Editorial: Govt should act on Goff's tax gesture

Opinion

Sometimes an Opposition is not completely without power. When the country needs something unpopular to be done, a signal from its rival may be needed before the Government might dare to do it. Labour leader Phil Goff has given just such a signal on the subject of a capital gains tax on investment homes.

This country is unusual in its lack of an effective tax on capital gains and in its demonisation of the very idea. It is hard to know how it became an article of faith among New Zealand politicians that the merest whiff of the subject is electoral poison. No tax is ever popular but the electorate is open to reason.

A value-added tax on consumption used to be anathema in this country, although like capital gains tax it was a common source of revenue in other places and advocated by successive inquiries into ways to broaden the tax base. The fourth Labour Government grasped that nettle and introduced GST but it shied away from taxing capital gains on housing. In those days real estate investment was not the problem for the economy that it is now.

The financial crisis in developed economies over the past year came from an extraordinary bubble in house prices fed by cheap money and poor credit control. Orthodox monetary ideas might be altered as a result. Central banks might begin to monitor asset prices almost as closely as they watch consumer prices for signs of instability.

But notably, New Zealand's financial crisis was not the same. The Reserve Bank here did monitor house prices during the long boom; Governor Alan Bollard was forever worrying aloud about overvalued housing and unsustainable levels of household debt. Unlike his United States counterpart, Alan Greenspan, Dr Bollard did see an inflationary threat in rising property values and he kept interest rates very high to counter it.

The interest rates, however, also attracted foreign savings which largely went into further residential property investment encouraged by New Zealand's generous tax regime. The country's financial attraction kept the dollar at punishing heights for exports.

Whatever is done elsewhere to curb asset price bubbles may not be enough to cure the imbalance of investment in this economy. The weight of unproductive capital must be tackled at its cause: the lack of an effective capital gains tax to offset the full writedown of losses on rental property against other income.

Both those concessions may need to cease. The Prime Minister points out that a capital gains tax did not prevent a property-driven crisis in places that have the tax. He has yet to rise to Mr Goff's offer. John Key says he remains unconvinced of the worth of a capital gains tax, though with a panel looking at all options he cannot rule it out.

He ought not to regard Mr Goff's gesture lightly. Labour could easily have wet its lips at the prospect of National even toying with this subject. For a party newly banished from power and facing years in the wilderness it would be tempting to recover some poll points by invoking the old spectre.

In daring to consider it, Mr Goff is careful to exempt owner-occupied homes from any such tax. That would be a minimum condition of public acceptance. The tax would probably need to be limited to gains made on sale, too. Like the value-added tax (GST) an effective levy on realised capital gains would probably be presented to the public under a different name.

But no political packaging would make much difference if the proposal is opposed. In declaring his party open to discussion of a bipartisan approach Mr Goff has put the country's interest uppermost. National should take up his offer as soon as it has a concrete suggestion from its tax panel. Only if this subject can be removed from political contention is there an even slight prospect of progress.