Wednesday, July 6, 2011

Frank Newman: Capital gains tax back on the political agenda

Property investors are again being pilloried by self-serving politicians. This time it’s the Labour Party promising to impose a capital gains tax on investment properties should they become the government after the next election (presumably with support from the Greens).

The proposal was to be announced next week but has already been leaked to the media (which actually does not give one a lot of confidence in their ability to keep private the information it holds about individuals).

The changes are part of Labour’s election tax package:
  • A capital gains tax on the sale of investment property at a rate of 15%, as an alternative to state asset sales. The family home would be exempt.
  • Remove GST on fruit and vegetables.
  •  Exempt income tax on first few thousand dollars of income.
  • Increase the top rate of tax.
Some say Labour’s capital gains tax proposal is bold. I think it is foolish and manipulative.

Capital gains tax had been off the agenda for decades, and for good reason. There was a similar tax introduced in 1973. It failed. The reality is if a law is unpopular the best brains in the country will earn hundreds of thousands of dollars a year picking it apart to come up with ways to circumvent it and enacting those inventions for their clients.

The other thing Labour and many commentators have over-looked is there already is a capital gains tax regime! Those who buy property with the intention of flicking it on at a profit must pay tax on the gains (and conversely can claim losses). That’s true for share investors, art dealers, those dealing goods via trademe, and so on.

Most property owners invest in rental property for long term income stream. Your typical investor is the sort of person who wants to do something for themselves so they won’t have to rely on the state in their retirement (hear hear to that!). Most have invested in bricks and mortar because it is better than the alternatives. Leaving your money in the bank will see it eroded by inflation, and the sharemarket has been a high risk poor performer compounded by a lack of trust of sharebrokers and company directors.

While the technical issues about a capital gains tax will no doubt become the focus of the media attention,   there is a more relevant and fundamental flaw with the Labour proposal. That is thinking a spend-more tax-more approach to economic management will be good for the economy. It won’t. Politicians generally (and the so-called “caring” socialist politicians in particular) want us to assume that more of their type of governance is the answer to our problems. Politicians have for as long as anyone can remember promised more government as the path towards a utopian society (it is after all their business activity), but the promises of the Promised Land remain simply that.

Most progressive economies (the ones that are actually growing) take a light handed approach to taxation and regulation. They realise that if they turn the tax tourniquet too tight the golden goose will take flight, generally to Australia or England.

But not only is a capital gains tax silly economics it’s dumb-dumb politics. Property investors are a diverse group with a wide range of political views. I suspect few if any would support Labour’s capital gains tax proposal, because it is based on so many false premises. I challenge present and aspiring Labour Party politicians to speak to their local property investors group to explain exactly why they believe property investors should come in for special treatment.

Politicians don’t seem to have quite got the message that you have to work with people rather than dictate to them. They also don’t quite understand that the 200,000 private sector landlords actually save taxpayers money by providing $60 billion worth of housing that the state would otherwise have to purchase and maintain.

Sadly Labour’s capital gains tax proposal is the tax-the-rich politics of envy. It’s a style that produces failed economies and desperate societies and what other examples of that does one need than those European countries that feature in our daily news for all the wrong reasons?  Should they ever be given the opportunity to put their tax package in place the short-term winners will be lawyers and accountants. In the long-term everyone will lose.  

15 comments:

Anonymous said...

Good article again Frank. Labour is so stupid. Now is the wrong time to introduce a capital gains tax anyway. If they were going to do it Labour should have been done 5 years ago when the market was booming.

Phil Sage said...

In what sense is it equitable to tax the fruits of labour but not the fruits of capital?

R Cressy Own_Up_Dude said...

Labour has highlighted an issue. All income no matter how it is gained should be taxed equally if it is to be taxed at all.

This argument goes deeper than just a capital gains tax on houses. We need a total overhaul of our tax system to both simplify it and widen it to create a fair system.

I would also call for a capital tax and negative tax system such as the one suggested by Milton Freidman (crazy old communist).

