Political Roundup: A capital gains tax is dead, so what will Labour do about inequality now?

COMMENT:

What is a leftwing political party and government for? Ultimately, they exist to ameliorate inequality, making the world better for working people, the poor, and marginalised. The point is to transform society – restructuring in favour of the powerless, against the wealthy. That's the theory, at least.

In the wake of the Labour-led Government's capitulation on introducing a capital gains tax there are now broader questions being asked about whether this Government - and the Labour Party in particular - are committed to or even have a plan for dealing with inequality. The post-CGT conversation has now moved on to the question of "what now?" and "how will this Government make progress towards greater economic equality?"

The Government is certainly not off the hook according to political journalist Henry Cooke: "Labour has spent the last nine years telling voters the economy is in desperate need of change, with inequality high, house-prices skyrocketing, and wages stagnating. With the CGT off the table and the restrictive budget responsibility rules holding off borrowing, it's hard to see how exactly Labour is going to deliver on that change" – see: Capital gains tax: Jacinda Ardern took a lifeboat off a ship she could have saved.

He says although "changing the tax system is unpopular", "it is also probably the biggest lever government have to shape the economy".

Of course, tax reform that is focused on addressing inequality doesn't have to mean a capital gains tax, which is the point made at the weekend by the Herald's political editor, Audrey Young: "A capital gains tax is not the only way to address inequality. Helen Clark and Michael Cullen rejected a CGT during their nine years in Government, opting instead for direct transfers of wealth through Working for Families" – see: Lay off Jacinda Ardern over capital gains tax.

Young nominates one particular tax reform: "If Labour wants to target rental property owners in the future, there is nothing to stop Ardern and Robertson promoting a tax policy to achieve that without it being a capital gains tax – such as the risk-free return method promoted in the minority report".

This method, "the risk-free rate method (RFRM) or net equity approach" has also been strongly advocated for by University of Auckland economist Susan St John – see her post-CGT blog post, Grasping the chance to do it better.

She explains that this would require "each person's total equity in housing and residential land after deducting registered mortgages [over the threshold of $1m], to be aggregated and treated as if it was earning interest, say in a bank term deposit. The implied taxable income would then be taxed annually along with other income." According to St John, this would actually be superior to a CGT, without the complexities, and would produce better use of housing.

Tax Working Group chairman Sir Michael Cullen main proposal is for some serious tidying up of tax collection on businesses.

She also says "the existing bright lines tests must be strengthened, extended and properly policed to catch short-term speculation". But overall, St John stresses that doing nothing isn't an option, as the original problems which led to the CGT debate, "have not gone away. These are housing unaffordability and increased inequality, both of which are highly damaging to New Zealand's future stability and prosperity."

The chairman of the Tax Working Group, Sir Michael Cullen, has also come up with some suggestions for a way forward, saying "Where to now with no new tax base? All is not lost" – see: 'Vested interests' sunk Capital Gains Tax idea.

Cullen's main proposal is for some serious tidying up of tax collection on businesses, especially those employing creative accounting to avoid tax: "The Government and IRD need to come down hard on such artificial tax avoidance schemes. There needs to be more test cases taken to establish what are the current limits in the law on such behaviour. And there needs to be legislative changes to ensure that the more egregious examples are dealt to."

Also at the more minor end of the scale of reform, it's worth looking at some of the other proposals that came out of the Tax Working Group.

Back in February, Catherine Harris covered these well in her article, Five things that the Tax Working Group considered apart from capital gains.

According to this, "the report also gives considerable thought to taxing shares, empty houses, gig workers, business assets and vices like sugar."

The leading alternative to a capital gains tax continues to be a "land tax", which economist Shamubeel Eaqub advocates as a better solution to the housing crisis than the proposed CGT – see Newshub's The tax that's better than a CGT, according to economists.

In this, Eaqub explains: "The way we charge rates is the tax is on the improved value of the land, but really it should be on the unimproved value of the land, because that would force people to use their land." So, instead of a CGT, he says "the Government should look at a land tax, which would involve revamping how local councils are funded."

However, many have lost faith in the ability of this Government to lead and implement anything like this kind of bold thinking.

Writing for Newsroom, Anna Rawhiti-Connell argues that Ardern and her colleagues are willing to pay a high price for choosing "political reality" and compromise: "The environment is in serious trouble. Child poverty and inequality look to have increased not decreased since this government took office. The housing crisis is still very much a crisis, teachers are still underpaid and overworked, productivity and wages remain static – we work more hours and get no further ahead and the fate of our mental health system rests in the hands of yet another working group" – see: 'Was it naive to expect a change Govt?'

Rawhiti-Connell concludes that true transformation is more likely to come from the private sector.

David Cormack thinks there is still a slim chance of bold reform from the Government: "maybe there'll be a different adjustment to our tax system. Like a land tax. Or a wealth tax. Or nationalising the banks. But I'm not holding my breath" – see: Labour Govt had better be more than meets the eye.

Cormack is holding out hope for progressive change coming in next month's Wellbeing Budget, "which I've been assured has strong demonstrations of progressivism in it".

The Government was forced to abandon plans for a capital gains tax.

But he says the Government needs to deliver more than just rhetoric about kindness: "All this talk of governing in a new way and doing the politics of kindness is great. But you can't eat kindness. Kindness doesn't afford you a house. Kindness doesn't redress the imbalance where one generation got huge amounts of support to get houses, jobs, education, and healthcare while those coming next have been left fighting over scraps."

For a scathing critique of the Government's failure to make good on the promise to be transformational and tackle inequality, see former Labour Party activist Joe Pagani's What is the Labour Party for?

Pagani argues that most of the progressive reforms of the Ardern administration "could credibly have been introduced by a Bill English-led National party with a centrist partner".

A proper leftwing party and government, Pagani says, would be implementing much more radical changes to taxation: "Labour governments aren't elected to ban plastic bags. They are elected to shift the balance from capital to labour. From those who own, to those who earn. By raising taxes on those who own for a living and lowering them on those who earn for a living, the Government would shift the balance between labour and capital."

And here's Pagani's own proposal for reform: "The Government should now come up with a better means of switching tax. A tax on the unimproved value of land – traded off with income tax cuts (say, an income tax-free band that would extend some benefit to every taxpayer) – would be efficient, and effective. By definition, it would redistribute from those who own, to those who earn."

Changes of this magnitude are unrealistic under the current leadership of the Labour and Green parties, according to union leader Mike Treen. He argues the CGT reforms failed because workers are already overtaxed, and a more fundamental shift was needed to make any new taxes politically-achievable – see: There is a lot of noise but little light being shown on the debate over a capital gains tax.

Treen puts forward two proposals as the way forward for dealing with inequality. First: "The solution to the challenge the Government faces is to go straight for a wealth tax that targets everyone with an asset above $5 million. The Government could design a tax that can't be avoided in life or death. Working people would not care a bit because almost none of them would have an asset above $5 million."

Secondly, Treen argues that the current ACC fund of $40b is entirely unnecessary to be kept as a reserve, and instead: "The Government could take and use over the next decade to fund urgent needs in health, education and welfare and still have a billion dollars a year to build 10,000 state houses a year."

Finally, if the three coalition government partners aren't willing to deal properly with inequality, they might face the rise of a new political force that takes the issue more seriously according to Bernard Hickey – see: Jacinda Ardern just did a John Key.

He sees a generational war emerging: "Young voters are unlikely to just sit there and take it. They may have been disappointed by Ardern's promises of transformation and action to improve tax fairness, but they will find a home to vote for. At some point there will be room for an anti-Winston party, or more likely a party to agitate for the interests of generation rent."