Tuesday 19 February 2019

Just Like “Rogernomics”, A Capital Gains Tax Would Traumatize The New Zealand Economy.

Pushing CGT Uphill: The prospect of collecting a tax-free capital gain at the end of a life of hard work and deferred gratification is what keeps “Middle New Zealand” going. The farmer, the small businessperson, the professional couple who diligently paid off their mortgage and then leveraged the freehold into a second property: these are the people whose undying enmity will destroy any party foolish enough to enact a CGT.

LATER THIS WEEK, the recommendations of the Tax Working Group will become public. It is highly likely that a Capital Gains Tax (CGT) of some description will be near the top of the Working Group’s “To Do” list. How should Labour handle this extremely hot potato? The tax which all the experts tell us we have to have has much to recommend it theoretically, but, in the bluntest of practical political terms, it could very easily destroy this government.

The most important aspect of the CGT issue, and the one the Coalition Government should keep in mind at all times, is that the expectation of capital gain is now “baked in” to the economic expectations of a huge number of New Zealanders. One might even say that it is the beating heart of this country’s economic culture. The prospect of collecting a tax-free capital gain at the end of a life of hard work and deferred gratification is what keeps “Middle New Zealand” going. The farmer, the small businessperson, the professional couple who diligently paid off their mortgage and then leveraged the freehold into a second property: these are the people whose undying enmity will destroy any party foolish enough to enact a CGT.

Only those who conceive of our society as some sort of mechanism could possibly advocate a CGT. These are the people who believe that with a just few judicious adjustments to the social mechanism everyone’s lives will be immeasurably improved. Doubters will find themselves wondering what all the fuss was about when they see how brilliantly the technical changes are working. Opponents should be ignored. They just don’t get it.

Anyone who lived through the “technical adjustments” of the Rogernomics era knows that this line of argument is complete and utter bollocks. The “short-term pain for long-term gain” mantra that was advanced by the Fourth Labour Government (and amplified to ear-drum rupturing levels by the news media) was a lie.

Very few of New Zealand’s social indices have registered a clear improvement in the lives of New Zealanders as a result of the so-called “Rogernomics Revolution”. The wage-earner’s share of company surpluses has reduced in comparison to the shareholder’s. The number of New Zealanders owning their own homes has declined sharply. The dramatic surge in average life expectancy that distinguished the 30 years following World War II has plateaued.

The explanation for New Zealand society’s resolute refusal to be improved by the Fourth Labour Government’s neoliberal “reforms” is very simple. Society is not a mechanism, it is an organism. Ripping things out from, or cutting them off, a living system doesn’t improve it. All that happens is that the system is left wounded and bleeding. Given sufficient time, an organism may adapt to the loss of a limb, or an organ. Wounds do heal. But attempting to pass off the maimed subject of your surgery as a vast improvement over what existed before, is a fool’s errand. Trauma endures.

Has this government, dominated as it is by the Labour Party, learned anything from what happened between 1984 and 1999?

If it politely receives the Tax Working Group’s recommendations, only to consign them, quietly, to the archives, then we may be confident that Labour has absorbed the lessons of its recent history. If, however, Labour presses ahead: proclaiming, once again, the mighty improvements that are bound to follow the suggested adjustments to the mechanism; then we must anticipate the same disastrous consequences.

What farmer (who is not a corporation) will persist with the heartbreak and stress of extracting value from the land, if the tax-free reward awaiting him at the end of his stewardship is transformed into a crippling tax bill?

Will the small-business owner be content to pay herself less than the staff she employs; will she continue to pour her blood, sweat and tears into her enterprise; if a third of the capital gain she hopes to realise at the time of its eventual sale is payable to the IRD?

Will the professional couple with some capital to invest continue to put it into a rental property if a CGT is introduced? Will they go on putting-up with the often appalling behaviour of delinquent tenants? Will they continue to spend a small fortune keeping their properties warm and watertight? They might as well put all their savings into KiwiSaver.

