A capital gains tax is inevitable but can be introduced painlessly, writes John Lapsley.
To declare the obvious, money trousered from making a capital gain is the same colour as the money earned in your wage cheque.
To exclude either from taxation is like deciding we should tax English Breakfast tea but ignore Earl Grey.
New Zealand is the only advanced Anglosphere country without a fully working capital gains tax.
The United States launched CGT 110 years ago. Britain (under Prime Minister Harold Wilson) began the levy in 1965, with Canada (PM Pierre Trudeau) following in 1971 and Australia (PM Bob Hawke) in 1986.
Our main political parties are scared of proposing CGT, believing this would lose them an election. Oddly, the evidence seems otherwise. Prime Ministers Wilson, Trudeau and Hawke were each re-elected soon after introducing CGT.
A goods and services tax also seemed electoral leprosy. Yet New Zealand’s Lange government was re-elected after launching GST in 1986, and John Key scored the highest vote since MMP began — shortly after rocketing GST up to 15%.
Over the Ditch, John Howard actually increased his parliamentary majority after introducing a GST he had vehemently promised he would not.
It is fair to note that each of the six PMs I have mentioned was also a political titan who owned enough credit to carry off "brave" tax reform.
Among the less attractive aspects of the New Zealand character are its almost Presbyterian suspicion of the moral worth of business, and the resentment of success.
Last month’s IRD "tax investigation" of 300 of our richest families played straight to that pettiness. It claimed these super rich paid an "effective" tax rate of 9.4% compared with Joe Average’s 20.2%.
The report the Government commissioned was a blatant statistical stitch-up. Revenue Minister David Parker presented the stats as smoking gun evidence of the rich escaping their tax duties. But his damning figures were creatively built upon the crude dishonesty of putting unrealised capital gains into the "income" column.
There was no mention that Jacinda Ardern herself had promised there would be no CGT on her watch. Then, total evasion by Mr Parker when asked the necessary follow-up question: "Does all this mean you’re considering a capital gains tax?"
We have a government which has a rare talent for sowing division. It is now aboard with the politics of envy, chastising the wealthy for not paying a tax that the Government refuses to levy on them.
To give David Parker some credit, he delivered the IRD report details about as enthusiastically as Lenin with a migraine.
His performance was no doubt clearing the ground for Chris Hipkins to become the jolly pie-man PM who steps in with what he will present as a "moderate" CGT Lite.
If National is brave enough (repeat "if"), they would see that the Rich 300 report has opened the door wide for a surprise counter-attack.
National could beat Labour to the punch if it has the cojones to pull a handbrake U-turn and announce a surprise policy called: "A CGT That’s Fair To Everyone."
Labour would then face three truly awful choices. It can say "That’s brilliant, Mr Luxon." (Yeah, right). Or, Labour accepts the derision that would accompany opposing a tax that should be at its heart and soul. Or (politically even worse) it argues the Opposition’s CGT plan is insufficiently severe.
Here are fair policies which would give a CGT a better chance of acceptance.
1. Bring it on slowly, by not taxing any assets bought before CGT starts. (Apart from such retroactive taxes being unfair, they would create an Everest of appealed capital valuations that would instantly turn the IRD into an asylum).
2. Make CGT tax rates lower than the top marginal income rate. That is reasonable because much CGT will be applied to income won via risk.
3. Only tax capital gain once it is cashed in. Otherwise, it will beggar thousands who can only pay a tax on their paper profit by selling up the asset.
4. Exclude family homes. People trade homes for a hundred unavoidable reasons — new jobs, new towns, new children, empty nests, dead spouses, old age.
5. Exclude superannuation.
6. Be flexible with exceptions. In the UK, for example, there is now an "entrepreneurs" CGT rate of only 10%. Something similar could apply to family businesses.
A capital gains tax will come to New Zealand, but the country will be heavily punished if it is designed via the "soak the rich" envy we saw our Government encouraging last month.
- John Lapsley has a background in business and journalism.
