Capital Gains, Housing, and Business NZ

In their campaigning for the last election, the Green Party of Aotearoa announced that they would re-introduce a tax on Capital Gains in line with previous proposals dating back to the 2014 Labour Party’s manifesto. Admittedly putting it at a much lower rate than most previous proposals by working groups in Parliament and pro-tax-reform lobby groups, the Green Party ended up getting support from the Labour Party on the policy and it was mentioned in the Speech from the Throne announcing the new Alliance Government. In this article I will be examining the Capital Gains Tax, how it affects housing in Aotearoa, and the Business NZ stand on the tax.

Capital Gains Tax is a long contended issue, but basically there are a couple of different types of tax. Our main taxes are income taxes, taxes on what we earn; consumption taxes, taxes on what we buy such as GST; and wealth taxes, taxes on capital/assets/wealth. A Capital Gains Tax acts to extend the taxation of income from wealth. (Tax Justice “Capital Gains Tax is a good start”). Essentially, a Capital Gains Tax would do exactly what it says on the tin; put a tax on capital gains. We already have a tax that kind of have a tax on this; the brightline test requires income tax to be paid on any gains from residential property sold within five years of purchase - but this is a tiny percentage of the profits capable of being made just by buying up housing and selling it at premiums, while renting it out. A Capital Gains Tax in proper would extend the tax on wealth and ‘make companies pay their fair share’.

But is a CGT a fair thing to impose? According to the assessments from experts, including party and government working groups over the past years, the current tax system is ‘unfair because property is taxed less than income which created an incentive to buy up houses in an already inflated market’. The reasoning is that a broader tax system will boost productivity, removing the encouragement to invest in assets that don’t increase productivity and withhold those assets from people that may need them more (housing). It encourages productivity, grows the economy, and reduces the inflation of property markets (as a massive part of capital is properly assets).

Interestingly, the proposed Capital Gains Tax that has been proposed over the years does not count personal use assets such as family or primary homes, cars, boats, household and personal items, and intangible property not used for business or income earning properties (paraphernalia). This makes a distinction between personal and private property that dips its toes into wider social philosophy, though far too broad to get into in this particular article. The CGT will also apply at marginal rates to account for levels of wealth. The idea behind it is making wealthy people pay their fair share, and contribute to society in more ways than just taxes on their income. The overwhelming majority of people do not own more than a single property, and for the number of people who are struggling to buy even one home the idea that there’s a massive portion of wealth sitting there in many people’s ownership is abhorrent. The presence of mostly non-taxable income coming from capital gains serves only to grow the inequality gap. Currently 70% of all the wealth in our country is owned by just 10% of people, and CGT might help fix that.

Aotearoa isn’t even a common case in the world; most nations already tax capital gains including most in the OECD. As one article puts it, ‘tax is the contribution we all make to a decent and developed world’. We require taxes to make life better for everybody with public institutions, and to ensure that the upper class of people pay their share to prop up the lower classes which are the ones who generate most of the wealth in society anyway. Most people work ridiculously hard in this country to get their income from wages and salaries and the idea that someone can just sit on a house and let their wealth grow with little beyond administrative work is offensive, it’s angering many people. A CGT would fix this, would impact the wealthy people who can afford to pay the tax the most.

So what is the opposition to this tax? Predictably, it is exactly the people who I just discussed. People who have invested in property and are making profits (often off of housing that someone could have lived in, or someone is living in but if paying ridiculous money to be able to live in). Business NZ came out with a statement a couple days ago stating a couple things. Most notably:

"NZ businesses face a high corporate tax rate already and increasing taxation will hurt businesses and jobs across New Zealand."

Not to mince words here, but this is an outright fabrication. As pointed out by the Deputy Prime Minister on Twitter; Aotearoa’s tax rate is a disappointing 22%, 2% below the OECD average rate. In 2017 business tax was 28%, which is considerably higher. The reasoning behind such a clear bold-faced lie from a major lobby group seems strange… if you know nothing about lobby groups.

"A Capital Gains Tax would cause needless paperwork and complications in a tax system that’s already very difficult for small businesses to function in."

A more valid criticism, but still not quite true. While it is true that a CGT has the capacity to be paperwork-heavy there is nothing to say the government’s plan will be, and Tax Justice Aotearoa said in one of their statements on the issue a couple years ago ‘a well designed CGT adds relatively little administration costs and is non-distortionary’. And besides, even if it does add a little more paperwork, isn’t the prospect of lowering inflation in housing far more important than reducing said paperwork?

"Taxing shares and business assets would compound the impact on New Zealand businesses and consumers."

What I would say to this is… why is this a point? Anything will have an impact on ‘businesses and consumers’ but the question has always been whether or not that is a good thing. Based on advice from experts, tax working groups, and pro-tax reform groups; the answer is that CGT will have a positive impact.

People who have money will oppose anything that could take that money away even if it would benefit society. It's practically a fact of life. But we have an interesting choice here, more importantly the Government has an interesting choice. So we cave into the demands of the people who are very much a part of the stratification of society, or do we say 'no, no more, now you pay your share'. The simple fact is that the holders of assets and capital are not the ones who create value for society; if they all stopped working one day little would change. If the working class suddenly stopped working one day, the economy would shatter. Propping up the working class and taxing wealth and capital to discourage them investing in non-productive assets is a no brain-er from a 'public good' standpoint, and it's certainly a concession on businesses given the more radical alternatives that may come to characterise the push for income inequality without it.

One upon a time Aotearoa was built upon the public good, on not letting businesses strong-arm against positive change. How about we go back to that way of thinking, working in the public interest and not for profit.