Editorial: Keep the tax plan, lose the envy politics

Labour leader Phil Goff at their tax policy launch at Westpac Stadium in Wellington. Photo / Mark Mitchell

The Labour Party deserves applause for sticking to its guns and making a capital gains tax on investment property part of its election policy. Since word of the proposal leaked out a week ago, it has been the subject of considerable debate. Encouragingly, a capital gains tax no longer appears to represent the ultimate in electoral poison. Phil Goff has, therefore, decided to press ahead - but in a manner that, unfortunately, raises serious reservations.

A considerable drawback revealed in yesterday's policy announcement was that Labour's capital gains tax plan embraces not only property investment, but also shares. While an attempt may be made to justify this on the grounds of consistency, it ignores the bigger picture and suggests Labour may not fully understand why it is treading this path.

As much as creating a broader-based and fairer tax structure, a chief reason for a capital gains tax on property investment is to direct investment into productive enterprise. Distortions in the current tax system are responsible for a crippling imbalance in which too much of people's savings is going into housing. Shares are precisely the type of investment destination that should be encouraged. Instead, Labour plans to introduce a deterrent.

A similar blind spot blighted Labour's presentation of its policy. Its polling apparently showed that support for a capital gains tax was strongest when it was contrasted with the National Party's preference for state asset sales as a means of reducing debt. But, whatever the potential political advantage, it is misguided to suggest the country must opt for either one policy or the other.

Both would deliver substantial economic benefit. The part-sale of state-owned power companies and suchlike will encourage greater efficiency and transparency and a stronger customer focus. It will also address the present shortage of high-quality investment opportunities, another of the factors that has produced an unhealthy emphasis on property. As such, it should be seen as complementary to, rather than an alternative to, a tax on capital gains.

In an attempt to make its policy more palatable, Labour has included a large number of exemptions. The 15 per cent capital gains tax would not, for example, apply to the family home, collectables and inherited assets. As well, the first $250,000 in gains from the sale of small-business assets held by people aged over 55 would be exempt. This is designed to help tradespeople and owner-operators who have invested in their enterprises with an eye towards saving for retirement. But its effect could well be to stifle such people's enthusiasm for expanding their businesses.

Having a large number of exemptions also devalues any policy. Not only does it rein in the amount of revenue that will be raised, but it increases the potential for the tax to be circumvented. Labour may plan to use a panel of tax experts to construct a loophole-free capital gains tax, but other experts in the field will be intent on finding ways around it. Exemptions make that far easier. That will also be apparent if Labour's policy of removing GST from fresh fruit and vegetables is ever enacted. The all-enveloping nature of the GST system, a key strength, will have been undermined.

It would also be unfortunate if Labour's capital gains tax plan became intertwined with the politics of envy. Getting at rich property investors is not what this is about. It is about broadening the tax base and realigning investment for the benefit of the economy. Increasingly, there seems to be a public acceptance that this is overdue. Labour would be doing a powerful service if it advanced the debate solely on those terms.