Monday, February 11, 2019

Frank Newman: Taxing issues

Tax has become a topic of hot debate. The precursor is the impending release of the first Final Report of the Tax Working Group (TWG), headed by former Labour Finance Minister, Sir Michael Cullen. That report is now with the Minister of Finance, Grant Robertson.

It's pretty much a given that the report will recommend a capital gains tax (CGT); that was the brief given to the TWG by the Labour led government. It's the possible finer details that are attracting a lot of commentary, and criticism. Commentators are rightly pointing out the many practical limitations of a capital gains tax.

A capital gains tax has been considered a number of times previously by other working groups. Each time it has been rejected and there is a general view that for it to work it needs to be applied universally across all asset classes.

But don't expect that from the TWG. The government's terms of reference specifically excluded the family home, presumably because it would be unpopular with the voters that matter to Labour. The effect will be a perverse tax that will create a tax-free incentive for people to invest in their own home rather than businesses and investment property.

Prime Minister Jacinda Ardern has confirmed that it remains the government’s intention to bring forward legislation for any tax changes before the end of its current term, but coming into effect after the 2020 election. That will give electors the chance to factor the CGT into their voting preference.

Should it ever pass into law the CGT will be a fiasco. The disappointing thing is that if it does get the thumbs up from voters it will be for all of the wrong reasons. It will be because those who envy the good fortune of others will want to shaft those who are better off. It is this mentality that Labour will appeal to and it may well offer a tax reduction as a sweetener. This is likely to be in the form of a tax free threshold so it can run the line that the tax take will not increase, but those who can pay more, will pay more - to "reduce inequality" and create "fairness" in the tax system. They will be banking on enough voters being gullible enough to swallow that line, so they can win the next election.

The interesting aspect is the role of NZ First. The CGT can't pass into law without their support. The danger for NZ First is that if they support it, they would be labelled Jacinda's poodle. I am sure National would love to pin that one on them, and more so given their strategy to winning the next election appears to be to take out NZ First and the Greens by limiting their vote to under 5% (although it is likely the Greens and NZ First will gain the support of Labour to reduce the Parliamentary threshold to 4% to counter National's strategy). 

On the other hand, if NZ First opposes the CGT, it would show they cannot be taken for granted - and more importantly, they have a place in the political landscape. Rather than thwart the legislation in its entirety and risk its cosy relationship with Labour, NZ First is more likely to seek and gain relatively minor concessions like a threshold level before the CGT kicks in (on the sale of a business, for example).

I personally think a CGT in the form outlined in the TWG's draft report is a stupid idea and time will prove it to be so, but I am not at all surprised it has been proposed given it has been driven by politics rather than sound economics. Everything about the Tax Working Group's report is about politics, from the limited terms of reference to the selection of the Chairman.

Last week National's leader, Simon Bridges, delivered a state of the nation speech outlining its vision for the future. In amongst the fluff he had some specific things to say. If elected in 2020, National says it will: 

  • Repeal the Auckland Regional Fuel Tax
  • Ensure no increase in petrol taxes during our first term
  • Have no new taxes in our first term
  • Repeal a Capital Gains Tax, and
  • Amend the Income Tax Act to make sure income taxes are adjusted every three years in line with the cost of living.
About the RMA he said, "This year National will release a draft Bill that will overhaul the Resource Management Act and unlock development, while protecting our environment." If it's anything like the RMA reforms National did while in office then the proposed changes will be little more than tinkering and do nothing to bring council planners and the planning industry into line.

Tax is going to be a big issue for debate over the next year. Hopefully, in amongst all of the political rhetoric some critical economic analysis will emerge that will add an element of rationality to a debate that to date as been anything but rational.

Frank Newman, an investment analyst and former councillor on the Whangarei District Council, writes a weekly article for Property Plus. 

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