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NOV 18

Where there is a will there is a way.

It’s been interesting watching the discussion on Capital Gains Tax (CGT). Commentary looks like something out of Yes Minister around resisting change. You can get a flavour of that here, and maybe test the manifest defence of the status quo against this model, with some interesting Australian inserts in this version:

The absence of CGT distorts our economy. Sadly, the weight of discussion is all about protecting the existing benefits and by inference, maintain existing penalties. Change (CGT) it is just too hard, look at all the implementation problems, look at all the complications, it will not return much to Treasury anyway, asset values will tank, and the old folks will be hurt. What we see is status quo commentary and lobbing well-funded by the winners of the moment.
Not much discussion around past impacts, future threats that should drive the need for change and the broad principles that should structurally underpin those changes.

The plain fact is that our existing tax frame work has its winners and losers, large wins for those holding favoured asset classes and losses to others due to uneven distribution of the tax burden. Add in the loss to everyone from an underperforming economy as those that can further extend their holdings of favoured asset classes. This process amplifies the distortion of the economy, starving investment in asset classes not so favoured, which also happen to be critical for the productive growth of our economy. When assets matter more than activity, it is bad for employment and for real productive growth, we become a balance sheet economy without much of an income statement.

Savings, consumption, profits, and earnings are taxed but not capital gains. Small wonder that business models chase tax minimums, it is unfortunate that rational behaviour at the company level leads to exceptionally poor outcomes for the wider economy and has distorted an entire key industry into a real estate flutter. Add that bias to the broader housing market and we have one badly bent economy.

Past outcomes and future threats are such that clinging to the status quo is likely to end in a social and economic disaster. In common with the English-speaking world, over the past generation we have depreciated activity, cut local content, and in New Zealand taxing all but speculative gains. It should be no surprise that investment in enterprise and returns to labour falls as the return to assets inflate. Add in a financial sector willing to take a flutter on land and buildings and there we are: overpriced houses the waged cannot buy and dairy farms that barely earn enough to cover the borrowings necessary to buy them.

These characteristics inflate borrowing, much of which comes from offshore. That dynamic lifts interest rates and offshore borrowing which in inflates the value of the NZ dollar: making imports cheaper and eroding export returns. Discouraging productive investment and further reinforcing speculative investment. Jobs, and the balance of trade are depressed.

Where we come from and where we are is not that flash. Looking forward to the threats, things are a real worry unless we lift our level of enterprise. Climate change, or more specifically sea level rise, threatens a huge amount of “valuable” real estate. Lab grown meat and milk will be cheaper and will not come with a carbon or water penalty. These resolve to major risks to the economic structure of New Zealand. Solutions are not obvious. However, persisting with a tax system that weights in favour of land and buildings, starves investment in areas of the economy is not a good start. We need those areas that have lighter, more creative footprint to flourish, when they wither so does the development of capacity and capability across the economy.

The longer we delay some radical rebalancing of the tax burden the harder it will be. A bit like changing the direction of asteroid on a collision course with the world, the sooner you push the less work you have to do to make it happen, conversely leave it too long and we might not have enough push to save us.

Bias is subtle and undesirable, it seeps unnoticed into the rational behaviour of us all. The overall outcome is a distorted economy and an increasing polarised society with those holding capital capturing an ever-greater share of economic output and those earning, selling and buying get what is left.

The principles of a good tax system, transparent, neutral, broad, simple, stable, future focused, low, support trade, open, low, broad and ubiquitous are widely accepted, while New Zealand ticks many of the boxes, the capital gains tax omission is a clear hole in New Zealand’s tax framework, a better future needs balance.

Where there is a will there is a way. CGT; we should get it done now before it is too late.

tags: capital gains tax, tax, balanced taxes, yes minister
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