We need to create a fairer system than the current one that screws a very narrow band of people for tax and to smash the current system that does New Zealand and it's land and people no good.

Anonymous said...

Why should I work and earn a $100,000 and pay 25% in tax, yet someone who sells a property for $100,000 pay no tax, Daft and unfair.

Anonymous said...

I totally agree with your article.Its just a envy tax primarily aimed at the better off who already contribute by far the greatest proportion of tax.Thank goodness Labour has little chance of being elected.

Anonymous said...

Question on Bill English's website last weekend.

Do you agree with a CG tax.

Answers No 37% 1849 votes.

Yes 64% 3205 votes.
Interesting, hence it was pulled from the website after 24 hours.

Anonymous said...

Very well said Frank. Capital gains tax is yet another tax on the wise investor. As Frank says the average investor in property is someone who wishes to have an income upon retirement rather than rely on the state. He or she is a person who has firstly saved as much of his taxed income as possible and rather than spending it on extravagances and letting the state carry him in his old age has placed it in the land.This person should be applauded by the state not victimised by jealousy and by politicians who think taxation saves the world.

A common argument we are hearing is that Australia has such a tax - but have you met and Australian who likes it? In Australia it has stifled many sensible, bricks and mortar investments and even sent Aussies over to this side of the Tasman to invest. I can name two.

The person above who earns $100,000 and pays tax on it, and deplores the person who sells a property and pays no tax on the gain, should copy that investor rather than invite the state to tax him, after all where did the investor get his money from in the first place - from his salary.

As Prof Prosterman (University of Washington)once said - landed societies are the happiest,most peaceful and have the least call on the state. So rather than tax landed people and sensible investors I suggest giving them a tax advantage and in the process encourage everyone to own land or buildings and especially the houses they live in.

Let's hope National counteracts Labour's suggestions with some new thought in this direction and put envy aside.

Stuart Chambers

Anonymous said...

Readers seem to be forgetting there is already a capital gtains tax on those who bought the property with the intention of resale. The same applies to shares.

John C - Whangarei said...

Frank I have a genuine question please.

Almost as a toss away line, you and others have pointed out that the post WWII CGT didn't last long.

I would like to know why that was. Do you know any more about that history, please?

jh said...

"Capital gains tax is yet another tax on the wise investor. As Frank says the average investor in property is someone who wishes to have an income upon retirement rather than rely on the state. "

except that they have often received way too much in the way of rewards.

Asset inflation isn't wealth creation, it simply creates a charge elsewhere in the economy; so people straining to buy their little piece of dross are paying for the capital gains of the investor, not recladding, double glazing etc.

jh said...

Do tax structures affect aggregate economic growth? Empirical evidence from a panel of OECD countries

http://www.oecd.org/LongAbstract/0,3425,en_2649_34325_41487020_119684_1_1_37443,00.html

the worst-to-best order runs 1) corporate income taxes, 2) personal income taxes, 3) consumption taxes, 4) “Property taxes, and particularly recurrent taxes on immovable property.”

Anonymous said...

What a waiste of space having labour party. Reduce emmissions and keep them out!!!!!!!!!!!

Anonymous said...

CGT is a rort, based on inflation, caused by politicians, themselves. There is little, if any gain. If there was, folks would be selling their houses and buying ten more, with their "gains." Bah! Humbug!

Freeman said...

Phil

How is CGT worked in relation to inflation? Is a house not a house? Say I bought a house 10 years ago for 100k that is today worth 200k is that 100k profit (income)or did the buying power of the dollar half in that time? It is not still the same house whether I live in it myself or rent it to someone else?

Anonymous said...

What do the supporters of CGT think about it not being inflation adjusted? Is that fair? Why should the govt receive tax because it has created inflation through its own mismanagement?

Lot's of you supporters of CGT also seem to overlook the fact that there is a CGT. That guy Sam Morgan should have paid tax on his gains because it's pretty clear that he went into the venture with the intention of flogging it off at a profit a few years later. How come the IRD has not got onto that one?