The Haps

Devastation in Dunedin and the loss of HMNZS Manawanui are hurting New Zealanders in different ways. They also underline what Free Press argued last week, that the Government needs to think hard about its capital assets. It holds over half a trillion in assets, but does it own the right things, do core infrastructure and defence need more commitment? Meanwhile we’ve received voluminous praise for David Seymour’s performance Q+A with Jack Tame last week.

Capital Gains Tax... Again

ANZ CEO Antonia Watson revived the unending debate about a capital gains tax for New Zealand. Free Press welcomes business leaders talking about public policy. We’d all benefit if they did it more. Too often we hear business leaders say things privately that we wish they’d say publicly but they’re usually too afraid of criticism.

We just don’t agree with Watson about the capital gains tax. It always seems to be a band-aid for concerns about housing, but it won’t fix that, and what New Zealanders really need is more capital. This week, once more with feeling, Free Press goes through the usual arguments for a capital gains tax and sets out why they’re wrong.

Perhaps the worst argument for a capital gains tax is ‘everyone else has one.’ Practically every other Government imposes a capital gains tax on its citizens, except the Swiss Federal Government. Being like Switzerland can’t be the worst thing for the New Zealand economy.

Even if ours was the only Government not levying a capital gains tax on its citizens, the argument still doesn’t work. Governments do silly things all over the world, and we don’t need to copy every one of them.

Others say the Government needs the money. We’d argue that it needs to spend better, and it is improving, but there is better evidence the Government doesn’t need more money, at least not from a capital gains tax.

The New Zealand Government is the second biggest taxer in the Asia Pacific region (behind Japan) with total revenues of 33.8 per cent of GDP. Every Asia-Pacific Government has a Capital Gains Tax. It’s difficult to argue a Government raising more revenue than dozens of Governments with capital gains taxes needs a capital gains tax for lack of money.

Then there’s the fairness argument. People who make money from capital should pay tax like people who work for their money. Sounds fair, but the reality is capital gains are already caught by income tax.

Anyone who buys a farm, a business, or a property is really buying a stream of income in the future. That income is taxed. A company with future income worth $10 million before tax is not worth $10 million though. It is only worth the after-tax income. You’ll be lucky to get $7 million. You’ll already lose $3 million-odd, that’s the tax that whoever buys it will pay.

Putting a tax on the price of the asset each time it’s sold is just nasty. The argument with housing is that house prices go up regardless of how much rental income they produce.

People even claim a capital gains tax would make housing more affordable. Any realistic capital gains tax would apply to all businesses, but only to houses you don’t live in. Nobody who wants a capital gains tax wants one ‘on the family home.’ On balance it would be more of a tax on businesses than on houses, so much for shifting investment away from housing.

Maybe it would at least stop ‘speculators’ from pushing up house prices by buying ‘more houses than they need to live in’? Unlikely when the new tax has gone on every other kind of investment, too.

Just like L.A., London, Sydney, Hong Kong, and Vancouver have all had outrageous house prices with a capital gains tax, a capital gains tax won’t make housing affordable in Auckland. Prices are set by supply and demand, and so long as supply doesn’t keep up with demand, prices will rise.

A capital gains tax really just makes the Government a silent partner in property investment, it doesn’t change the underlying fundamentals of the housing market. It certainly doesn’t comfort a first home buyer to know that the Government took a share of their eye-watering purchase price.

We hope these arguments are helpful for repelling demands for a capital gains tax. They’re technical though. The real question is whether the goal is to grow the pie, or divide the pie?

If you think New Zealand can’t get any richer, and it’s just a matter of pulling the ‘rich’ down a peg or two and dividing up the wealth, maybe it’s time to talk about a new tax. On the other hand, maybe it’s time to shelve the distraction, acknowledge our lack of a CGT is a strength, and get back to making New Zealand wealthier overall.

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