Jacinda Adern retreats on NZ capital gains tax

By Leith van Onselen

New Zealand will remain one of the few developed nations in the world not to have a capital gains tax (CGT), after the Labour-led Government yesterday ruled-out implementing such a measure. From Interest.co.nz:

The Government will not introduce a Capital Gains Tax having failed to reach a consensus, with coalition partner NZ First opposing the move.

Prime Minister Jacinda Ardern said on Wednesday that she still believed there were inequities in the tax system that a Capital Gains Tax could have helped to resolve but it was clear many New Zealanders did not believe in a CGT. She’s now ruled out a CGT under her leadership in future.

“All parties in the Government entered into this debate with different perspectives and, after significant discussion, we have ultimately been unable to find a consensus.”

Taxing capital gains would have improved equity in the tax system by allowing for income taxes to be lowered. After all, why should workers be taxed at full rates on their income while wealthy owners of capital avoid paying tax? A CGT would also have improved incentives to invest in productive businesses rather than unproductive real estate.

Alison Pavlovich – assistant lecturer with Massey University’s School of Accountancy –  argued the case well earlier this month:

Missing from the debate is the fact that a capital gains tax should reduce income taxes for most New Zealanders…

The debate strikes at the heart of two essential elements used to assess the quality of a tax: equity and efficiency.

In order to be equitable, a tax should treat people with similar economic situations in a similar way. This is called horizontal equity. Equally, taxation should fall more heavily on those who have the ability to pay. This is referred to as vertical equity…

Not taxing capital gains results in a failure to achieve both horizontal and vertical equity…

Currently, in New Zealand, some income is taxed and some is not. The income that is taxed is typically derived from personal services (“hard work”) and from investments of capital (interest, rent and dividends). The income that is not taxed is typically derived from market movement, such as capital gains on assets…

On the whole, we have a counterintuitive approach to taxation in New Zealand where we tax “hard work” and fail to tax gains that accrue passively. Two people in similar situations are taxed differently. A person who invests in a small business that produces goods and services pays tax on all their profits, while another who invests in property that accumulates passive gains, does not.

In a world where the accumulation of capital through passive gain is increasingly being held by a smaller group, the need to tax those gains is becoming more urgent…

Contrary to popular belief, land investment, in itself, is not a productive activity. The land is there regardless of who owns it. Someone may conduct productive activity on the land, such as farming or building houses, but the ownership itself does not produce goods or services. A capital gains tax would reduce distortion in investment choices, not increase it.

If tax applies to gains on investment in assets as it does to business profits, it will encourage investment decisions based on where the greatest return can be made, not where tax-free gains are derived. The lack of capital gains tax has been distorting investment decisions for decades.

What a shame the property vested interests won out at the expense of the broader New Zealand economy.

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Comments

  1. Trololololol! They got to her, the property lobby did. Just like I knew they would.

    Now NZ will need to wait for a budget crisis to introduce a CGT. Hopefully that is not too far away.

    • Yep she’s as useless as all the rest of them.. But she does have excellent platitudes. So NZ has that going for it.

  2. My rage from yesterday has been tempered somewhat with several thoughts:

    (1) Ardern has said, “No CGT whilst I’m in charge!”. So if she hands over to, say, Robertson after one term, then he can reinvigorate the policy.
    (2) Property prices are undoubtedly ‘easing’ here and that would see $zero collected in CGT – No Gain, No Tax, and
    (3) Nothing stops the Labour Government enacting other, less politically inflammatory, taxes such as Land Value Tax or Vacant Property Tax etc. That revenue is no dependent upon sales prices.

    So, yes, A bad move on the face of it, but pragmatic and politically savvy – it takes the thunder away from the Opposition who now have less mud to throw at Ardern.

    So. I’ll take a deep breath; try to look for the positives, and hope this setback is overcome in some other way.

    Oh, and note that Coalition Partner, NZFirst, Winston Peter’s is taking the flack/kudos for stymieing CGT, but is that also politics? It was going to be an umpoular tax anyway, so has Winston ‘saved’ Jacinda for a longer term?

    • On the money with (2). Just like the super-profits tax on mining in Australia, the gains have already been had before the politicans get around to working out how to tax it.

  3. The equity arguments in the article all make sense in theory but only if different taxes are balanced out. That is, bring in a cgt but lower income tax proportionally. But it never happens this way.

    In Australia we have too high income taxes as a disincentive to work and to take entreprenurial risk. Now Labour are proposing to incease CGT from 1st Jan 2020 but where is the offsetting lowering of income tax? We’ll end up with high CGT and very high income tax. But then I guess the baby boomers here have made their money now and the next squeeze on following generations is to get Gen X at the current peak of their careers and earnings to fund government services and health through BB retirement.

  4. She could put in a CGT on foreigners along with a land tax on foreigners.

    But insane NZ allows foreigners to vote!

  5. So why bother working and getting slugged if you can just speculate with capital, tax free?

    The revenue v capital tax cases must be huge because it really is a case of all or nothing.

  6. Again, the palpable inbred sense of moral superiority of the Kiwis fails in spectacular fashion. Why don’t they just keep their cvnting mouths shut?

  7. Hugh PavletichMEMBER

    Prior to the 2008 election with the last Labour Government, Michael Cullen was well known for his view ‘Capita; Gains Tax in New Zealand is political hari kari.’

