Mark Lister, 3 September 2018

September is here, and you know what that means. Summer is on the way, it’s statistically the worst month of the year for shares, and the Warriors are set to play finals football for the first time in years.

It also means the release of an interim report from the Tax Working Group, ahead of the final recommendations in February of next year.

I think we all know what’s coming. The centerpiece will probably be a capital gains tax, while the rest is just detail. The housing market is at the crux of this, mainly because of the affordability and inequality issues that have emerged as prices have got out of hand.

I’ve got no qualms with what the government is looking to achieve there. If house prices were at sensible levels, many of our social problems would disappear overnight and the rest would be a whole lot easier to deal with.

The tax system is not the only issue, mind you. It’s definitely a part of it, as is migration, land availability and the physical undersupply we have. However, we shouldn’t forget about the small matter of the lowest interest rates we’ve seen since the 1960s.

Many home buyers will simply spend as much as the bank mortgage servicing calculators say they can afford to, and as interest rates drift lower the answer to “how much can I borrow” goes up.

Inflation and interest rates won’t be low forever, and recessions will come and go as they always have. House prices won’t be immune to these trends, and sooner or later market forces could well solve our affordability problems.

Despite all that, I’m open minded about a capital gains tax. I just worry the politicians will get it wrong.

We know it will exclude the family home, as is the case elsewhere. There will no doubt be other allowances that could also skew the landscape, allowing those with access to good accountants an opportunity to exploit such loopholes.

My biggest concern is that it all backfires, with other asset classes like shares and businesses getting hit harder than property. That would be a disaster, given the need to push capital and savings toward those productive, job-creating parts of the economy and get people off the real estate bandwagon.

I’ll also be interested to see what they have in mind regarding income taxes. For the introduction of a capital gains to truly be a rebalancing exercise, we should reduce the tax rate on income at the same time.

That would shift the focus toward actual cash profits that reflect genuine growth, and drive investment decisions in the right direction. I doubt that will happen though, and we would simply see yet another tax on top of what wage earners and income conscious investors are always paying.

Anyway, the real question is what the Government does with this advice, if anything, and when.

After the final report in February it will become a political issue. What makes sense to a group of tax experts won’t necessarily work for politicians with an eye on the next election.

They could move quickly to implement some of the recommendations this term, or they might decide to campaign on some key elements and let the voting public decide, or they could choose to do nothing at all.

It might depend how the economy and the housing market develop over the next 12 months, and whether the fine-tuning we have already seen allows a victory to be claimed against the housing juggernaut.


This article was also published in the NZ Herald on 2 September under the title "Mark Lister: Will a capital gains tax backfire?".