Capital Gains Tax and housing

June 14th, 2016 at 10:00 am by David Farrar

I support a comprehensive capital gains tax (so long as other taxes are reduced to compensate) as the best tax system is broad based, low rate and few exemptions.

But I have always been suspicious of the claims that a CGT will have a big impact on house prices. Certainly Australia has a full CGT and they have similiar price inflation.

This exchange from Q+A was interesting:

Jonno Ingerson told Q+A that the Government’s bright line test doesn’t seem to be deterring speculators.

CORIN   Well, that’s interesting too, because that suggests, say, that the bright line test that the Government brought in, which was to say, ‘You sell within two years, that’s a clear line there. You have to pay your tax on your capital gain,’ that’s not deterring people.

 JONNO No, and if you look at the people that that was targeted at, which would be the speculators, if you like, that are driving the market, turning it over quickly, a lot of them were doing that as a business anyway.

 CORIN   And paying tax, presumably.

 JONNO And paying tax. Quite happy for the IRD, sure, yeah, ‘I bought and sold, and I’m paying you my big block of tax.’ The people it was aimed at were those that were skirting around the system. Yeah, it’s knocked a tiny number of those out, but—

 CORIN   Yeah, but that suggests they’re making such a decent profit that they’re quite happy to hand over it.

 JONNO Quite happy. Make 100,000, there’s your 50,000, 30,000, whatever it is and keep going.

If you make $100,000 off a house purchase and sale, then its a great investment whether or not your profit is $100,000 (untaxed) or $67,000) taxed.  A CGT will have some impact around the margins, but when demand is so much greater than supply, the impact is small.

Until the land supply issue is fixed, house prices will continue to increase.

A very good analysis by a Labour candidate on The Standard

May 18th, 2015 at 2:00 pm by David Farrar

It is not often I refer people to a really good article on The Standard, let alone one by a Labour candidate, but Deborah Russell has done an easy to read analysis of the Government’s tax changes around property.

She doesn’t say whether it is a good or a bad thing – just calmly explains what the change is, how it will work, what impact it is likely to have, and whether or not it can be regarded as a capital gains tax.

One extract:

So what difference will it make? Very little in terms of tax revenue. I imagine that most property speculators will simply elect to hold onto their properties for at least 731 days, thereby avoiding paying tax on their capital gains. The real effect will be to slow down the property market in Auckland, and elsewhere. It will knock the top edge off the market, winding it back just a little bit. Together with the Reserve Bank’s new rules about the deposits that Auckland property buyers must have, the heat may be taken out of the property market. There will still be pressure due to inwards migration, but frantic speculation in property should calm down.

So why use a tax measure at all, if it’s not going to raise any revenue? And heaven knows that the government must be looking for every possible tax dollar it can find.

It’s a preventative measure, not a revenue raiser. Back when we had a gift duty in New Zealand, there was never very much gift duty raised. Instead, the threat of gift duty meant that people didn’t try to avoid income tax by gifting away assets that earned income. So they couldn’t engage in all sorts of elaborate tax schemes, or if they did choose to do so, there was a price to pay. Most people elected not to engage in the elaborate schemes, and so very little gift duty was ever collected. It was a very effective tax measure.

Likewise, this measure should be very effective in shutting short term speculation down. I suspect that once the two years is up, plenty of properties will end up on the market, but very few properties will be sold under the two year mark, and so very little tax revenue will be collected.

I always enjoy an insightful analysis, regardless of medium or author.

Parker v Little on CGT

November 11th, 2014 at 4:00 pm by David Farrar

The Herald reported:

Labour’s leadership contest has turned into a showdown on the party’s capital gains tax policy, with Andrew Little and David Parker at loggerheads over its future.

At the first of three hustings meetings in the critical Auckland region yesterday, Mr Little was stronger than before in condemning the policy, while Mr Parker shifted to more strongly defend it.

Mr Little told the audience of about 300 party members that Labour had now lost support in three successive elections – something that had never happened before.

Been a long time since any major party lost support in opposition two terms in a row.

He said there were a number of reasons for that but two policies stuck out – lifting the retirement age and capital gains tax.

