BusinessSense: Labour Tax Announcement

New Zealand is drifting without a plan. Debt is out of control. The economy is not performing. Record numbers of New Zealanders are leaving permanently.” - Phil Goff

In a move which Labour believes will halt its slide in the political polls, Opposition Leader Phil Goff today unveiled a bold tax package including a broad-based capital gains tax and a top rate of income tax of 39% on income above $150,000. Goff says “NZ is drifting without a plan. Debt is out of control. The economy is not performing. Record numbers of NZers are leaving permanently. We are fighting for the future of our country. It’s that simple. It’s time to show courage and take action.”

Goff says Labour’s plan charts a course for a “stronger, more resilient economy and will allow us to keep our valuable assets for the benefit of future generations. We will make the hard decisions needed to secure a prosperous, long-term future for all NZers.” He claims the policies will result in investment shifting from speculation on property to the productive sector. This will lead to more jobs with better pay, give the economy a much-needed boost so we can pay our way in the world and make it easier for more Kiwis to buy their first homes.

The Opposition leader says we need to build an economy with the capacity to create safety nets to pay for future shocks, like the devastating Canterbury earthquakes. He notes these changes won’t be easy and some people won’t like them. But it’s the right thing to do.

Labour’s own polling indicates a majority don’t like CGT but prefer it to the sale of state assets. Goff says a Capital Gains Tax is already in use in nearly all developed countries, including Australia, the UK and US. Goff says “it’s not fair for people to have to pay tax on every dollar they earn from wages or interest on their money in the bank while others are making huge profits buying and selling assets without paying any tax. This tax switch is about creating a fairer tax system. In fact, under Labour, the overwhelming majority of Kiwis will end up paying less tax not more.”

The Key Points Of The Proposed Capital Gains Tax Are:

• Most New Zealanders will not pay the tax.

• It will not apply to the family home.

• Those who do pay it will still get to keep 85% of any gain they make because the tax rate will be set at a flat 15%.

• It’s predicted the tax will raise $26bn over 15 years which can be used to pay off debt, cut taxes for most New Zealanders, save our assets and prepare for the mounting cost of our aging population.

• Real estate in the Canterbury CERA zone will be exempt for at least five years to give earthquake-affected residents some relief.

Labour will also put the top tax rate back up to 39c for income earned over $150,000. It will affect around 2% of NZ’s top earners. Goff says “this is about everyone paying their fair share – nothing more, nothing less. We won’t be borrowing billions of dollars to give tax cuts to the wealthy like the National Party is. Instead, we will be asking those earning the most to pay just a little more, to help meet costs like the Canterbury earthquakes.”

“We know many middle and low-income Kiwis are finding it hard to make ends meet. We’ll ease their burden, by making the first $5000 they earn tax free. This means $500 extra a year in the pocket of every NZer. We’ll also take all GST off fresh fruit and vegetables so families can afford healthy food.”

In a clear indication Labour expects this package to be the turning of the electoral tide, Goff says Labour has a plan. National doesn’t. “Its only idea is to sell our assets off to big corporates and foreign buyers. This is incredibly short-sighted and will see NZers become tenants in their own land.” He says “for goodness sake, if you’re in a hole, why would you sell off the ladder?”

He carried on the attack against National - “for nearly 3 years, National has been content to tinker with the economy when bold action is needed. They’ve had their chance. They’ve failed. The time for tinkering is over. Labour has a plan and the courage to make it work so that NZ can become a better place to live for all Kiwis.”

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The Details Of Labour’s Plan For A Capital Gains Tax Are:

1. Rate: The CGT will be set at a simple low flat rate of 15% with no indexation for inflation.

2. Gain: The tax will be applied to net gains.

3. Exemptions: The family home, personal assets, collectables, small business assets sold for retirement and payouts from retirement savings schemes, including KiwiSaver, will be exempt.

4. Scope: The CGT is broad based and comprehensive.

5. Implementation: The CGT will be forward-looking and only apply to gains accrued after implementation. Past gains will not be affected.

6. Canterbury: Real estate in the CERA zone will not be liable for CGT for an initial period of five years from the commencement of the CGT. After that it will be reviewed.

7. Point of Taxation: The tax will be applied on realisation. In most cases at point of sale.

8. Treatment of Gains at Death: Capital gains on inheritance passed on after death will be rolled over to the heir, and not payable until the gain on the asset is realised.

9. Trusts: We will ensure trusts are not used as a means of avoiding a CGT.

10. Capital Losses: Losses can be carried forward and offset against future capital gains.

11.Treatment of traders: Assets currently taxed at the individuals¬ marginal or at the business tax rate will continue to fall under the existing regime.

12. Expert Panel: An Expert Panel will be established to deal with issues that are technical in nature and involve areas where a high degree of specialised knowledge is required before a final decision can be reached. In spelling out what Labour regards as a fair tax plan.

Labour’s finance spokesman David Cunliffe said the first shift required is to put the top tax rate for the top 2% of people earning large sums of money, above a threshold of $150,000 back up to 39%. He says the revenue raised from this change effectively enables GST to be taken off fresh fruit and vegetables – improving affordability and quality of life for all NZers.

The second change in the Fair Tax Plan is to make the first $5000 of income every person earns, tax-free. This is a simple change which creates a fairer balance in our tax system, and again, improves life’s affordability. Fairness means when times are tough, everyone gets a fair go and everyone pays their fair share. At the moment some NZers are not paying their fair share and are leaving it to others to shoulder the burden.”

Labour’s David Parker spelt out the rationale for Labour’s move to a CGT. “The fairness arguments in favour of a CGT are indisputable. Is it fair that currently NZers don’t pay tax on income from speculation, while those who earn wages, interest or dividends, all pay tax? No it’s not. Is it fair that younger generations can’t afford to buy a home, while their taxes cross-subsidise the people they rent off? No it’s not.”

“Equally important is the structural effect on our economy. We have heard a great deal about how NZ’s poor economic performance has been made more difficult by the global financial crisis and the Canterbury earthquakes. But what really requires attention is the fact that our underlying economic problems are structural and long-term.”

In a study commissioned by Labour, Independent economic consultancy BERL said it had generated headline estimates of the revenue from the introduction of a capital gains tax (CGT) commencing April 2013. As a starting point, BERL used revenue estimates from the Taxation Working Group 2009 report, along with additional information from available Treasury and IRD reports. Consequently, a model was developed, with appropriate assumptions adopted and incorporated, to provide a high-level estimate of revenue from a CGT.

It is estimated a 15% CGT commencing in April 2013, charged on the realisation of capital gain, excluding owner-occupied housing, would provide full-year ‘steady state’ revenue of the order of $3.7bn by 2028. In line with Aust estimates, there is a 15-year horizon before this “steady state” is reached. The first full fiscal year of implementation (i.e. the year to June 2014) sees revenue of $78m.

Trans-Tasman says: Labour’s decision to go for a broad-based capital gains tax is daring in a political sense; It opens up the election to provide voters with a clear choice between the governing coalition and Opposition parties. Will it be sufficient to swing voters away from National? Probably not. Goff and his team have yet to show the skills they can “sell” their ideas, let alone such a revolutionary one, to an electorate which has traditionally regarded new taxes as political poison.

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