OnPoint by Keith Ng


Why Rightwingers Should Support the CGT

Allow me to soften you up a bit here - this is not a Labour idea, nor some "full-scale attack on enterprise" dreamed up by people with tall poppy syndrome. This was recommended by the Tax Working Group - a group commissioned by the National Government, stacked with lawyers, accountants and consultants from the big firms, backed by Treasury and IRD.

(Correction: The TWG came out against it. They said in their report:

The most comprehensive option for base-broadening with respect to the taxation of capital is to introduce a comprehensive capital gains tax (CGT). While some view this as a viable option for base-broadening, most members of the TWG have significant concerns over the practical challenges arising from a comprehensive CGT and the potential distortions and other efficiency implications that may arise from a partial CGT.

However, the paper produced for the TWG by academics Leonard Burman and David White was broadly in favour of the CGT, saying that it would:

..sharply curtail the incentive for individuals to invest in tax shelters. With a 38% top income tax rate and a 0% capital gains rate, a tax shelter that could transform $1 million of ordinary income into capital gain is worth up to $380,000 to create. With such huge tax incentives, the investments that produce capital gains do not even have to be particularly productive. Thus, many resources invested in such underperforming assets may be wasted.

It would also bolster support for the income tax. A tax system riddled with loopholes, where billionaires can pay lower average tax rates than their secretaries, invites disrespect and undermines voluntary compliance.

Treasury said:

A capital gains tax would improve the progressivity of the tax system, and.. improve the efficiency of the tax system by more comprehensively taxing economic income. The impacts of lock-in, loss ring–fencing, and design and transitional issues, should not be overestimated. The primary question is whether a CGT, in conjunction with personal tax changes, could lead to overall efficiency and fairness gains despite some mechanical issues.

And IRD:

On balance, Inland Revenue argued that the advantages of a real-world CGTwould not outweigh its disadvantages.

Correction ends. Sorry for the wrongness.)

It was recommended by the OECD in 2000. CGT is the norm among OECD countries – New Zealand is one of the few not to have it.

Forget about the money. The narrative that this is all about paying for Labour's promises is besides the point. Even if we didn't need the money (we do), this is still a good idea because...

You don't want the government picking winners, right? If you believe that markets make good choices, that also implies that government should not be distorting those choices. Yet, this is exactly what the lack of a CGT does. It means that one kind of activity (i.e. Working) is taxed, and another (i.e. Generating capital gains) isn't. This should be a deal-breaker for people who believe in capitalism: The government should not be distorting the market in this way (and Roger Douglas concurs). This should be all you need, but here's the punchline...

It's not picking a winner. It's just letting some random loser win. The government taxes tobacco because it wants fewer people to smoke; it taxes petrol because it needs to fund roads. Why does it tax income from work but not capital gains? It's kinda hard.

What kind of excuse is that, given that we can learn and copy from virtually every other country in the OECD?

There is no positive reason for it. Try finishing this sentence: “It's good that we don't have a CGT because...”. If a CGT existed, nobody would argue for it to be scrapped.

It'll take 15 years” is not a bug, it's a feature. It's not a capital tax, it's a capital gains tax. We start counting the gains from the day the tax is introduced, it's just not collected until the asset is sold.

That this tax is not collected immediately is a completely irrelevant argument. We are not in a “we need to get $1.5 billion in the next 24 hours or S&P will kneecap us all” situation. This argument is a red herring.

It's a flat tax. By broadening the tax base, it provides more breathing room to flatten the system, but more directly, it is flat. You should love this as you would love any other flat tax.

(Nerd-note: Well, if there's a CGT-free threshold, then the average rate technically goes up as income goes up, but the marginal rate is still flat.)

You are the key. Let's face it, Labour's chances this election is fairly poor. The question is what we do with good policy ideas.

I have little doubt that Key and English considered it long and hard after the Tax Working Group. Maybe they took GST because it was easier and saved asset sales for this year because it was more important to them. But now that Labour's picked up CGT, it's forced National to come out against it – even though it could have easily gone the other way, with National campaigning on a CGT and Labour harping on about the cost of living, shoulder-to-shoulder with the Federation of Property Investors.

As much as I like to dream that we make our own political reality, we do, and we've made it pretty stoopid. Since I don't imagine that we'll get an epic show of bipartisanship and working for long-term interest of the nation, I'd like to just implore those on the Right not to paint themselves into a corner.

Weasel. Weasel like it's worth billions a year. Weasel like there's a cut to the top tax rate in it. Give National enough room to maneuver and change their minds in the next three years.

Please don't poison a good policy – because if National gets reelected, they're the ones who'll be hamstrung.

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