“There are at least two policies I know for a fact have caused people not only to not vote for us but to turn us off completely.”

He said the party and caucus had championed those policies. “But the conclusion I’ve come to now is that those two policies alone are enough to stop people even considering what we have to say any more.”

The tax was aimed at property speculators, but Mr Little said it also impacted on those who had scrimped and saved to buy a second property which they considered their retirement savings.

Mr Parker, the architect of both policies, said it remained the best way to ensure an equitable tax system.

“Currently, our system is rigged and it’s rigged to favour speculation, not investment in jobs. We reward speculation and we punish work. If the capital gains tax is not the answer, then what is?”

People don’t like the Capital Gains Tax because it is an extra tax which will punish families and businesses by up to $5 billion a year when fully implemented, according to their former leader.

But if Labour were smart, they’d stick with a policy for a CGT, but announce they’d give families and businesses reductions in income and company tax to match the increased revenue they’d pay overall with a CGT.

It can be sensible to broaden the tax base – but not to increase the tax take by new taxes. If you want to increase the tax take, then you should concentrate on having a growing economy, rather than new taxes.

CGT no panacea for housing

August 8th, 2014 at 12:00 pm by David Farrar

The Herald reports:

Labour and the Green Party have conceded that a capital gains tax would not be a “panacea” for New Zealand’s unaffordable housing crisis.

The two parties seemed initially flummoxed when a questioner at an otherwise friendly election forum organised by the Public Health Association in Auckland this morning noted that having capital gains taxes had not stopped housing price booms in Australia, the US and Britain.

“I don’t know why they haven’t worked in those countries,” said Green health spokesman Kevin Hague.

I do. It is because the artificial restrictions on supply of land are the major factor in house price increases.

National North Shore MP Maggie Barry said Labour proposed so many exemptions in its capital gains tax that it would be ineffective.

“Perhaps that’s why it’s been ineffective in other countries,” she said.

I support NZ having a Capital Gains Tax, but it must be with no exemptions, and more importantly income and company tax rates should be lowered to compensate families and businesses – so the overall level of taxation remains the same.

David Cunliffe has said that their Capital Gains Tax will see NZ families and businesses paying $4 to $5 billion a year more in taxation. That is why they are doing it.

CGT will apply to KiwiSaver

August 12th, 2011 at 9:00 am by David Farrar

Trans-Tasman reports:

In a press statement issued August 3, Labour’s finance spokesman David Cunliffe stated categorically “KiwiSaver funds will not incur capital gains tax on their share investments under Labour’s policy proposals. KiwiSaver funds which invest in shares are already taxed as portfolio investments entities (PIEs) at the PIE rate of 28%, or as widely-held superannuation funds taxed at 30%.”

So a categorical statement that CGT will not apply to share investments in KiwiSaver funds.

Revenue spokesman Stuart Nash added “in neither case would the KiwiSaver fund attract additional capital gains tax, as tax is already paid on a trading basis.” This is not correct. One of the big attractions of KiwiSaver funds is they do NOT pay tax on share trading gains.

So they got the current law wrong.

Based on a written response from Cunliffe to the Shareholders’ Association on July 20, in circumstances where currently no tax is payable on capital gains, the 15% CGT would apply under Labour’s proposal. So KiwiSaver funds would suffer CGT on share trading gains, which are currently exempt from CGT, at the rate of 15%.

And they got their own policy wrong. KiwiSaver funds will be subject to CGT on currently exempt share trading gains.

And where Labour says PIEs are taxed at 28%, the maximum rate, they are actually taxed at the rate of the investor, which could be lower than 28%, ie at 10.5%, or 17.5%.

So got that wrong also.

Widely-held superannuation funds are taxed at 28%, not the 30% rate, as Cunliffe contended.

This is surely a serious blow to Labour’s credibility, if Trans-Tasman are correct.

Taxed for working from home

July 31st, 2011 at 10:16 am by David Farrar

As we roll out fibre to the home, more and more people will work from home – at least part of the time. This will have a number of positive side-effects such as reduced congestion, lower carbon emissions and reduced office rental pressure.

