John Roughan: Time to slay old demon about tax

Capital gains has been so politically toxic that even the reforming 1980s Labour government could only produce a paper on it by David Caygill. File photo / NZ Herald

Like most of the people in polls I wasn't planning to vote Labour this year. Now? It is possible. No single issue has swung my vote before but a capital gains tax could.

Tax-free capital gains on property investment is the one crippling flaw remaining in our economy. Economists know it, accountants know it even if they don't like it. Politicians of every party know it, though none have had the courage to do anything about it.

It's curious that a tax so commonplace in other countries should have acquired demonic status in New Zealand. Nobody seems to remember how or why.

In the United States they call these "third rail" issues - touch them and you die.

But things change. Generations of voters die, new generations take a fresh look at the landscape. Eventually a daring leader gives the third rail a tentative touch, and it's dead.

People with memories older than mine know that a previous generation regarded a value-added tax on goods and services with the same aversion it had for a tax on capital gains.

Successive advisory committees advocated it but National governments shied away.

Then we got the fourth Labour government and GST turned out to be one of the less contentious demons it confronted.

Interestingly, even as that government was ripping out farm subsidies, import controls, floating the dollar and attending to a different economic distortion every week, it wouldn't touch capital gains.

The closest it came was a paper put out by Associate Finance Minister David Caygill.

When David Lange was asked about it he gave his famous reply that a capital gains tax was something you did if you wanted to lose the next election and one or two elections after that.

I dare say that clip is being dug out of television archives and prepared for screening if Labour really does take the plunge this coming week.

But I think there was another reason Phil Goff's former colleagues didn't touch capital gains.

They were levelling the playing field and there was no reason at that time to treat property any differently from other business. Let investors find the best returns wherever markets lead.

That is still the prevailing principle of public policy and it should be.

But excessive property investment has become a curse, absorbing too much national capital, driving house values far beyond the reach of ordinary incomes, requiring high interest rates to offset its inflationary effects and keeping the exchange rate at levels that punish exports.

John Key and Bill English have been very good at highlighting this problem but they're not doing enough about it.

I'd like to vote for Key this year. A coalition between a conservative party and an independent Maori Party has the potential to give this country a future far more exciting than anything in the economic field.

But as someone succinctly put it to me after Hone Harawira made his move, "the Maoris are going to stuff it up, aren't they?"

I'd like to vote for Key for the same reason he is the preferred Prime Minister of record numbers in the polls. He is immensely likeable, and I respect his business judgment even on investments I loathe. The hobbits and Bollywood will probably earn a buck.

He doesn't make those judgments on sentimental grounds and my vote at the election should be equally hard-headed.

We've never had a major party commit itself to a capital gains tax before and the circumstances may never be as propitious again.

Nobody is making capital gains at present, but when the recovery gathers pace it remains more than likely personal investors will return to property. Sadly, it sounds like Key would settle for that.

One of his criticisms of a capital gains tax this week was that it would be "a handbrake on the economy".

His main objection is that it is "complicated", which I simply don't believe. It's not too complicated for other Western governments.

Last year's Tax Working Group took this refuge too but didn't explain the complexities and proposed land taxes that looked far worse.

Labour should do better than a 15 per cent half-measure. It should aim to tax realised capital gains at the seller's top personal rate, like interest and dividends on other passive investments.

When property investors complain that this would treat them differently from other business, the only answer is "damn right".

They lead with their chin when they point out Marc Ellis isn't being taxed on the millions he has made from the sale of Charlie's orange juice. Ellis and friends went into a competitive market with a label that could have bombed.

They had to work hard to promote and manage it. They've earned every cent.

That's exactly the investment we need.