    As PM Ardern made clear with yesterdays announcement, the government simply did not have the mandate to proceed with it.

    Other recommendations of the Tax Working Group are being followed.

    Note my posts on todays MB Links page … and in particular, the hugely important late March speech by Housing Minister Phil Twyford.

    MB readers also need to research the recent ‘Bunnings’ decision by Environment Court Judge Jon Jackson. This will be sending shockwaves through local authorities.

    • Hugh PavletichMEMBER

      … New Zealand Governments recent renewed focus on key structural issues to solve housing crisis … Housing Minister Phil Twyford explains …

      … The political direction is clear …

      New Zealaned Housing Minister Phil Twyfords speech to the New Zealand Initiative Members Retreat … New Zealand Government / Beehive

      https://www.beehive.govt.nz/speech/speech-nz-initiative-members%E2%80%99-retreat

      … extract …

      … In our view there are three big challenges that have to be addressed:

      1. A broken system for financing infrastructure

      2. A planning system based on urban containment

      3. The failure of governments until now, both local and central, to actively work with the private sector to enable urban growth and expansion.

      … concluding …

      … I talked about the land banking and speculative economy, and the pressure cooker that has given us some of the most obscenely expensive housing in the world.

      These moves are designed to change that. …

      … If we do these things we can truly flood the market with development opportunities. We can break the land banking economy, and drive down the cost of urban land.

      We can achieve more competitive urban land markets. And industry that is more focused on development and building places of enduring value instead of land banking and speculation.

      That is the pathway to more affordable housing, and a systemic fix of the crisis that has caused so much hardship, and sucked so much of our national wealth into residential property instead of the productive economy. … read more via hyperlink above …

  8. kiwikarynMEMBER

    Please explain how a CGT has lowered Australian’s income taxes? A CGT just means more people pay more taxes, not that more people pay less tax. Already half of NZ households dont pay any tax – just how many tax freeloaders does the country want?

    • Foreign “students” work full time for $10/hour cash and therefore pay no income tax at all. So the trains that they overcrowd have to be funded by you.

      A shop here has written “cash only” on the wall. She must be violating the GST law or the income tax law or both!

      Land tax is unavoidable. You could offset it by any income tax paid – and the foreign “students” who work full time illegally would not be able to offset income tax because they pay no income tax.

      If NZ has a stable population like Germany, there is no capital gains and therefore no CGT to pay.

  9. – Is Ardern also going to make a U-turn when it comes to getting rid of Negative Gearing ?

    • It is incredible how right wingers pretend that the GST is not a tax. It is a horrible tax that even homeless dudes have to pay.

      A mansion tax is clearly something that only the rich need to pay. Along with the luxury car tax and luxury yacht tax.

  10. Hugh PavletichMEMBER

    Barry Soper: If PM pushed on with CGT, she’d face a mutiny … NewstalkZB

    https://www.newstalkzb.co.nz/opinion/barry-soper-if-jacinda-ardern-pushed-on-with-capital-gains-tax-shed-face-a-mutiny/

    COMMENT:

    There was a very real chance of mutiny on the Beehive barque which forced the captain for the second time to make a contradictory call.

    But it was essential to keep all hands on deck, without them she knew they’d all sink without lifebuoys.

    One of the deckhands though has been left clinging to a lifeline that has become perilously frayed. … read more via hyperlink above …

  11. Hugh PavletichMEMBER

    Twyford looks to Auckland-Hamilton corridor as key to housing crisis | Michael Daly | Stuff.co.nz

    https://www.stuff.co.nz/national/politics/110731259/twyford-looks-to-aucklandhamilton-corridor-as-key-to-housing-crisis

    KiwiBuild’s failure to deliver isn’t stopping Phil Twyford from making bold statements about other parts of his plan to solve the housing crisis – with a “growth corridor” between Auckland and Hamilton a key ingredient.

    Before the September 2017 election Twyford was unambiguous that solving Auckland’s housing problem involved getting rid of any urban growth boundary around the country’s largest urban area. In its Speech from the Throne, the new Labour-led Government undertook to make that happen.

    Now, 18 months since the election, Housing and Urban Development Minister Twyford has said he remained committed to getting rid of the boundary. … read more via hyperlink above …
    .
    .
    Why are New Zealand homes so pricey? It has nothing to do with avocados … Charlie Gates … Stuff NZ

    https://www.stuff.co.nz/business/property/106789344/why-are-nz-homes-so-pricey-it-has-nothing-to-do-with-avocados
    .
    .
    Following the 21 January 2019 release of the 15th Annual Demographia International Housing Affordability Survey , the extensive reporting including the New York Times article and The Listener February editorial it is past time for long overdue progress on the key structural issues of land supply and infrastructure financing …

    http://www.performanceurbanplanning.org/

  12. Meh its easy to understand. They look over the ocean and see Australia where the mere threat of property increases and a Labor government are enough to sink prices 20%, most job advertisements down 20%, prospects of negative equity country wide for your young home buyers, and potential recession/depression feedback loops and it hasn’t even started yet. Australia is not unique btw – that’s what happens in credit based economies.

    Unless they are politically desperate and they aren’t because they aren’t in opposition forever (i.e. Rudd/Gillard put them there in Australia) no politician would sensibly/self-interest wise suggest these policies even if they may be good long term.