Which is, of course, exactly what the economists want them to do. But will KiwiSaver rent out properties to students? Will it give young tradespeople somewhere decent to live while they amass the capital resources necessary to fulfill the Kiwi Dream of becoming one’s own boss?

Money flows around the social organism we call New Zealand in a unique way. We are not Germany, with its hugely facilitative regional banking structures and its comprehensive tenant protections. Nor are we the USA, with its vast domestic market and its middle-class households’ longstanding propensity to invest in stocks and shares. Ours is an economy driven by delayed gratification: by putting in the hard yards now, on the promise of tax-free capital gains later. Rip that expectation away from aspirational Kiwis, and the economic organism will suffer yet another massive trauma.

Those responsible for inflicting a Capital Gains Tax on New Zealand should not expect to be re-elected for a generation – at least.

This essay was posted simultaneously on The Daily Blog and Bowalley Road of Tuesday, 19 February 2019.


Anonymous said...

Spot on perspective - & not what I really expected to read. A lot of social commentators & self appointed economist "experts" living in their bubbles up their taxpayer funded ivory towers wilfully choose to ignore the fact that someone has to bake the cake before it can be taxed & divided. Socialist envy theft is an ugly feature of the NZ political landscape.

David Stone said...

Capital Gains , apart from building capital assets, which can only be created out of already taxed money, i.e. unearned increment of association , are simply inflation. A capital gains tax is an inflation tax pure and simple. The Tax working group should have addressed the distortion of unlimited overseas investment in NZ real estate in a world of QE where money is being created on a scale never seen before, and the 1% has nowhere to invest it except in real estate and shares. A CGT is simply punishing the victims of fiscal mismanagement.

Andrew Nichols said...

So Chris ...You dont believe capital should be taxed? You really are a funny kind of socialist. A CGT is long overdue to rectify the hideous imbalance in our nations investment habits. The obsession with property has led to NZs productive enterprise being starved of investment which is why the NZ Sharemarket has the highest level of foreign ownership of any bourse on the planet. Just because so many have a stake in something unhealty doesnt make it right to continue down that path. After all we all thought smoking was harmless once.

Trev1 said...

An excellent commentary Chris, showing a profound understanding of the way kiwis think. And there are of course many others whose life prospects would be undermined by a CGT: anyone in kiwisaver for example, or children hoping to use the proceeds from the parental house for a deposit on their own home. A CGT on these items would provoke outrage and bitterness on an immense scale and the party responsible would never again be trusted.

Guerilla Surgeon said...

Against a capital gains tax? Good God, I've just seen a peak fly past my window. I can't see what's wrong with it myself, as long as your family home is left out of it. Capital gain is not actually made by the sweat of one's brow quite so much as by just hanging onto property while inflation takes its course. And I can't see farmers abandoning the land in droves if they have to pay some sort of tax – not that they will for crying out loud they all employee regiments of lawyers in order to avoid it. An increasingly these days farms are run by corporations anyway.
I would really like it if ordinary working people could take their expenses off their tax like farmers and business people do. After all, I'm selling my labour just like they are selling produce – why shouldn't I claim for the car that takes me to the place where I sell it, the food that sustains me while I'm selling it, the clothes I need to wear while I'm there. Now that's not going to happen. And that's where the tax relief is needed, bugger the farmers. Never seen any of them driving round in anything less than a big flash car – on my dime.

factchecker said...

My late mother worked part-time for about a decade in a job she didn't particularly like with people she didn't particularly like.

And scraped together a deposit on a student flat in Dunedin. She had to put up with arsehole students who didn't pay rent, trashed the property etc because they thought this was their rite of passage.

Eventually the mortgage was paid off.

The rent was to top up her National Super. Over the years she paid a ton of tax. And asked for nothing in return.

This is the kind if individual the CGT will hurt the most.