However as previously reported here, and now by Maria Slade in the HoS, Labour’s proposed CGT will tax people who work from home.

Ernst & Young tax partner Jo Doolan said Labour had claimed that only a small proportion of New Zealanders would be impacted by capital gains tax, but because most firms employed fewer than five people many owner/operators could be affected.

“It’s quite clear in [Labour’s] document … but they’re hoping they can distract attention from it,” Doolan said. “Let’s not be sneaky about it and pretend it’s not going to impact on a lot of people.”

Small and medium enterprises (SMEs) could choose not to claim tax deductions for a home office, and would therefore avoid the capital gains tax. “Either way you’re going to be paying more tax. We want our SMEs to grow and that’s absolutely critical to the future. We can’t afford to be hitting them.”

And just think about the compliance costs:

There would also be issues in policing it, defining the areas used for operating the business, and valuing those areas, Craig said. Many entrepreneurial companies kept costs low by working from home. “Why would you punish that efficiency? It’s going to add a whole lot of compliance obligations for very little practical effect,” Craig said.

BusinessNZ chief executive Phil O’Reilly described the proposed tax as “absolutely counterproductive”. If a person owned a house for 10 years but ran a business from the home for only half that time, which part would be subject to the tax? “It just shows you the ridiculous nature of this proposal.”

If you are going to do a Capital Gains Tax, then it should be simple and fair and apply to all assets.

CGT question

July 20th, 2011 at 10:00 am by David Farrar

A couple live together in their family home. they think they don’t have to worry about CGT as it appreciates in value.

Sadly after a few years they split up, and both move into smaller apartments. They sell their old house.

Do they pay CGT on the difference between what they paid for it, and what they sold it for?

Joyce v Cunliffe’s numbers

July 18th, 2011 at 11:00 am by David Farrar

Labour have said that over 15 years their tax package will reduce debt by $8b. Steven Joyce says it will increase debt by $15b. Let’s have a look at where their numbers differ.

First it is worth recalling that what is undisputed is that Labour’s package will result in more debt for at least the next seven years. It is only if Labour win this election, the 2014 election and 2017 election that in their third term would their tax switch start to reduce debt – by their own calculations.

By Steven Joyce’s calculations, it will never reduce debt. At a time when debt is growing massively, Labour is actually proposing to borrow for tax cuts – they very thing they have accused National of in the past.

Now I’m going to go through the differences line by line. Keith Ng has also blogged on some of the differences. Keith, like me, is a former parliamentary staffer for Labour (National for me of course) so we both tend to have a more favourable disposition towards numbers from our own side. But that doesn’t mean one can’t also look at the quality of the argument.

CGT – The $1.6b difference is not hugely significant, both Keith and I agree. This is for revenue over 13 years, so the difference is around $100m a year. Joyce uses a Treasury CGT model developed in 2011, and Cunliffe uses BERL. Joyce makes the point though (which has not been covered much) that getting a CGT in place by April 2013 would be nigh impossible considering the huge number of issues being left to the expert panel. You need time to appoint panel, have the panel do its work, then draft a bill up, and then go through select committee process.

New top tax rate – Joyce has this coming in at $934m less over 13 years. Not a big difference per annum. I would tend towards the lower figure because I think it is inevitable that a top personal tax rate of 39% and a company tax rate of 28% will see massive (legal) avoidance. We already know half the top 100 earners don’t pay the top rate. This policy will probably see it drop even lower.

Loss ring-fencing. The TWG said loss ring-fencing will lead to behavioural changes, so Labour’s policy will only bring in half of what Labour says. Keith Ng basically agrees, so little dispute there.

Anti-avoidance. Labour have just invented a figure of $300m a year from greater anti-avoidance work. Now this is pie in the sky. If Labour announced actual law changes to reduce avoidance, then maybe you can estimate revenue changes. But this is the equivalent of “I hope it happens”. Keith Ng is right that it is probably not realistic to say Labour will not be able to get any extra revenue at all, but when you consider most experts are saying their tax package will make the tax system more complicated, I think avoidance will increase not decrease. In the absence of any specifics around anti-avoidance measures, I think you go with zero.

