Jacinda Ardern ruled out a capital gains tax on her watch. With her watch now over, some are speculating about whether her successor Chris Hipkins could revive a policy still popular in some quarters, as Nikki Mandow reports
First, some history.
In 1966, Auckland accountant Lewis Nathan Ross was asked by the government of Keith Holyoake to chair a committee tasked with producing a comprehensive review of New Zealand’s tax policy.
Among its findings: a system where income was taxed, but capital was not, was inherently unfair. The political workarounds in place were complex and confusing. Reform was urgently needed.
Ross’ report was followed by findings from the McCaw Taskforce of 1982, the Don Brash Committee of 1987, and the Valabh Committee of 1988. The latter two reports specifically recommended a capital gains tax.
A year later, the Consultative Document on the Taxation of Income from Capital was published from the work of Arthur Valabh and his team.
It examined previous studies and said there was “no sound principle” behind a law which taxed money people made from working, but mostly exempted money people made from buying and selling assets like houses, farms, businesses or shares.
A preface from then-finance minister David Caygill called the existing law “an accident of history… lacking any coherent basis”.
“There is little reason to believe that the line which is now drawn between taxed and untaxed income has any inherent justification,” Caygill said.
“The present law is not fair. There are arbitrary distinctions between people in similar circumstances. The present law is not clear. It is open to manipulation and cannot be administered effectively. As a result, some large businesses pay no tax.”
By 1989, the year of the minister’s remarks, the UK had had a capital gains tax for almost 25 years, the US since 1921, and Australia since 1985.
And New Zealand? It didn’t have one then, and it doesn’t have one now. In fact, close to 35 years since Caygill said “no one can reasonably defend the present arbitrary and confused set of rules”, Aotearoa arguably still has an arbitrary and confused set of rules.
With Jacinda Ardern’s resignation last week, and her replacement by Chris Hipkins, the No CGT spell is broken – at least in theory.
The reason is more political than economic. From Roger Douglas to Michael Cullen to Jacinda Ardern, a number of leaders – mostly on the left – have supported a capital gains tax ideologically but dropped it under election pressures.
Cullen, the former finance minister, allegedly called a CGT “political suicide” (he later said it was “not dead, but not kicking either”). Meanwhile, Labour leader David Cunliffe’s 2014 election bid was derailed partly by the prospect of a CGT, and Ardern scrapped the party’s tax proposal just a few days before the 2017 election following a barrage of criticism from National and others.
Two years later, Ardern ruled out a CGT in her political lifetime, a promise she repeated before the 2020 election. But with Ardern’s resignation last week, and her replacement by Chris Hipkins, the No CGT spell is broken – at least in theory.
Hipkins, like Ardern, is a supporter. Asked by Newshub in 2019 if he would be happy to pay the tax, he said he would be. Asked by Newsroom yesterday if he still supported it and might reintroduce it, he didn’t say one way or another.
However, it’s hard to see a CGT emerging before the next election given the political considerations, says University of Auckland law professor Craig Elliffe.
Elliffe was a member of the 2018 tax working group chaired by Cullen. A strong recommendation for some form of CGT, supported by a majority of the group’s members, were largely ignored by the Government.
Elliffe says some sort of capital gains tax will be unavoidable – it’s just a question of politicians having the courage to introduce it.
“Sooner or later, as the population ages and if our percentage of spending on things like healthcare and pension continue to rise and income tax receipts decline, there will be no other solution other than to tax capital in some way.
“There are plenty of options but the current one is not sustainable.”
It’s not just individuals and property which are problems – it’s also about the tax take from companies large and small, Elliffe says.
“If you said to any tax advisor in Europe that our businesses do not pay tax on capital gains they would be stunned – it’s incomprehensible for them.”
Politicians, particularly on the left, are aware of the “problematic anomaly” – that the lack of a CGT is adding to the inequality in this country because people with property and businesses avoid tax on money they take in, while people living purely on wages pay tax on everything they earn.
The longer we don’t have a capital gains tax, the worse the situation, he says.
“Since the tax working group, most of our concerns have played out. The integrity of the tax system is in some doubt – working out how to pay the least tax is a game the most well-off people are playing.
“Our tax system is creating great inequality – the wealthy truly getting wealthier in terms of the gains they see.”
“We’ve painted ourselves into a political corner. [Governments] had to do them and I’m not surprised they have done them, but all of us in the tax community recognise they are a substitute for a sensible, rational tax on capital.”