The Capital Gains Tax should be consigned to the bin in New Zealand and never spoken about again.

greywarbler said...

Andrew Nichols
...Talks like an idealogue. And has a should at the back of his argument.
I am sick of simple idealogues and 'should'-spouters (and people who count words and not their meaning, and would announce there isn't a should in the comment, without concern for the overall argument.) ANichols exlains the mechanism but doesn't explain the ramifications and factors. Let's have CGT 202 when you're ready.

Nick J said...

There is some merit in your argument but on the balance I believe Chris proposition has greater merit. People who create wealth need incentive, not disincentive.

Your comments on the NZX are interesting. The exchange has very few listed companies that were originally private entities. Most are ex public utilities and privatised SOEs. That hardly consists a market, it merely gave rich people another way to make money from the rest of us, taking profits from something once owned by the public. As a vehicle for making investment capital available the NZX is a joke. A capital gains tax is not going to improve that.

GJE said...

Well said...Many people forget that this country was built around the concept of a property owning democracy. This was never meant to be some sort of right rather a goal to aspire to and one that could only be achieved through hard work and a strong belief in a fair and just society..the man with a mortgage has voted massively in favour the society he is a part of and to destroy that belief as a CGT surely would is folly in the extreme

Tom Hunter said...

I very much wish that people would invest more in New Zealand companies via Venture Capital funds and the sharemarket, rather than property.

But the sad fact is that ordinary people have been burned too often by the uselessness of NZ companies and their management. There is no indication that any of that would change simply as a result of people funnelling more of their savings into such companies.

As a personal example, almost twenty years ago I put $100k into a startup company in NZ. It was a risk and I knew it. But I thought that even if it failed it would take several years. It took less than one. I've occasionally wondered about what would have happened if I'd simply plugged that money into something as boring as market Index fund in the USA, which simply follows the composition and weighting of the Dow Jones, the S&P500 or the Nasdaq. A conservative estimate for it would be at least $200k.

By contrast my investments in my house have generated a steady 10% per annum. Investment meaning buying the damned place and then spending multiple $100 k' on improving and enlarging it. I'm going to be taxed on that say the fans of CGT? Well guess what - I still would not put the money into NZ companies. Been there, done that.

But we're going to get a CGT anyway, because the reality of NZ is that rather than utliise some form of actuarial/insurance approach we have gigantic pay-as-you-go systems of health, education and werfare.

These have no limiting principles aside from running out of tax revenue - and that's assuming future NZ governments don't try the money printing approach of the likes of Venezuela and the USA - so more tax revenue is the name of the game, and that will come in the form of steadily increasing tax rates and new taxes.

- Top Income Rate, 40%
- GST, 25%
- CGT, 15%

And don't worry about Natonal: after screaming their guts out about taxes for years in Oppositon the new Amy Adams-led National government of 2026 will embed all of the above. It's either that or cuts to everything and that's verboten.

Congratulations Lefties, despite what you think of the "neoliberal triumph", you've actually won the long-term battle. Hope you enjoy it as much as I will - in retirement. Pity about my kids going overseas to make living, but them's the breaks.

pat said...

An odd appraisal of an as yet unannounced recommendation (though there can be a certain confidence in those recommendations given the chair and narrow brief) ...strange though you should draw a parallel with the Douglas reforms which were wholesale and structurally radical, a CGT on investment (and at what rate?) even should it be adopted is mere tinkering in comparison.

Unknown said...

I could not agree more with Andrew. Investment that deliberately sets out to side step tax simply means that those who do are deliberately passing the tax burden on to others. I think that the example of a hard working farmer that Chris gives out will not stand scrutiny. The farmer could well have brilliantly avoided tax for most of his working life thanks to his accountant, and now expects a tax free Capital gain as well. That farmer should always be considered to be someone who has not paid his way.

mikesh said...

