Guyon Espiner: Politics punches holes in the tax net

12:52 pm on 27 February 2019

Analysis- It's our job to be fair, went the old ad campaign from the IRD. It's my job to be kind, goes the on brand message from the Prime Minister. So we're heading for a kinder and fairer tax system then? Some even suggest, given it pays for much of civil society, that tax is love.

Tax

What does a Capital Gains Tax mean for you? Photo: Photo NZ

But when it comes to making changes to a tax system, tax is politics. And that's where we find ourselves with the capital gains tax (CGT).

You know those two months in New Zealand politics when, having listened, deliberated and voted, we then sit back, speculate and wait for Winston Peters to tell us what is actually going to happen?

Well, turns out that's not only the post-election period. Half way through the election cycle, here we are again. And the same strategies are at play.

The Greens showed their cards before the game started, saying that the government didn't deserve to be re-elected unless it enacted a CGT. Reveal your hand, lose your leverage.

So guess who holds the whip hand? Actually, no you don't get extra tokens for that answer.

Already Jacinda Ardern is buckling. On Monday she opened her press conference arguing not to listen to opposition attacks but her main goal was to soften the ground for exemptions.

Farmers and small business people would be top of mind when preparing the government's response, she said, going some way to alleviate concerns recently expressed by Peters.

And yes you can argue that's MMP in action. But we can run into real trouble by granting concessions in the tax system in order to please constituencies.

Fairness and kindness are subjective concepts so tax systems have to have strong and consistent principles underpinning them. That's why GST works. No exceptions. Even drug dealers pay GST, as David Lange famously observed.

Australia's GST system is messy because of its exemptions and our own politicians routinely attempt to win votes proposing them.

Labour wanted to exempt fruit and vegetables in 2011 but eventually ditched the policy.

New Zealand First policy at the 2017 election was to exempt 'healthy food' from GST. "Ask your grandmother" was the response from Peters when asked which foods would qualify.

Needless to say, grandma was not called for during the coalition negotiations. The policy was shelved, presumably next to the items your grandparents would recognise.

We are heading into that territory now with the CGT where you puncture the IRD's net with such large holes that it becomes useless. In fact, it started before the Tax Working Group even got underway.

There are about 1.8 million homes in New Zealand. More than 1.2 million are owner-occupied and about 600,000 are rentals. But 'the family home' was ruled out of a CGT from the get-go. Why? Not out of fairness or kindness but because it affects 1.2 million households, making it a giant vote loser.

Sell an Auckland villa and get $3 million tax-free to live in South America? No problem, as long as it's the 'family home'. No one believes that is 'fair'. But no government wants to lose an election over it.

Of course, if you leave out most of the homes in New Zealand from a CGT then it's not going to have much impact on housing affordability.

I don't know about you, but nearly every conversation I've ever had about CGT - usually with friends in Auckland frustrated about how hard it is to enter the market - has focused on housing affordability.

But according to the TWG report, backed up in media statements by Grant Robertson, its proposal will have only a minor impact on housing affordability.

At that point, you have to ask, what is the point? Raise more revenue so we can pay for schools and hospitals? That might be nice but we're also told it will be revenue neutral, meaning tax cuts balance out any tax increases.

It sounds as though after all the pet constituencies are protected we may end up with a CGT on residential investment properties only.

Will that mean a ban on BBQs, boil up and beach cricket? No. I think the Kiwi 'way of life' will continue.

But after all the agony Labour has been through over the CGT that outcome means ending with a whimper rather than a bang.

It might be kinder on the coalition's constituencies and fairer for Labour's re-election chances but it's not the transformational government we were promised.

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