Agriculture ETS. this is basically an argument about what the price of a carbon credit will be. Cunliffe uses $50 and Joyce $25. Ng backs Cunliffe on the basis that the PCE has said they estimate the price will be $50 by 2030 if there is little international action on climate change and $100 if there is a moderate commitment. Australia’s ETS is priced at NZ$30.

However against that the current international price is 11 euros, which is NZ19 only. And bear in mind this is for the whole period 2013 – 2025. Let’s say the PCE is right and in 2030 the price is $50. Then if you assume linear price increases, maybe an average price is $35 for the period of the forecasts. So around halfway between what Joyce and Cunliffe say. Personally trying to predict ETS revenues more than a few years out is very challenging as it all depends on if a post-Kyoto agreement can be reached.

The first $5,000 tax free zone has a $2.2b difference over 13 years. Keith says:

Everyone earning over $5000/year would get the benefit of the whole tax free threshold. That’s pretty much everyone in the workforce. So if everyone already gets something, how would more people get it?

The cost of a tax-threshold only grows when new people enter the workforce.

So unless Joyce thinks he can create 3 million jobs (and find 3 million workers to fill them) in the next decade, this is a patently stupid and ridiculous result. Common sense would tell you that it is impossible.

This one goes firmly in Labour’s favour.

But Keith misses a key point. It is one I have blogged on many times, but gets so little media attention. Labour’s tax free zone is not just for people in the workforce. They have pledged it will also apply to everyone on benefits, even though benefits are calculated on an after tax basis.

Labour are actually promising to increase all benefits by $10 a week – the first ever increase (beyond inflation) for over 20 years. Tax cuts have never applied to benefits in the past (as they are calculated on an after tax basis). Cullen’s 2008 tax cuts did not. But Labour is saying they will pay people on the dole more money for not working.

Also as superannuation is calculated with a floor linked to the after tax average wage, their tax free threshold will increase the cost of superannuation.

So Keith is wrong when he says the tax-free threshold will only increase in cost when new people enter the workforce. It will increase in cost whenever we get new workers, new beneficiaries or new pensioners.

Now having said all that, National’s numbers do still look a bit high with the cost increasing approx $80 million a year, which suggest an extra 160,000 people per year working (as tax free zone is $500 of foregone revenue), on benefits or retired. So while Keith gets some stuff wrong, National’s numbers may be too high.

On GST there is no dispute, and for R&D tax credits Keith says National’s figures look more robust.

Then finally we have the biggie – finance costs, or the extra interest on the extra borrowing. There can be no debate that one should calculate finance costs, unless Labour has convinced the People’s Republic of China to loan us money at 0% interest. This is an extra $7.5 b of costs. Even if you take Labour’s numbers for some of the items, you will still have billions in finance costs.

Using Cunliffe’s numbers Labour is borrowing for at least seven years. If you go to Keith Ng’s numbers then I’d say (Keith didn’t do formally calculate this) that the borrowing is for at least a decade, and if you think Joyce’s numbers are more realistic (and for the most part I think they are) then Labour’s package is never fiscally positive.

But the up to $15b of extra debt is just the beginning. You see Labour done a big lie, and said it is a choice of asset sales or their tax package. But they have not calculated for any increased borrowing through no sales. If you add on the extra $7b they will need to borrow, then the borrowing figure climbs to up to $22b. Of course there will be over the long term less income from dividends.

But even putting aside the asset sales issue, the big big issue is spending. You see Labour’s debt track is already up to $15b higher – before they even fund a single spending promise. it is impossible to think that Labour is going to campaign on spending no more than National. Labour were increasing spending at $2b a year and National reduced this growth to $1.1b, then $0.8b and finally zero. Each time, to protests from Labour. Let’s say Labour promises an extra $1b a year of spending (they have implicitly already promised many billions through their opposition to spending reductions).

