Capital Gains Tax - Too Little Too Late

I've frequently been very critical of the Labour Party economic policies because, despite the bluster, it's been impossible to fit a cigarette paper between what John Key decides and what Phil Goff supports. Both are wedded to the same failed neo-liberal ideas whereby the rich gain at the expense of the poor.

But credit where credit's due. For a while now Labour has been signaling a move to the left. They broke a 25 year policy to call for GST to be removed from fresh fruit and vegetables and this week's leaking of Labour's decision to impose a capital gains tax opens the gap with National a little wider.

Neither of these policies would be promoted if Labour were still in government but whenever Labour is thrown it tries to reconnect with workers to give them some reason to support the party again. Hence a capital gains tax.

Aside from the predictable squealing from National and Act the move has been supported as commonsense in most quarters. Ardent capitalists can support it because it prevents market distortions whereby people invest in property rather than put their money into more productive wealth-creating enterprises.

At the moment property investment provides a revenue stream as well as a significant tax-free capital gain when the property sold. The result has been a speculative property bubble which has driven up house prices even further from the reach of working New Zealanders. The 2006 census shows we have 388,272 rental properties together worth well over $100 billion. This represents close to 400,000 families effectively locked out of home ownership while the property owners have had a free ride.

Almost all comparable countries have a capital gains tax and economists are regularly astonished that New Zealand hasn't embraced such a tax. However such is the pervasive ideology of the free market that Labour is only now picking up the ball. Leader Phil Goff began his parliamentary career under the spell of rogernomics but seems to be finally wakening a generation later in the train-wreck economy those policies produced.

Credit to the Green Party for showing Labour the way although one gets the distinct feeling Goff would not be going down this path were Labour not so far behind in the polls. It's a desperate move to put some air between himself and John Key.

The policy is on the right track judging by the squawks from the Auckland Property Investors Association. Their President David Whitburn says prospective investors are being scared off by Labour's 15% tax. "It's to the point that they are calling me saying they were thinking of buying but now they definitely won't." Whitburn thinks that's bad but it's good news for low and middle income New Zealanders. Less investors buying property means lower house prices over time. Sell up Whitburn.

We will have to wait to see just how comprehensive Labour's tax will be. It will need to cover all capital gains - shares and dividends as well as property - and the tax rate should be set, as it is typically in other countries, at the level of income tax paid by the individual. In other words all a person's income should be collated and taxed together instead of wage and salary earners expected to do the heavy lifting while the unearned income of the wealthy gets off tax free.

The signs here aren't good as Labour is apparently proposing a flat 15% tax. This will have to change. In fact it's easy to make the argument that unearned income should be taxed at an even higher level than tax on wages or salaries but Labour seems too timid for the task of even matching current income tax levels.

Will this improve Labour's chances at the election? I think most voters will see it as too little, too late. Working New Zealanders will not see any immediate benefit from the policy and disillusioned voters won't be able to see how voting Labour would make a material improvement in their lives. Taking GST off fresh fruit and vegetables won't do it.

For Labour to be really bold it would need to tighten up on what it's proposing on capital gains tax and include a financial transactions tax, death duties and the abolishing of GST altogether. Now that would be a set of policies worth voting for.

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