Labour came to the only logical conclusion, with a little help from its friends. A Capital Gains Tax was little more than scratching an itch of its voting base, but would have done little for the country and the government

The decision of the Labour-led government to back away from a capital gains tax was a good move in a number of ways.

In the first place, it’s a matter of self-preservation. Staying the course with an unpopular tax for the sake of appeasing the taxation ultras of social media is not a strategy consistent with re-election. There is a reason why successive Labour leaders have failed to win the public over capital gains.

Then there is the ineffectiveness of the specific proposals. Even if you took the Tax Working Group's forecasts at face value, the case for the CGT was underwhelming in practical terms.

It would not have generated substantial new revenues for spending. It would not have materially diminished house prices. It would, it was conceded, put some upward measure on rents.

All the while the building of more expensive family homes would be encouraged. The construction of affordable rentals, on the other hand, would be discouraged. The compliance costs would have been an expensive nightmare for the majority of New Zealand businesses already burdened by the accumulations of decades of regulatory creep.

Some of these problems arose from the compromised nature of the CGT put forward. To have a chance of being palatable, however, the tax had to include exemptions on things like the family home. The minute you go down that path, however, you create a whole new suite of distortions and encouragements for tax minimising behaviours.

But these exemptions were also necessary. Without them, the harsh nature of realisation-based taxation would create unsympathetic tax liabilities that nonelecotrate would stand for. There are good reasons why those exemptions - and the attendant complexity they create - are a feature of capital gains taxes the world over.

So whenever they were properly scrutinised, proponents of a CGT could only fall back on the argument that they just really thought we ought to have one. That overall wealth might be diminished by the tax was beside the point. The CGT was either an end unto itself or a means of socking it to baby boomers and other perceived class enemies.

Accordingly, beyond scratching the emotional itches of its mostly salaried voting base, there was no real upside to Labour pursuing the matter. There are only so many votes to be harvested through Twitter favs, after all. Certainly not enough to justify foisting a tax of this nature on an electorate with whom you have repeatedly lost the argument.

In the past few years, there has been a growing sense of assertiveness and confidence from the Tax is Love crowd. They will, understandably, be feeling somewhat discombobulated by the prime minister's announcement. But, given time, I am sure they will come to see it as an acceptance of political reality rather than a betrayal.

For years, a strand within National wanted modification of our anti-nuclear legislation as a means of restoring full allied status with the United States. There are probably still people within the party who see things that way. But as far as the New Zealand public is concerned, the matter has been settled, and MPs from all parties are accepting of that.

 And if we had not reached that point with a capital gains tax before yesterday, we have now.

Comments (3)

by Ian Tinkler on April 20, 2019
Ian Tinkler

If CGT are a bad idea why do we tax the gains on have bank in the bank?

by Charlie on April 21, 2019
Charlie

Great post Liam! 100% on all points.

One aspect you missed: ALL the factors you mentioned have been self-evident for years leading up to this point, which leads me to two conclusions:

By promising it during the election, then investing in that pathetic 'tax working group', then waiting for Winston to chop her legs out from under her, she's made herself look terribly weak. All for no good reason - an own goal.

It speaks volumes about the Labour caucus in general. Nine years in opposition and STILL they can't assemble a viable tax policy! It signals a lack of clear thinking and intellectual horsepower.

by Bruce Carruthers on April 22, 2019
Bruce Carruthers

If you wanted money form it, then it should have been CGT on the gain from original cost. Thus real income from rentals on sale and from farm sales - the tripling of Auckland values since 2002 for example and doubling of farm values. 

Of course then there was including the family home in the way it is overseas - which is not in the CGT, but as an estate tax. This is because of what is called rollover, where money reinvested in a new businees, a new farm farm or a new family homje is rolled over until leaving business, farming or in the case of the family home - inheritance of the estate. 

A real left wing party would have been looking at this all along.

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