Could Labour’s CGT policy be a winner?

Labour’s targeted capital gains tax (CGT) announcement last week was interesting.

We’re yet to see the detail, but maybe it’s got merit.

I was no fan of the proposals we saw back in 2018, after Jacinda Ardern established a high-powered Tax Working Group chaired by the late Sir Michael Cullen.

The CGT framework recommended in that report was much more comprehensive that this recent announcement, and it included most assets outside of the family home.

However, it was still riddled with inconsistencies.

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Small investors were set to be punished at the expense of large fund managers, while (equally bizarrely) international shares were going to be advantaged over investments in local companies.

My biggest concern was that the changes would see asset classes such as shares and businesses hit unfairly hard.

I felt that would’ve been counterproductive, given our need to push capital toward those more productive, job-creating parts of the economy.

Interestingly, the ten members of the Tax Working Group didn’t completely agree.

Three of them, including tax expert and former Deputy Commissioner of Policy at the IRD Robin Oliver, reached a different judgement.

In addition to the official 132-page final report, they released a “minority view” outlining their preferred course of action.

Both reports are available online, and the latter suggested something very similar to this new Labour policy.

Oliver and his colleagues, Joanne Hodge and Kirk Hope, argued that the tax system shouldn’t discourage innovation or productivity.

They also noted that a comprehensive CGT could very quickly become incredibly complicated, with a raft of exclusions and compliance costs.

In the interests of keeping the simplicity of our tax system intact, whilst also maintaining the incentive to innovate, they suggested a CGT on residential rental housing.

It was noted that a decent proportion (some 39 per cent) of the total revenue from the more comprehensive CGT would be from residential houses over a 10-year timeframe too.

Labour hasn’t released any figures yet, but that equated to $180m in year one rising to $2.4bn in year ten.

I had a lot of sympathy for this minority view several years ago, so I can’t help but be intrigued by what the opposition is suggesting today.

It could prove to be a politically savvy move as well.

While being watered down and targeted rather than broad-based, this is a much more straightforward approach than previous iterations of Labour’s CGT proposals.

That should help avoid another awkward “show me the money” moment, like we saw during a debate between then-Prime Minister John Key and Labour leader Phil Goff during the 2011 election campaign.

It could also garner more public support.

A Reid Research poll from earlier this year saw 43 per cent of respondents support a CGT, compared with 36 per cent opposed and 22 per cent unsure.

A big chunk of New Zealanders would be unaffected by this new Labour proposal, which targets residential and commercial property specifically.

The family home is excluded, as are farms and most businesses (outside of those directly involved in the property sector).

A few others might get caught in the net, although very few of the small business owners I know own their land or buildings.

The vast majority lease those premises from a commercial landlord.

Real estate investors will obviously be opposed to this, although it’s unlikely they’d exit the market altogether if it was to eventuate.

A CGT won’t stop house prices from rising, it might simply slow the pace of gains.

Businesses and shares could be the big winners.

Being exempt gives them a strong relative advantage, and you’d expect to see investment capital move away from property and toward these areas.

Entrepreneurs and growth companies looking to get bigger and take on the world with new products would benefit, which would hopefully lead to wealth creation and more jobs.

We’re only about a year away from the election, and this isn’t a bad first salvo from the opposition.

However, the biggest concern for the voting public will still be how our money is being spent.

High earners and asset-rich voters are not opposed to paying taxes, but they want that capital to be used wisely and effectively.

Poor decisions and frivolous spending choices in recent years have dented the credibility of our politicians, especially those in the Labour camp.

That trust will need to be rebuilt before voters will fully embrace a CGT, even a targeted one.

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