Andrew, the obsession with property exists because property is considered a safer investment than either the shares or productive assets. The introduction of a capital gains tax will do nothing to alter that perception. Nor will a capital gains tax affect t banking interests since it is not usually levied until a property is sold and any loan extinguished. A better option if one wished to reduce the amount of capital being poured into the property market would be a land tax, or a risk free rate of return tax as suggested by Gareth Morgan. Either of these options would reduce the amount of income available to pay interest, which of course is why the banks seem to prefer capital gains taxes.

Geoff Fischer said...

As far as I can see there are two arguments for a capital gains tax. First that it is only "fair" to tax those who acquire wealth from speculation rather than labour. Second, that the government needs new sources of revenue in order to continue redistributing wealth and income to state beneficiaries of all kinds.
The political problem is how to do that without antagonizing too large a proportion of the population, and, in particular, one's own power base.
That is a real conundrum, given that the great majority of New Zealanders are to some degree capitalists (owning a small business, a farm, residential rental property, company shares, money on term deposit, money in KiwiSaver superannuation scheme and so on).
Should we worry? Why agonize over ways in which capitalism can be made "fair" and a capitalist state kept viable?

Guerilla Surgeon said...

Interesting the comments – just goes to show how dangerous it is to piss off the lower middle classes and aspirationals. There'll eat you alive as soon as you suggest that they pay a bit more to help those at the bottom of the heap.

David Stone said...

" An increasingly these days farms are run by corporations anyway."
One significant reason for this is that allowing unlimited overseas investment in NZ farm land has led to valuations that make it almost impossible for a farmer to pass his farm on to one of his children. The revenue that can be generated from a farm now is minute in relation to the capital investment needed to own one; so if there are several children there is an income in the farm for only one of them. If the farmer has a wish to be even handed with his offspring he has to sell to share his estate.
Most farmers would much prefer to remain on they farm while a son takes over than turn it into cash and spend the proceeds on a house in Remuera.
Corporations will never have to pay a CGT because to sell all the owners need do is sell their shares. As far as the law is concerned the Corporation can live forever , while the farm in reality changes hands constantly. A capital gains tax on shares would be more to the point but I won't be holding my breath for that to happen.

Michael Johnston said...

Articles like this are why I have such respect for Chris despite agreeing with him about very little, in the domain of economics at least. The man has true integrity, a commodity in short supply amongst our political commentariat. He says what he believes whether or not it accords with the orthodoxy of the left. Never has he demonstrated this quality more forthrightly than when he condemned Massey University for banning his ideological foe Don Brash. If our journalists had, on average, even half of Chris's intellect and integrity, the quality of political discourse in this country would be vastly better than it is.

mikesh said...

Guerilla Surgeon, you have raised the matter of workers' expenses and whether they should be tax deductible. The Income Act states that expenses are tax deductible if they have been incurred for the purpose of earning taxable income, and the IRD would argue that the sort of expenses you mention merely prepare a worker to earn taxable income but don't actually contribute to that income, and would therefore not be deductible. What the department sees to forget, however, is that the same reasoning would apply to interest borrowed for the purpose of investing in an income earning entity. Interest doesn't actually contribute to the earning of income; the business can get along quite well without paying one cent in interest once a businessman in a position to invest. One would therefore have to question whether interest should be deductible.

Nick J said...

Interesting comment GS, "I would really like it if ordinary working people could take their expenses off their tax like farmers and business people do. After all, I'm selling my labour just like they are selling produce". Spot on, never thought about it that way.

KJT said...

So. Those who have been rorting the system for decades, by converting taxable income into tax free capital gains, may have to pay the same taxes, as those of us who work for a living.

My heart bleeds for them.

KJT said...

How about we abolish the tax on real hard working Kiwi's, income tax and GST, and tax speculators, landowners and capital gains earner?

After all, that is what Adam Smith said. Tax owners, not workers.

KJT said...

Chris. CGT already applies to Kiwi saver. Profits are taxed at the marginal tax rate.

sumsuch said...

