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.
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.