Mike Butler: CGT or sell assets?

Time to do the right thing for New Zealand, Labour Leader Phil Goff asserted as he tried to sell his unpopular capital gains tax proposal on Radio New Zealand on Friday morning. Why an extra tax? Because government spending exceeds income by $16.7-billion this year. Why has the spending ballooned? Partly because of expensive and poorly thought-out policies of the 1999-2008 Labour-led governments, of which Goff was a senior minister.

Goff tried to sell Labour’s new economic policy that would levy a 15 percent capital gains tax on the sale of assets excluding the family home, remove GST from fruit and veges, create a new tax margin of 39 percent on earnings above $150,000, and have the first $5000 of earnings tax free.

The capital gains tax will cover property, shares and business investments including farms with an exemption on all real estate, land and buildings in the Canterbury quake zone for at least five years. The tax is expected to raise $26-billion over 15 years, Labour said, and would be introduced from April 1, 2013. It will not be retrospective, meaning people would pay tax on any gains after the introduction of the tax. (1)

Goff’s own polling of 750 voters shows the CGT is unpopular, with almost a third, 31 percent, saying they strongly oppose the idea. There were 21 percent in the middle, with 17 percent strongly approving and 14 percent approving, an overall approval rate of 31 percent. (2)

Goff seems to be creating an either-or option for voters, pushing us to choose between an unpopular CGT, and similarly unpopular assets sales, promoted by the John Key-led National Party.

A poll on tvnz.co.nz showed an even 50/50 split from people asked whether they thought National's state assets sales or Labour's capital gains tax was the best way to reduce the country's debt.

Increasing tax is not the only way to stop haemorrhaging taxpayer money. Try cutting a couple of costly and counter-productive institutions – namely interest-free student loans, which cost $2.1-billion a year, and Working for Families, which costs $2.8-billion. If both schemes were stopped, the government would save $26-billion in 5.3 years.

Goff, who owns a rental property, is happy to scapegoat other property investors, while blurring the distinction between investors and traders by describing both as “speculators”. Property traders, those who buy property with an intention to sell, and subsequently sell, are already subject to tax on their gains. Investors who never sell would never be in the situation where they would have to pay a capital gains tax.

Goff repeats the lie that property does not create wealth, which helps him to argue that a capital gains tax would channel funds to the productive sector, including as he said “professionally”managed funds. He is probably the first politician to publicly promote managed funds while in office – most do it after they have been booted out of politics. He probably means that private property does not create wealth for the government and his CGT is a means of tapping into that wealth. (3)

Apart from the CGT there is not much more in Labour’s new economic plan apart from a policy of higher asset ratios for banks.

Goff thinks the lack of a CGT creates a loophole. He did not mention how that loophole has manifested, and that involved Working for Families, a policy put in place by the government he was a senior minister of.

In 2009, the Tax Working Group was told that more than 9700 families receiving Working for Families credits own rental properties and are using losses on them to boost the amount they get from the taxpayer. Other recipients of the scheme are using trading companies, sheltered within trusts, to pocket tax credits even though they are earning well over $70,000. LAQCs became LTCs in the 2010 Budget in a bid to address those rorts. (4)

The interest-free student loan scheme, also set up by Goff’s former government, has attracted its own rorts. Students enrol in papers and then dropped them to get their fees refunded while still receiving living costs. The annual $1000 course-related cost allowance can be be used to pay for international airline tickets, or anything. Students can provide studylink with a quote for a laptop in exchange for $1000 that can be used as a great interest-free OE starter. (5)

Students apply for the maximum amount of living costs, which is up to $169.51 a week during the academic year. That money may be invested in high interest bank accounts while the student works a part-time job to support him or herself.

“Doing the right thing for New Zealand” right now involves putting an overweight government on a diet, not feeding it more. Goff, who says he wants to do the right thing for New Zealand, was part of the government that created Working for Families and interest-free student loans, which together cost $4.9-billion a year, and which make up part of the problem Goff purports to solve. Goff is part of the problem and his “soak the rich” capital gains tax is more about getting Labour up higher in the polls than it is for “doing the right thing for New Zealand”. It is the politics of desperation!

Sources
1. Labour to target high earners in election fight, http://tvnz.co.nz/politics-news/labour-target-high-earners-in-election-fight-4304874
2. Ibid
3. "Labour’s new economic policy", Nine to Noon, July 15, 2011, http://www.radionz.co.nz/national/programmes/ninetonoon
4. "Well-off families rort system", http://www.stuff.co.nz/national/politics/2761239/Well-off-families-rort-system
5. "Here's how over 250,000 students are using and abusing over NZ$2.1-billion of interest free loans and allowances. Your experience?", http://www.interest.co.nz/personal-finance/54098/heres-how-over-250000-students-are-using-and-abusing-over-nz21-billion-intere