The cumulative debt from an extra $1b/year of spending is:

  • Year 1 – $1b
  • Year 2 – $3b
  • Year 3 – $6b
  • Year 4 – $10b
  • Year 5 – $15b
  • Year 6 – $21b

Basically Labour are going to increase debt with their tax package, increase debt with their spending, and increase debt through not doing partial floats of SOEs.

The true numbers for Labour’s plans

July 17th, 2011 at 3:07 pm by David Farrar

Cost of Labour’s Promises

Steven Joyce has put Labour’s numbers through the Treasury calculator (found at and found that it is far worse than even Labour were revealing.

Labour’s own numbers revealed that their tax plans would lead to greater deficits and debt for the next six to seven years. They desperately did not want people to know this, so left this document off their website.

But their own numbers were inflated, such as as imaginary $300m a year from reduced tax avoidance (despite them wanting to have an 11c gap between the top tax rate and the company rate). They also failed to take account of interest costs, and over-estimated revenue from some of their measures. The numbers on the CGT itself were largely accurate, but on the rest of their package were crap.

So what does it mean? It means Labour’s package will result in less tax revenue until 2024! And then when you take account of the interest on the extra borrowing, it will result in an extra $15b of borrowing between now and 2025.

But it does not end there. This assumes that Labour will keep to National’s spending track. That they will not pledge one cent extra in spending than National. That there won’t be one cent extra for early childhood education etc.

So the $15b of extra debt is just on the revenue side. Wait until they release their spending plans and see that number increase exponentially.

The problem is not Labour’s CGT per se. The problem is that their promise to remove income tax on the first $5,000 of income is unaffordable. It has no fiscal credibility and can only be funded by increased borrowing.

Hickey on Tax

July 17th, 2011 at 2:23 pm by David Farrar

Bernard Hickey writes in the HoS:

Prime Minister John Key says a capital gains tax is one of the “third rails” of politics in New Zealand – and anyone who touches it will, in political terms, be killed instantly.

This week Labour touched that rail and received only an invigorating tingle rather than the shock of their lives.

That may be a premature call.

The debate is welcome, but Labour could have done much better and should be trumpeting how such a tax would shift investment into more productive export industries and create higher-wage jobs to keep young New Zealanders here.

Instead, it has watered down that message by proposing a capital gains tax that is full of exemptions and then used the revenues to shuffle tax from the very rich to the poorest. …

The exemptions for the family home, for residences in family trusts, for Maori land, collectibles and gambling winnings will be welcomed with open arms by budding tax accountants and lawyers.

These will be high-paid jobs, but they’re not the sort we want.

The exemption for gambling is interesting. If you take a chance by investing in the (initially) unproven company Xero, and make a capital gain you’ll be taxed on it. But if you take a chance at a casino and win the same amount of money, you’re exempt from tax.

A land tax would have been much more efficient, simple and lucrative.

The idea put forward to the Tax Working Group in late 2009 by Motu economist Arthur Grimes for a 0.5 per cent land tax with a $50,000 a hectare tax-free threshold and the ability to defer payment until sale would have raised about $2 billion a year.

I support a land tax, so long as income tax rates are cut to compensate.

Trevor’s e-mail

July 16th, 2011 at 12:00 pm by David Farrar

Whale has a copy of Trevor Mallard’s e-mail to the masses. The key extract:

How­ever, as we all know the NACT team will be com­ing for us over the week­end, there will be hic­cups includ­ing a TVNZ poll taken before the launch and with­out the pol­icy details. We want to keep the momen­tum going as much as is possible.

The key point for us is not to be dragged down into the detail on the CGT. The pub­lic don’t care and we get boring.

Very ironic. Trevor is saying ignore the poll because it was taken before the policy details were known, yet he is also instructing the faithful to avoid mentioning the detail as he says the public don’t care about it.

If they don’t care about the detail, then the TVNZ poll should be regarded as accurate as it was taken after they had announced there would be a CGT but prior to any details. Can’t have it both ways.

