By Alex Tarrant
The Prime Minister needs to tidy up his argument opposing a capital gains tax.
[FYI, updated to include transcript of exchange with Key in Parliament Tuesday morning (below)].
Now, he's allowed to hold his point of view, and good on him for drawing a line in the sand and standing by his word. But in terms of his rhetoric, his words one day need to follow coherently from his words the day before.
One of Key's main arguments for opposing Labour's capital gains tax is it will be a new tax that will drive a dagger through the heart of growth (his words, not mine).
Yet then he argues that New Zealand already has a capital gains tax, so we don't need to bother with what Labour is proposing.
Well what is it? Would Labour's CGT be a new tax, or will it just mean an existing form of taxation is tightened up?
The current system to tax capital gains in New Zealand (which he uses as an argument for not needing one) was called inconsistent by the IRD and Treasury in a submission to the government's Tax Working Group in 2009. Here's a little comment from that submission:
New Zealand’s current approach to taxing income from capital is inconsistent. This is resulting in the same form of income being taxed in different ways, at different rates, or not at all.
Not exactly a ringing endorsement for the status quo.
And for those asking, here's how our current capital gains tax structure works, and why perhaps it's not actually very good: It's all to do with whether income is revenue or capital in nature.
Revenue income's pretty easy to figure out, with the easiest example being wages. If you make revenue from your activity you get taxed - you worked in order to get income, so you pay tax. Yet confusion arises when assets are held on the 'capital account' (rather than the revenue account).
I'll leave the rest of the explanation to the IRD and Treasury:
A less obvious example is the taxation of share gains. Whether or not realised share gains are taxable depends on whether the seller of the share held that share on capital or revenue account.
This is often difficult to ascertain as the tax rules turn on whether the dominant purpose of acquisition was for resale. Often it is difficult to know and demonstrate with comfort what the dominant purpose of any particular share acquisition was (especially where there may be more than one purpose). The uncertainty is compounded where taxpayers buy and sell some shares for profit and buy others to hold for dividends (but later sell them).
Further, identifying whether or not a number of share sales makes a person a trader is also an area of difficulty.
Which is to say: Bob buys a rental property with the intent of selling it in 10 years for a capital gain (he's told the IRD this). He therefore gets taxed at his given personal tax rate on the gain he made due to the rising property price.
Meanwhile, Dave decided to buy the identical apartment next door at the same time, and sold it at the same time as Bob for the same price. However, Dave had bought the property primarily so he could collect income from rent (the same rent Bob got) during those ten years (he's told the IRD this). Now Dave's had to sell the property because his marriage broke up, see - he's not selling in order to get a capital gain, because that's not why he bought. Dave doesn't pay tax on the capital gain.
So how does this fit in with the Prime Minister's argument?
Well, Key is saying there is no need to change anything because we already have a capital gains tax. At the same time though, he is arguing a capital gains tax would drive a dagger through the heart of the economy.
If he's that opposed to capital gains taxes, then 1) why use an example of a capital gains to argue against a capital gains tax, and 2) if they're so bad, then why isn't he doing everything he can to get rid of the capital gains tax we do have? Surely he can't have it both ways?
And before you say anything, if Key thinks that the status quo captures everyone it should - ie all of those who bought with intention to sell for capital gain later on - then he must have rocks in his head. If the IRD and Treasury thought that was the case - ie, it's working - then I'm pretty sure they would have made that little note in their report and there would have been no need for consideration of a capital gains tax.
Whats more, if Key uses the 'we've-already-got-one-so-don't-need-to-change-but-having-one-is-bad' argument, then isn't he endorsing situations where the exact same types of income might be taxed differently? He is endorsing inconsistencies and irregularities in our tax system.
I thought he didn't like inconsistencies and irregularities in the tax system, which was one of the central reasons for commissioning the Tax Working Group.
I'm obviously wrong.
Key's reaction
I asked Key about this on Tuesday morning, on the regular 'caucus run' in Parliament. Here's the transcript:
[AT] Your argument against a capital gains tax is that it will ‘drive a dagger through the heart of growth.
“Yep.”
[AT] Yet then in the same breath you’re trumpeting giving the IRD NZ$100 million to tighten up the current capital gains tax regime.
“Yeah, and that’s because we have a capital gains tax system in New Zealand, that’s my point. When people argue that we don’t have a capital gains system it’s not true.
“What we don’t have is a comprehensive capital gains system, and for all of those people who say, ‘the IMF and everybody else advocates for a capital gains tax,’ they actually advocate for a comprehensive capital gains tax system, which doesn’t even exclude the family home.
“That means you go and do the research about what these people are actually saying, they want.”
[AT] But what Labour is saying is it’s not going to be a comprehensive capital gains tax, so it’s going to be pretty similar to what we’ve already got, would you accept?
“Well if it’s similar to what we’ve got why do we need to change?”
[Another journo]: Are you worried that the idea of a comprehensive capital gains tax, albeit one that excludes the family home, is getting a bit of traction – there’s a lot of experts who seem to be backing it...
“No I don’t agree with that actually. Look, we need to go and see what they propose on Thursday. But what I can tell you is that, if you go and have a look, it’s a very complex law, and you’ve got to make sure that you don’t have unintended consequences.
“And we’ll have a bit more to say about that on Thursday.”
[AT] But if Labour’s policy [interruption] would drive a dagger through growth [Key: “Well it will”] is not much different to what we’ve got [Key: Well that’s your proposition], why don’t we go about trying to get rid of what we’ve got?
“Let’s go back to the fundamental point. Does New Zealand need another tax? And the answer is, not under a National government. We’re going to be back in surplus in three years, we’re going to create 170,000 jobs over the next three or four year, we’re going to have debt topping out under 29% of GDP, we’re going to have a tax system which has good integrity to it.
“If Labour want to go and bastardise the New Zealand tax system, and take GST off fruit and vegetables, have a capital gains tax which might see a whole lot of people pay less tax not more and some people paying a lot, and have unintended consequences of what they might do, they’re welcome to do it.
“It’s called an election, let’s go and campaign on those things.”
[AT] But if capital gains taxes are so bad, then why don’t we get rid of the one we’ve currently got?
“Ok, this is a circular argument. Thanks very much.” [Walks off to caucus.]
(Updates with transcript of Tuesday morning exchange.)
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