Sir Michael Cullen is trying to calm fears about a capital gains tax, but in doing so he makes it sound like the tax could be voluntary, or easy to manipulate.
And if you believe that, there is a bridge for sale.
Last week I warned the TWG’s preferred method of bringing in the new tax which would force every asset to be valued, as at a certain “valuation date”, adding billions of dollars in compliance costs across hundreds of thousands of New Zealand’s small businesses.
Cullen, the TWG’s chairman, accused me of “blatant scaremongering”but I stand by the reasoning. So does the TWG’s own report, the only one the public is able to work from.
So blatant scaremongering means quoting the TWG’s own report.
Cullen’s response was to insist that no one was suggesting all businesses would have to be valued on a single day, revealing that the TWG may give businesses years to get the valuation. But this would simply spread the cost, not mitigate it.
But Cullen also claimed the costs would be lower than I believed, for astonishing reasons.
He said it didn’t matter if business valuations were not accurate and that business valuations could be “rough and ready” and would be accepted if they were “close enough”. If they are artificially too high or too low, that was not as important to him than getting CGT into law.
The IRD is of course known for taking a “close enough” approach to tax law – NOT!
Imagine a tax system where a “rough and ready” and “close enough” test replaces a sworn accuracy test.
The reason why valuations are absolutely critical to CGT is that there are only two components in the simple formula to work out how much tax you pay when you sell an asset. The price you sell it for minus the valuation of the asset on valuation day.
This creates a massive incentive to inflate the value of your business on day one, because it will mean you pay less tax, or even no tax, when you sell it.
Cullen seems to think it does not matter much, but it could determine how much revenue a tax earns for decades to come. If businesses are allowed to inflate the value of their businesses, it will effectively make the tax voluntary for a generation of ownership.
And if the aim is to produce extra revenue for the Government, then obviously that will be unacceptable.
What should bother us most is Cullen’s dismissive reaction to any form of criticism. The TWG’s very existence is at the behest of the Labour government. He is no longer a politician. He is a civil servant doing a job that we as taxpayers are paying him to do.
Alas it is very clear Dr Cullen is acting as a politician, not a civil servant.