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Dunne Speaks: Tax Working Group no more than Cullens stooges

So, the details of Labour’s long-awaited capital gains tax have been revealed, and now the speculation begins as to how the government will go about implementing Sir Michael Cullen’s long-cherished dream. One thing that is near certain is that should Labour choose to proceed (and why should they not – they have been promising this since 2011, despite its contributing to their massive election defeats in 2011 and 2014, and they have no other tax policy to speak of) it will not implement the Cullen proposal in its entirety (governments never do). And even if they do proceed, assuming that in this era of feel good politics they do not succumb to a reality check in the meantime, because they know better than the majority of New Zealanders opposed to a new capital gains tax, it is just as certain that the tax will be amended early and often as the myriad loopholes associated with it become more and more obvious. The history of major tax change is always one of constant tinkering and amendment to try to make it more workable.

It is no bad thing to review tax policy and the taxation system from time to time, to ensure it remains effective in its primary task of collecting the revenue the government needs to do its business, as efficiently and cleanly as possible. However, politicians invariably run into trouble when they attempt to use the tax system for wealth redistribution or social policy purposes, because those often run counter to the smooth and efficient collection of taxation. They inevitably create loopholes for those who are the target of such policies to exploit, leading to further measures to close the loopholes, in some sort of never-ending game. As a consequence, the tax system becomes more complex to understand and complicated to administer, making it more and more inefficient, and fuelling calls for its simplification.

The capital gains tax, no matter how it is designed and monitored, will exemplify all these issues, and be a boon for few but the tax accountancy and advisory businesses. It is, for example, difficult to see how taxing the capital gain on the sale of second property will make it any easier for those currently unable to enter the residential housing market to do so, especially since their problem is raising the initial deposit. It is far more likely, that such properties will be retained within families through gifting or other devices, and an explosion of mechanisms to enable this to occur can be expected.

The best way to ensure fairness and equity in the tax system is by keeping it as simple as possible so that it is easy for taxpayers to comply with, and just as easy to enforce, without the need for complex rules, trying to second-guess every tax minimisation possibility. A massive plain-English rewrite of the tax law in the mid 2000s still left us with more than 2,000 pages of tax law, and the capital gains tax proposal can only be expected to add significantly to that.

A curious feature of the Cullen proposal is that it is supposed to be tax neutral. The revenue a capital gains tax may potentially raise over time is purportedly to be re-distributed back to those on the lowest marginal tax rate. That means all taxpayers, including those paying the capital gains tax in the first place, as well as the least well-off, will end-up receiving the same personal tax cut! It is hard to see the logic of how that contributes to the redistribution of wealth the Prime Minister talks about. Her airy dismissal of criticism, saying it is really all about some undefined sense of fairness, is shallow and no answer at all.

The blunt reality is that all the mealy-mouthed talk we have heard so far about the capital gains tax is a giant diversion tactic. This is not about fairness, rebalancing the tax system, or any other vacuous inanity used to describe what is going on. This is about Labour doing what it always intended and using the Tax Working Group as its cover.

If Labour had been truly serious about fundamental reform of the tax system, it would have sought to answer much more basic question first – what is a reasonable level of expenditure for a New Zealand government, given its various social and other commitments, and what is the best way of funding from a tax perspective? That way, an expanded and broadened working group would have been enabled to make a meaningful contribution to the future shaping of social and economic policy, rather than just be used as stooges for a predetermined policy outcome, the way the majority of the Tax Working Group have been.


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