Fran O’Sullivan: Capital gains tax, land tax - which party has the guts to push for real change?

OPINION

The International Monetary Fund has thrown the most delicious curve-ball into the forthcoming election campaign by advocating in a not-so-subtle fashion a tax switch.

Cut through the bureaucratese and careful balancing in the IMF’s latest pronouncements on the New Zealand economy.

What you are landed with is the IMF effectively agreeing that corporate and personal income tax rates could be cut as well as addressing fiscal drag (that’s where, as people get wage and salary increases, they find themselves bumped up into higher tax brackets with the government getting the benefit from windfall revenue gains — the answer is to raise the tax thresholds).

But — and here’s the sting — capital gains and/or land taxes should be introduced to replace lost revenue and fund the cuts.

The IMF doesn’t put it as baldly as that, of course.

But it’s an attractive and quite logical proposition, as no government wants to miss out on the tax revenue that comes its way in an inflationary environment if rates are cut without somehow replacing the lost revenue.

But it’s not a proposition that has (yet) found its way onto the policy platforms of either of the main parties for this election.

Put bluntly, neither National nor Labour has (so far) displayed the cojones to take this fight to the electorate.

Plenty of MPs have property portfolios of their own — most notably National leader Chris Luxon.

They would be stung if the IMF’s suggestions were implemented here.

But they would also get more cash in the hand through income tax reductions, which could fund their further investment in the productive side of the economy.

Former National Party Finance Minister Sir Bill English was the last politician to perform a major tax switch when he increased GST from 12.5 per cent to 15 per cent to fund income tax cuts.

Labour has advocated a capital gains tax at prior elections. But former leader Dame Jacinda Ardern put any notion of implementing such a tax into cold storage while she was Prime Minister.

Luxon and National finance spokesperson Nicola Willis are promoting tax cuts at the October 14 election.

The party has said it will release a fully costed fiscal plan, but not until after Treasury’s Pre-election Economic and Fiscal Update (Prefu), which could be four weeks before the October 14 election.

What is so far on the table has been subject to dispute.

The Council of Trade Unions claimed National underestimated the cost of its tax plan by at least $1.5 billion when it made a promise in March 2022 to adjust tax brackets.

At that stage, National costed the policy at $1.66b annually — $6.64b over four years. But the CTU reckons the cost would now be some $8.2b over the four years.

In truth, the reality is that it is high inflation which is pushing up the tax take, leaving wage- and salary-earning New Zealanders still caught by bracket creep.

It is them who are the losers here.

National Party politicians have indicated they are opposed to a tax switch by funding income tax cuts through other mechanism such as a CGT, wealth or land taxes.

Their proposition is to fund cuts through increased economic growth and government spending cuts.

The IMF does agree that macroeconomic policies should retain a restrictive bias. “Fiscal policy should prioritise the recovery from the floods and cyclone, while limiting other discretionary spending,” the fund said.

But New Zealand is an outlier when it comes to a broad-based taxation system.

As former Inland Revenue senior official Robin Oliver points out, New Zealand does not have a general capital gains tax, nor does it levy tax on inheritances. “This makes New Zealand unusual among member countries of the OECD”.

Neither Prime Minister Chris Hipkins nor Finance Minister Grant Robertson has yet addressed the issue head-on.

Both say any tax changes would be a matter for Labour’s election policy.

If Labour does finally opt for capital gains, wealth or land taxes, it would be a simple matter to cite the IMF’s prescription.

Labour also has the benefit of an earlier report into the disparity between the tax ordinary New Zealanders pay compared with those who are “rich”.

It’s not an issue that can be pushed off forever to suit self-serving politicians who are focused on the next three years rather than the next 30.

As the IMF notes, in the longer term, fiscal policy will need to maintain an appropriate balance to address long-term structural needs such as preparing for the costs related to ageing, closing productivity gaps and investing in climate change-related priorities. “Reforms for superannuation should be considered to address the intertemporal challenges of funding public pensions from current revenues while the taxpayer base shifts with the ageing population.” This issue deserves to be centre-stage during the election campaign.

Both major political party leaders must face searching questions on these realities come the election campaign.

The time for bamboozling voters by not facing up to fiscal realities is long gone.