Ele Ludemann: Labour hasn’t learned

Labour says it’s been listening. That may be true but when the first big policy musing from its leader Chris Hipkins is about adding another tax it demonstrates it hasn’t learned.

One of the reasons the party lost last year’s election was because it spent too much while taking the country and its its services backwards.

Labour’s inexplicable failure to understand this must be at least in part why it thinks a capital gains tax would be a good idea.

It isn’t.

There are several reasons for that, not least the problems that would come with it which Steven Joyce explains:

. . .The first practical problem with a capital gains tax is what it would apply to. Pretty much everyone except maybe the Greens immediately rules out the family home, because that is political kryptonite. Try to tell New Zealanders the Government will take a cut on the sale of their family home, which they’ve paid for via their (already heavily taxed) wages and salaries, and they’ll show you the door.

A CGT that excludes the family home would incentivise people to invest more in it rather than more productive areas.

The next asset to get excluded is the family bach. Having a holiday home at the beach is almost considered a birthright by a large group of New Zealanders. Touch that at your peril, too.

Then we move on to the primary sector. Taxing the sale of the family farm is tantamount to declaring a political war on rural New Zealand. For most farmers, the equity in their farms is their retirement savings scheme. For many livestock farmers, the appreciating capital value of their land over the decades is the only significant upside they get for years of hard toil. So that, too, is effectively a non-starter.

Given the current dire returns from sheep meat and wool, those for whom they are their only, or main income, will be mining their capital gain.

At this point in the argument nearly all who are left in the net is the late Sir Michael Cullen’s “rich pricks”, a few of whom are actually wealthy but most of whom are small and medium-sized business owners. We are a nation of small businesses, and included among them are groups such as West Auckland tradies, battling shopkeepers and hospitality businesses up and down the country. Once those people realise you are after their prospective nest egg, you are in trouble once again.

All of which leaves you back taxing the capital gains of share traders or on bank deposits, both of which is already done, and the capital gain on rental properties. That, too, is already taxed if you fall on the wrong side of a politically moveable bright line test. It’s at this point the whole idea collapses.

As convincing as the political argument against a new (or more correctly a broader) capital gains tax is, the real argument against it is the economic one. And that can be summed up simply as you can’t tax your way to prosperity. The more you tax, the more you stifle economic activity. A state that keeps getting bigger simply drains away economic activity in the productive parts of the economy.

You also don’t increase taxes on economic activity you are trying to encourage. If you want more people starting businesses, taking risks, having a go, hiring people, and aspiring to succeed, don’t tax that activity more. . .

Quite. We need more investment, more savings and more people being rewarded for taking risks to create more wealth, for themselves and the country.

Two reports on an Ipsos poll said 65% of people support CGT but Rob MacCulloch provides a more accurate interpretation of the poll:

The Herald & Radio NZ owe the nation an apology. . . Yesterday they reported on their front pages, “Labour closing in on National in latest Ipsos issues poll, with 65% support for capital gains tax”. At best its a misleading headline; at worst its a blatant untruth. Then they go on to say, in a bit more detail, that the Ipsos Poll “found almost two-thirds of NZ’ers support a capital gains tax in some form”. But Ipsos never asked its 1,000 survey respondents the question, “Do you support a capital gains tax in some form?” And wording in surveys is everything. Every word matters, since it can bias respondents. In fact, Ipsos asked, “Would you support the introduction of a Capital Gains Tax in the following situations? (1) Sale of an investment property? (2) Sale of a business? (3) Sales of other assets like boats, cars & paintings? (4) Sale of a family home”. The proportions supporting were 57%, 43%, 22% and 13%, respectively. There’s only (narrow) majority support for one asset class – investment properties – and NZ already has capital taxes on them (ones that come under the bright-line test). Faced with this failure to show much public support for capital taxes, what Ipsos (sneakily) did & the Herald (sneakily) reported does not even come from the answer to a survey question. Instead it came from a calculation that was made up & contrived – they added up the number of people who ticked any one (or more) of the above 4 categories. That’s how they arrived at their “65% support capital gains in one of these forms” number.

To see how misleading is the Herald’s story (journos also confronted the PM with the “65% support number”) then answer the following question: do you think that only 35% of Kiwis oppose Capital Gains Taxes (being 100% – 65%)? If you think the answer is “yes”, its wrong. The answers to the question, “Would you not support the introduction of a Capital Gains Tax in the following situations? (1) Sale of an investment property; (2) Sale of a business; (3) Sales of other assets like boats, cars & paintings; (4) Sale of a family home”, are 32%, 41%, 64% and 78%, respectively, of respondents. So clear majorities in 2 out of 4 categories show no support. Although Big Media did not report it, I estimate about 90% of Kiwis object to Capital Gains Taxes on at least one of these asset classes (often several). Whereas the Herald reported that Ipsos “found almost two-thirds of New Zealanders support a capital gains tax in some form”, the headline could equally have been Ipsos “found almost 90% of New Zealanders oppose a capital gains tax in some form”. Big Media’s Plot to get capital taxes put in and Labour re-elected on that platform makes me suspect its in cahoots with Labour at some horribly unpleasant & deeply disturbing level, one that needs investigation.

