If the tax reform is designed properly, it should reduce the income tax burden on hard-working Kiwis. The capital gains tax (CGT) policy proposed by Sir Michael Cullen’s Tax Working Group in 2019 was revenue-neutral. It would have delivered no additional tax revenue to the Government, at least to begin with.
Government gains from any new taxes could – and should, in my view – be offset by income tax cuts.
It’s not about a tax grab. It’s a defence against losing our tax base.
We need to broaden that base or we are in trouble. That’s just a simple case of demographics.
It’s why the debate about a capital gains tax won’t go away. And it’s why the idea retains such strong support from a large chunk of the business community.
Our population is ageing. In the coming years, we are going to have considerably more retired people to support and relatively fewer workers paying income tax to pay the superannuation and healthcare bills.
Over the next 30 years, according to Stats NZ, New Zealand’s population of seniors is expected to grow from about 850,000 (17% of the population) to 1.5 million (24% of the population).
Hiking income tax on an ever-smaller proportion of Kiwis isn’t realistic or fair. It will disincentivise work and send young people offshore, exacerbating the problem.
That leaves two options: dramatically cutting government spending or massively lifting our economic performance.
The second of those options is the one politicians always lean on. But after 20 years or so it is wearing a bit thin. Also, the Crown has – as Treasury chief economist Dominick Stephens pointed out in a recent speech – a structural deficit.
That is to say, normal cyclical economic growth won’t be enough to address it. We need to do something with the structure of our economic base.
The first option – radically cutting spending – isn’t much fun and it makes achieving the second option more difficult.
So broadening the tax base makes sense.
The second thing I’d say about a CGT debate is that I’m not especially passionate about it. There’s no chance of one being implemented by the current Government.
I’m about as emotionally invested in it as I am in the upcoming Black Caps cricket tests with India. Hoping we win the series is a waste of energy. But let’s see if we can make some small steps in the right direction and build the strength of the team.
But the offhand dismissal of debate by the Prime Minister was frustrating.
The best (and most grown-up) Coalition Government response to renewed calls for a capital gains tax came from Finance Minister Nicola Willis at the Mood of the Boardroom breakfast in Auckland this week.
Speaking to a room full of New Zealand’s most senior executives and directors, she took the debate seriously. She had to, because 77% of the room had answered the Mood survey to say they thought it was a debate New Zealand needed to have.
ANZ chief executive Antonia Watson – who sparked the most recent CGT headlines by advocating for reform in an interview with RNZ’s Guyon Espiner – was sitting in the front row.
Willis didn’t attack Watson or say anything glib.
Instead, she made the point that ideas like a CGT can look all well and good on paper but are difficult to implement fairly and efficiently.
It was an honest and reasonable response. And, while not doing something because it is hard isn’t a great basis for politics, I’d certainly agree that the Finance Minister has more pressing issues to deal with right now.
Willis was keener to focus on a simpler and more politically plausible shift to the age of Superannuation.
That has to happen and will help the Crown’s revenue equations as the population ages. But it requires a long lead time to be fair. So we need to get the settings changed sooner rather than later.
When he was Prime Minister, Bill English proposed 2040 as a start date.
Raising the age of Super is easier than getting a CGT across the line because it is potentially bipartisan. It wouldn’t take much of a nudge to get Labour across the line on it.
Also, it doesn’t affect the elderly.
As English told me on the Money Talks podcast: “It’s easy to advocate change if you don’t have to look into the eyes of those facing the consequences.”
While a CGT could reduce the income tax burden on younger people, there’s no question that it would shift the tax burden along the age scale, demanding more of older asset-owning generations.
That might be fair ... but it’s also about to be me!
The other thing that makes CGT such a hard sell is that the concept is largely being pushed from the left, which means it is often seen as a tool of social justice and wealth redistribution.
Even though a lot of senior financial market and business leaders support the idea, many middle New Zealanders (potentially swinging voters) don’t trust the left to keep it clear of more onerous and complicated wealth taxes.
I don’t doubt that Labour finance spokeswoman Barbara Edmonds, who is a tax lawyer, has the right credentials to design a solid policy that addresses the issues without destroying wealth.
I’m not convinced Labour currently has the leadership to sell it.
It will happen, in some form, eventually. It won’t be called a capital gains tax (now a cursed moniker). But at some point, New Zealand will have no choice but to broaden its tax base.
The best way to get there with a policy that promotes growth and productivity would be for the political parties on the right to engage in debate in a more sophisticated manner.
Small steps ... one day we’ll win that test in India.