Trevor even supplies pre-fabricated tweets for Labourites to use:

  • Labour’s plan to keep assets and pay off debt  #ownourfuture
  • Labour’s bold plan for the econ­omy– most NZers will get a tax break  #ownourfuture
  • NZ not for sale #ownourfuture
  • Fam­ily home exempt – tax not ret­ro­spec­tive #ownourfuture
  • Kiwis bet­ter off with Labour #ownourfuture
  • Stop Asset Sales #ownourfuture
  • Labour’s plan means we can keep our assets #ownourfuture
  • If you are in a hole, don’t sell the lad­der #ownourfuture
  • Labour: Keep our assets to grow our econ­omy not some­one else’s #ownourfuture
  • Labour’s tax reform will pay the debt down, and lets Kiwis own our future.    #ownourfuture

Of course the tax reform will not pay the debt down until at least 2018. It will increase the deficit and debt for the next two terms of Parliament if implemented.

The case against a CGT

July 16th, 2011 at 9:00 am by David Farrar

I’ve said that in principle I support a CGT, if it is part of making NZ a broad base low rate tax system. Former ACT Leader Rodney Hide makes the argument against a CGT, as an effective double tax on business. He writes at

A business generates $100 a year. The going discount rate is 10 percent. The value of the business is $1,000. That’s if there’s no tax.

Introduce a tax of, say, 30 percent, and the business now yields only $70 a year. The business is worth only $700. The tax liability is capitalised into the value of the business.

Now let’s say I buy the business and fix it up. I double its income to $200. In the absence of any tax the business is now worth $2,000 and I can sell the business and pocket a $1,000 capital gain. However, if there’s an income tax of 30 percent the increase in the business’s value is from $700 to $1,400. My capital gain is now only $700.

My gain is not tax free even though I appear to pay no tax on my gain.

That’s because the capital value reflects the extra tax the extra income the business generates.

A capital gains tax of 30 percent reduces my gain from $700 to $490. I am doubly taxed.

Capital gains aren’t tax free and a capital gains tax doubly tax savings and investment.

Put like that, it does appear to be a double tax. Any arguments against the logic?

Capital gains tax is brutally unfair

There are plenty of ways a capital gains tax is unfair. Imagine a young widow with children whose husband poured his heart and soul into his business. Following his death the young widow has no choice but to sell the business. She has no income and no other assets.

The business was a start up. It generates $200 a year. After tax, that’s $140. The business sells for $1,400 upon which capital gains tax has to be paid at say 30 percent.

She nets $980. In the absence of any tax she would net $2,000.

The widow is taxed at 51 percent. That’s brutal.

A good case against by Rodney

Labour’s Numbers

July 15th, 2011 at 1:39 pm by David Farrar

Labour Tax Costs

My column in the NZ Herald focuses on the numbers in Labour’s tax policies. They stuck up masses of data on their site, but the one document they did not stick up was the one above, which shows that it will take seven years for Labour’s tax package to be fiscally neutral. They’d have to win a third term for it to start to bring in more income than they forego. And they also project $300m a year less tax avoidance by waving a wand. In reality an 11c difference between the top personal tax rate and the company tax rate will lead to much greater levels of tax avoidance.

Labour’s package

July 14th, 2011 at 2:52 pm by David Farrar

Here are details to hand. On radio shortly so won’t have time to check full details of timing, and whether the numbers add up.

  • Cullen’s envy tax of 39% put back on, but starting at $150,000
  • The first $5,000 tax free (which includes increasing benefits by $10 a week)
  • A CGT of 15%
  • Boats will be exempt from the CGT.
  • A farm house will be exempt, but not the farm itself
  • Jewellery is exempt. So if you invest in a start up company which makes money you pay CGT, but if you buy jewellery which appreciates you do not
  • If you are over 55 and have owned a small business for 15+ years then first $250,000 capital gain is tax free.
  • No GST on fresh fruit and vegetables

I’d say tax accountants will be celebrating the extra work, if this came to pass 🙂

Q+A on CGT

July 14th, 2011 at 7:39 am by David Farrar

I interview myself on Capital Gains Tax.

Can a capital gains tax be good for the economy?

Yes. Most tax experts say that the best tax system is one with a broad base and low rates. A Capital Gains Tax which broadens the base and leads to lower rates can make the economy more productive.

Is a CGT fairer?