What the poll showed is that few people support a CGT if it would affect them.

One could wonder why they think boats, cars and paintings which are luxury goods, the gain on which would largely be due to inflation and luck, should be excluded but not businesses which have capital gains as a result of hard work and risk taking, but logic doesn’t always come into thoughts on tax.

Another argument against a CGT is that it is based on the incorrect belief that it would be a fairer tax than GST about which Richard Meade writes:

. . . So is it more fair to tax income from all sources, including capital gains? Superficially the answer is a clear “yes”.

But mapping out the future for notional taxpayers – Jack and Jill – shows how it could be anything but.

Imagine Jack and Jill are each 21 years old, with the same qualifications, the same job and the same expected lifetime salary. They both plan to retire at age 65, and to simplify things, suppose neither has any existing savings and won’t have Kiwisaver accounts.

For whatever reason, neither of them marry or have children and they both rent the same type of apartment, with the same rent, all their lives.

What separates them is that Jack is a party animal, who spends every dollar he can, and saves nothing. Jill, by contrast, saves a quarter of her post-tax income, foregoing current consumption so she can consume more when she retires.

Some of her savings generate taxable cash returns such as interest, non-imputed dividends and rents. But they also accrue capital gains, which are treated as either being fully taxed like any other income (at Jill’s marginal tax rate), or not at all.

Assume Jack and Jill each have a pre-tax annual salary of NZ$50,000, which will stay constant in inflation-adjusted terms. Allowing for inflation only strengthens the contrasts discussed below.

For this illustration, New Zealand’s current personal tax brackets and rates apply for each year until Jack and Jill retire at age 65.

Jill’s savings are assumed to generate a taxable 2% annual cash income (distributed each year), and annual 4% capital gain (reinvested each year, taxable or not).

With these assumptions, Jill accumulates a retirement nest-egg of $1.5 million, while Jack has nothing to show for his working life when he retires.

Since Jill earns income from savings as well as her salary, she pays more lifetime income tax than Jack. It would work out to be over a third more even without capital gains taxes, but more than double with capital gains taxed.

Jill pays less lifetime GST than Jack, mainly due to her higher savings rate, but she still pays much more total tax than Jack over their working lives.

While many other scenarios and assumptions are possible, this simple illustration shows that even without a capital gains tax, Jill’s thrift is rewarded by her paying more overall tax than Jack while they are still working – and much more so if capital gains are taxed.

Plus Jill accumulates more savings to be used to pay for aged care if she needs it, whereas under current rules Jack qualifies for taxpayer subsidised aged care as soon as he needs it. Jack benefits despite paying less lifetime tax and having lived it up a lot more than Jill before retiring. . . .

Just like means testing superannuation, a CGT would be a disincentive for thrift, punishing those who forgo spending to save and rewarding those who don’t.

This shows that taxing capital gains is not obviously fairer than leaving them untaxed. Different lifestyle and savings choices result in differing lifetime contributions to the tax system (Jill contributing more) and differing burdens on aged care subsidies (Jack imposing more).

So if we are going to have a debate about capital gains taxes, we might need a broader definition of “fair”. We also need to take a broader view of how we incentivise – or not – desirable activities like saving for retirement.

New Zealand might be out of step with other developed countries in terms of not more widely taxing capital gains. But we are also out of step in terms of how poorly our tax system incentivises retirement savings.

That many New Zealanders take the route of saving for their retirement through tax-free capital gains on residential property is no mistake, even if it is an accident of policy.

If we shut that route down by extending the reach of capital gains taxes, how else do we comparably encourage people to save for retirement and reduce any future burdens they might place on the tax system?

We need to be encouraging savings, investments and the self reliance they can bring, not disincentivising them.

We don’t need higher or additional taxes. We need more growth, which will increase the tax take without the need for an increase in tax rates, and far more careful spending.

And it’s not just the wealthy who would lose from a CGT.

Labour calls itself the workers’ party but higher taxes hurt workers directly by leaving less in their pay packets and indirectly by leaving businesses with less to invest, grown and pay better wages and salaries.

Until Labour learns this they do not deserve to govern again.

Ele Ludemann is a North Otago farmer and journalist, who blogs HERE - where this article was sourced.