some-you-lose-some argument. They’ve used it before.”

Clearly the government parties will risk losing votes if they implement any sort of CGT. And Bernard Hickey has a useful column outlining how the electoral maths is against a CGT being implemented. He says that many citizens who are most inclined to vote have a strong financial interest in preventing such a tax being implemented: “The dirty little secret of the whole debate is that property-owning voters are almost completely dependent for their retirement security and their small business survival on over $500 billion of untaxed and leveraged capital gains from their land over the last 15 years” – see: Capital gains debate’s dirty little secrets.

Hickey says that “voting rate imbalance is especially wide between older Pākehā property owners and young renters that are Māori, Pacifika or new migrants”, but Labour “will be hoping the electoral mathematics of the low voting rate of young urban renters can be changed just enough to swing the balance.”

Chris Trotter is even less optimistic, and argues that polling data and any study of New Zealand political culture shows that introducing a CGT would simply lead to the current government being defeated at the next election, and therefore cheerleaders for the change are suffering from “a peculiar kind of political tone-deafness” – see: Dying in a ditch for a capital gains tax that half the country doesn’t want. Trotter also suggests that the CGT on offer is far from radical, and progressives have more important issues that “are worth dying in a ditch for”.

There are definitely some big questions about principle versus pragmatism over the issue, and for Magic Talk radio’s Ryan Bridge, Jacinda Ardern “must decide what’s more important for her politically, principle (we all know Labour believes a CGT is what’s right), or electability” – see: Jacinda has poked an angry tiger.

Bridge reports from talkback-land that “you’d be forgiven for thinking a bomb went off given the amount and heat of the reaction to a comprehensive CGT. I’ve not seen anything quite like it in my time hosting drive-time radio. Jacinda Ardern has well and truly poked the tiger.” But on the other hand, “then the left won’t be happy” if the Government only implements a watered-down CGT: “It’d be like going to a strip show where the main attraction keeps her pants on the whole time.”

However, the Herald’s political editor Audrey Young argues that “even a limited version would be an extraordinary political achievement for Ardern and Robertson” – see: Michael Cullen has given the Government exactly the kind of report it needed. She points out that “It is already quite an achievement politically that a Labour Party that could not sell a 15 per cent capital gains tax at the 2011 and 2014 elections now stands a reasonable chance of imposing an even bigger one at 33 per cent on residential investment property”.

Young has focused on the elephant in the CGT room: New Zealand First. In her column, A limited capital gains tax may not be such bad news for NZ First, she reports on statements last week that Winston Peters made on The Country radio show, in which he ruled out farmers being affected by any CGT.

This is a sensible position, Young suggests, because “New Zealand First would be dicing with death if it supported a comprehensive CGT on small businesses, including farms.” She also argues that Peters can benefit electorally through pushing for such major exemptions: “If New Zealand First can stop the Labour-Greens this term to have a CGT apply to farms and business, it will have a strong case to argue it would similarly be needed next term.”

For more on NZ First’s likely role in watering-down the CGT, see veteran press gallery journalist Peter Wilson’s Capital gains tax: Winston Peters holds all the cards on changes. Here’s his main point: “The party’s leader, Winston Peters, is on record as a strong opponent of a CGT. He has said it doesn’t work in other countries and won’t work here. In recent days, some of his MPs have been saying the same thing privately. Mr Peters doesn’t swallow dead rats. There’s no way he’s going to change his mind to the extent necessary for the government to get this through in the form presented by the Tax Working Group.”

Wilson is worth quoting further: “Peters will play this for all it’s worth. He’ll want concessions, and his demands will be focused on NZ First’s voter base in the regions and among older people. He’ll almost certainly insist that farmers are exempt, and perhaps small businesses as well. We’ve seen it before with the changes Labour had promised to employment law, which NZ First watered down to a level that greatly reduced their impact. If Mr Peters goes through a similar exercise with a CGT he’ll be a hero to those he has saved from it and his party could reap the rewards at the ballot box. It will also test Prime Minister Jacinda Ardern’s leadership.”

Finally, for humour on the political backlash against the capital gains tax proposal, see Andrew Gunn’s Hysteria and hubris: the CGT files.