CGT isn’t bad, Labour’s CGT is bad
Oliver Hartwich writes:
On Monday evening, I sat on a panel at Foxglove on Queens Wharf in Wellington, where I was expected to play the neoliberal villain.
The Institute for Democratic and Economic Analysis is a think tank devoted to fighting poverty and political exclusion. It launched a new report on capital gains taxes, including the one Labour has proposed, and invited me to be one of the discussants.
A centre-left think tank, a Wellington audience and a Labour tax policy sounded like a home game for the tax. And I was presumably cast to declare that a capital gains tax would wreck the economy.
However, the evening did not follow that script.
For a start, my own position on capital gains taxes is more nuanced. Designed well, I think they could work in theory. My objection is that Labour’s plan is just not for that kind of tax.
But the bigger surprise, at least to me, was on the other side. Neither the report’s author, Xandi Cooke, nor my fellow panellists, Infometrics economist Brad Olsen and ecological economist Marjan van den Belt, nor indeed anyone else in the audience rose to defend the tax as Labour has actually proposed it.
This Wellington audience, I would have thought, must surely be the friendliest audience Labour’s capital gains tax policy will ever find. And yet, nobody on the panel liked it.
That is telling.
But since Labour was not in the room, they should at least read Xandi Cooke’s report.
The report is nicely balanced and regards the usual claims on both sides of the capital gains tax debate as overstated. Instead, it finds a comprehensive capital gains tax more coherent, fairer and cheaper to administer per dollar raised than Labour’s narrow version. And since it was peer reviewed by Craig Elliffe and Robin Oliver, two of the country’s most serious tax specialists, the report is not to be easily dismissed.
The report is high quality, and can be read here.
Labour has ruled out any adjustment of their capital gains tax for inflation. To understand why that is a problem, imagine buying a rental property today for $1 million, holding it for 25 years before selling it for $2 million. If prices have risen 3 per cent a year over that quarter century, your $2 million buys less than your original $1 million did. You made nothing, but Labour would still want $280,000 for the privilege. That cannot be fair.
This is the most critical point. Labour’s CGT is a tax on inflation. The higher inflation is, the more tax you pay. Inflation will be great for the Government and terrible for asset owners who may have both the real value of their assets decline, and get taxed on the decline!
Any CGT must be imposed on real, not nominal gains, to be a goer.
Where the revenue from Labour’s tax goes makes it no better. Every dollar is earmarked for three free GP visits a year. Except New Zealand is short of doctors, and subsidising visits does nothing to fix that problem. In fact, it makes it worse.
A CGT on real gains, with few or no exemptions, and that is revenue neutral (income tax cuts to compensate) is worth debating and considering. Labour’s CGT fails all those tests.