Apart from arranging votes the report seems a very good thing. It's irritated the powerful.

The million missing votes aren't going to suddenly turn up, but over time... What is there for the Left, in the meanwhile, but a bully pulpit, unless we want to go back to supplicating before the strong as per 'the Winter of Discontent'.

sumsuch said...

What is demo-cracy but an endless battle for fairness. And that battle is against vested interests. Most of them here empowered by treating society as a mechanism in 1984. Our two track society from that, one dead-set against fairness. I'm not in favour of refusing battle. The other option is reverence for our real recent founders, Roge and Ruth.

However, this isn't going to happen with Peters.

Admittedly, the 'Living Wage', in its peaceable, constructive spirit , has been one of the great strokes of brilliance for the people.

sumsuch said...

Let's point out the most obvious model of a two-track society, America. It unites NZers that we can't stomach that division. Yet it's the end of our 84 track. Americanism seeps and seeps into our society with their simplifying stories in an age of complexity. All our values are quiet ones, strong but quiet in a media age. You have to wait to 50 to recognise their rightness.

Jays said...

So let's define fair as it should be.
The nz government collects $17,000 per man, woman and child in New Zealand.
If you are a couple with 2 children, you should be paying $68,000 in tax.
That is fair.
What is not fair is someone sitting on their father arses with 8 kids on the dole.
Those people and their spawn should be euthanised.

Young Hegelian said...

"Money flows around the social organism we call New Zealand in a unique way." How so?

Property speculation bubbles are not unique in history, in New Zealand, or elsewhere. The whole point is that if you've invested in property since 2000 you have not had to work hard for your capital gain and even better it's easy to avoid paying any tax on capital gains.

In this context the tropes about hard work, sacrifice, the consecrated status of the family crib/bach, is small minded parochial moralism - so it's right on point! This propaganda should work really well on aspirational voters as well as those invested, tried and true.

Even if a CGT is implemented by the next Government, while a necessary correction to discourage the massive over investment in property, it will not address the economic divide that has been created. Meanwhile New Zealand remains vulnerable to a correction in property prices, if a significant economic downturn occurs and employment levels drop, that's when the real pain will occur not when a CGT is implemented.

"The crisis consists precisely in the fact that the old is dying and the new cannot be born" - Antonio Gramsci

Guerilla Surgeon said...

I can't see what all the fuss is about to be honest. Very few actual working people will be hit by a capital gains tax. For every mother who worked her are soft to buy a flat for income in her retirement, there are a thousand at least who buy it simply as an investment, because let's face it shares in this country don't have a stellar reputation. And it will never as some seem to suggest be levied on the family home – that would be political suicide. I don't see why we distinguish between doorway in which different people earn their money. It's all earnings, and it should all be taxed. Not to mention we should be looking at some of these bloody big corporations that either don't pay any or get refunds from the IRD. Particularly international companies. If you want to do business here, you should pay taxes here it's as simple as that.

On another note:
"What is not fair is someone sitting on their father arses with 8 kids on the dole.
Those people and their spawn should be euthanised."
Oh shit, here we go again with the welfare Queen meme. As if there were thousands of families with eight kids sitting around on the dole laughing at the end me. Jesus I wish for once somebody would stop this bullshit! In the course of my career, I must've met thousands of people. I never met one who didn't want a job. I never met one who wanted to be on the dole with eight kids. Now I'm not suggesting that they don't exist, but they are few and far between and they don't leach nearly as much money off the country as corporate welfare does. But I guess every so often somebody's gotta bring up the fairytale. But it would be much better if you put your energy into railing at the rich and powerful who do their best to avoid all taxation. And probably more productive as well.

sumsuch said...

The do-ability of things by the next election has cut your toes off Chris, for the last 30 odd years. Speaking for the people no matter would've been far better, as per our best ideas of ourselves. I chastise our primary champion. Forget do-ability, remember what is right. And sell, like the bastard you are. I hope.