Report asks major questions of a Capital Gains Tax

A report by the New Zealand Institute of Economic Research (NZIER) reinforces Federated Farmers concerns over the Labour Party’s proposed Capital Gains Tax (CGT).

“The NZIER say the Labour Party’s proposed Capital Gains Tax would not be a good addition to New Zealand’s tax mix as it is proposed we agree,” says Dr William Rolleston, Federated Farmers President.

“The nature of politics will see the Labour Party try to dismiss the NZIER report. Yet they must listen to the message because the messenger is credible.

“We commissioned the NZIER to examine Labour’s CGT proposal since it represents a major change to New Zealand’s tax system and has been devoid of critical analysis.

“Perhaps the most concerning aspect of the report comes down to the Labour Party’s revenue assumptions. In 2011, the Labour Party estimated a 15 percent capital gains tax would raise $17.5 million in its first year, rising to $3.7 billion by 2026.

“The NZIER tell us these estimates are high, since the revenue potential of its proposed CGT is more likely to be half that sum. In fact it may be smaller. If this key policy is out by such a margin it asks fundamental questions about the Party’s shadow budget.

“What’s more, the Labour Party’s estimates of CGT revenue were revised up this year. The NZIER noting Labour’s “…2014 estimates are less believable than the 2011 estimates.”

“Labour also expects to raise at least $1.3 billion from the farming sector but a more realistic estimate is half that sum in 15 years’ time. NZIER further estimates that the loss in current farm values will be between $2.4 billion and $7.6 billion. But this will be a one off hit for farmers.

“Lower land values mean lower tax revenue too.

“Aside from simply delaying sale, the NZIER notes there would be significant opportunities to avoid taxable ‘realisation’ events by keeping assets in the family. The CGT tax proposed would not treat transfers to family members as events where capital gains are assessed.

“A CGT genuinely risks capital lock-in with the housing market. To avoid taxable gains people will choose not to sell achieving the opposite of what is desired for productive investment.

“Since the housing market has been part of a CGT’s rationale, the NZIER found Labour’s CGT will not aid affordability and is not as progressive as many would like to think. Indeed, a CGT may lead to higher rents.

“What is more, speculative property investment is already subject to income tax on capital gains.

“The lesson we can draw from countries with a CGT is that they are not immune from rising house prices, indeed, two weeks ago, the Sydney Morning Herald reported that Sydney and Melbourne had their strongest winter price surge since 2007.

“Federated Farmers, NZIER and others like Victoria University’s Tax Working Group agree that a CGT, of the kind proposed by the Labour Party, would not be an efficient and effective option,” Dr Rolleston concluded.

To read a copy of the NZIER report, please click here.

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