To some degree, yes. In some cases not taxing capital gains is unfair. However it can also be seen to be unfair taxing such gains, when they are incidental – such as selling the family bach when the kids are older.

Aren’t capital gains already taxed?

Only when the person making them is deemed to be investing for the purpose of making the capital gain. It is then treated as income for them.

So how do you judge if a capital gain was incidential or deliberate?

With difficulty and a degree of subjectivity. This is one of the advantages of a CGT.

Would it be better to just enforce the current law more rigorously, than have a catch all CGT?

Reasonable people can agree to disagree on this. National has allocated $100 million to target tax avoidance, including those who should be paying income tax on their capital gains. This might be more effective than a comprehensive CGT. Tax experts disagree on this one.

Could some people pay less with a CGT?

In theory yes. Labour’s proposed CGT is thought at be a 15% rate. Most of those who currently have their capital gains taxed will pay 33% tax on their gains. Presumably Labour will want those people to still pay income tax on their gains, not CGT. But I foresee good times for tax accountants if a CGT is introduced.

Is a CGT necessary to stop over-investment in residential property?

Not really. The Government’s 2010 budget changes have made residential property investment significantly less attractive anyway, by stopping depreciation tax write-offs and other changes. Plus those countries with a CGT got hit by the property bubble just as much as NZ.

So should a CGT target residential property investors only?

No. The most economically efficient CGT should be as broad as possible. It should include capital gains on shares, futures markets (even iPredict), business sales, farm sales and even the holiday bach. One could even argue a case for including the family home, even though politically that is not viable.

So farmers might have to pay CGT when they sell their farm?

Unless exempted, yes. And this could disrupt the way many farmers structure their affairs. Outside the lucrative dairy sector, many farmers have a relatively modest income, especially as a return on the hours they work. Many of their profits are ploughed back into the farm, meaning there is relatively little ability to save for retirement.

The sale of the farm as they get older, is often how they generate their retirement income. A CGT on any increase in value over the last 20 years could significantly affect them.

How can a CGT be good for the economy if it is an extra tax? I thought higher taxes were generally bad for the economy.

Great question. This is key. The best tax system is broad base and low rate. If the extra income from a CGT is used to lower income tax rates across the board, then that can improve the economy, as we are reducing disincentives to work and earn.

If the CGT is used to fund extra spending, and hence increase the overall tax burden, then it is not a good thing in my opinion.

So will Labour be announcing lower income tax rates?

Sadly it seems not. To the contrary they seem determined to reimpose an envy tax on higher income earners, as well as a CGT.

They have also said they want to exempt the first $5,000 of income (which is not a bad thing) but at this stage we don’t know if their proposed CGT will allow them to do that, or will raise more money than  needed to do that. We need to see the details.

So what is most important with tax?

The key thing I will be looking for is whether Labour’s changes will increase or decrease the overall level of taxation in NZ. There is a mass of emperical evidence that countries with a lower rate of overall taxation grow significantly faster than those with higher overall taxation.

This does not mean every low tax country in every year out-performs every high tax country. But a study done of around 30+ OECD countries over around 40 years found very significant correlations.

So why not just abolish tax, to maximise economic growth?

Because then we would not be able to afford the services that most people want the Govt to provide. It is a balancing act between low enough to enhance economic growth and high enough to fund certain services.

Of course over time faster economic growth, even with lower tax rates, will lead to greater tax revenues and hence a greater ability to fund more services.

This is why the key thing for me is not increasing our overall tax take. I want economic growth to fund future services, not new taxes.

So how good or bad is Labour’s proposed CGT?

Ask me again after it is out. If it is a pure tax swap, reducing income taxes in return for a CGT, I’ll be favourably inclined towards it. Of course I will want to verify if it is a pure tax swap – I won’t accept their press release on it.

But if the reports are right that they will be increasing the top tax rate to 39%, then that partly spoils any benefits from it. If anything they should be reducing the top tax rate, due to a CGT, not increasing it. This is the politics of envy, not economic efficiency if they bring back a 39% tax rate.

The top income earners already fund a massive proportion of our tax system. More on that later today.