– Professor Craig Elliffe, University of Auckland
This issue is why left-leaning governments have tended to be the ones thinking about a CGT and right-leaning ones have tended to be strongly opposed – in public at least. An anti-CGT stance has proved a sure vote-winner among the wealthy, farmers and the business community – National and ACT’s power base.
Instead of a CGT, governments on both sides have tinkered with measures to mitigate the inequities, the housing shortage, and the impacts on the tax take. The bright-line test, for example, imposes a capital gains tax on people selling a property within 10 years of purchase. Meanwhile, Labour’s phasing out of interest deductions for money borrowed to buy rental property was designed to calm what was then an overheated housing market, and might well be reversed by National.
These are “second-best tax policies” , Elliffe says, implemented because we don’t have a CGT.
“We’ve painted ourselves into a political corner. They had to do them and I’m not surprised they have done them, but all of us in the tax community recognise they are a substitute for a sensible, rational tax on capital.”
In November last year, 250 accountants, lawyers, corporate advisors and business people gathered in Christchurch for the annual CA ANZ (Chartered Accountants Australia NZ) conference, with another 200 joining online.
In one session, delegates were asked a simple question: “Would you prefer to have a comprehensive capital gains tax, as opposed to the evolving status quo?” A total of 72 percent voted in favour of the CGT.
“Rather than the complex, unprincipled, cobbled-together rules, the people closest to this issue chose a more coherent solution. They are saying there is a need to look again at this issue,” Elliffe says.
PwC partner Geof Nightingale was not only part of the 2018 tax working group, but an earlier one in 2010. Nightingale says while the process of changing tax policy takes a long time, much of the hard work of designing some sort of capital-taxing regime has been done by the working group.
The bright-line test is too narrow and “a very blunt instrument”, he says, which has unintended consequences for people it isn’t meant to punish – like parents putting money into a house to help their children get a house.
“It’s hideously complex and catches people unawares – people it wasn’t intended for. Anyway, if you are wealthy enough to be able to hold onto an investment property for 10 years it’s not going to catch you anyway.”
Nightingale believes support among the general population has grown over the last couple of years as Government stimulus hiked asset prices and increased inequality.
“But I don’t think there is yet a majority from a political perspective. Labour has run twice with a CGT policy and twice been punished, and National is not going to run with it.”
Political suicide? Not necessarily, says Terry Baucher, the director of tax consultancy firm Baucher Consulting, a media commentator, and a CGT enthusiast.
Baucher was overseas when Newsroom rang, but in a 2017 editorial published by Interest.co.nz and republished by the Spinoff, he argued political parties could raise taxes and still win elections.
“In the last 30 years three New Zealand governments have either introduced or raised taxes and all were subsequently re-elected. David Lange’s Labour government introduced GST, a completely new tax, in 1986. Helen Clark campaigned and won in 1999 with a promise to increase the top rate of income tax to 39 percent. Finally, in 2010, John Key’s National government raised the rate of GST to 15 percent,” he wrote at the time.
“All three governments were comfortably re-elected after their tax increases. Raising taxes or introducing a new tax is therefore not politically impossible.”
Now or never? Maybe not
So, what now for the CGT? Apart from his throw-away comment to Newshub in 2019, no one knows the strength of Hipkins’ view on a tax on capital, or any political risk he might be prepared to take.
Small Business Minister Stuart Nash was quoted as being prepared to pay capital gains tax in the same article, while Finance Minister Grant Robertson and Revenue Minister David Parker are also thought to be supporters – at least in theory.
National’s Christopher Luxon is not only against the CGT but has said he will wind back the bright-line test to two years if elected, also getting rid of the top tax bracket of 39 percent. But Luxon has been reluctant to put a timeline on the moves and to say how he will pay for them.
Cullen, who died in 2021, said it might be “now or never” for a capital gains tax when his working group released its recommendations in 2018. Both Nightingale and Elliffe disagree.
Nightingale has been quoted as saying it might take 10 years. Elliffe says a study into the tax take from some of New Zealand’s wealthiest individuals and families, announced by Parker in April last year, might provide more ammunition for the tax.
In a speech at Victoria University of Wellington, Parker said his mission was to find out how much tax New Zealand’s wealthiest people were actually paying as part of the work he was doing on a Tax Principles Act, new legislation setting out the rules around a fair taxation system.
PwC’s Geof Nightingale said at the time he believed Parker wanted credible data to show the unfairness of the current system.
“It feels like it is attempting to establish a political narrative for us as voters about the absence of a capital gains tax.”