Taxes and Votes

9 JUL 2014

Jamie Whyte

On TV1’s Q&A programme, David Cunliffe boasted that his proposed new capital gains tax would collect an extra $5 billion a year. That is the biggest tax hike in the history of New Zealand. Which is saying something.

It is a dreadful boast. Taxes are always paid by people, whatever the taxes are levied on. Income taxes, corporate taxes, property taxes, GST: they are all the same in this respect. They are all paid by people.

Nor are the people who bear the cost necessarily the people who write the cheques to the government. For example, if a capital gains tax means that landlords get a lower return on the capital appreciation of their properties, it will increase the rents they charge their tenants. Or landlords may sell their properties to owner-occupants. The supply of rental properties will then fall and, again, tenants will end up paying more.

Where the cost of a capital gains tax will fall is a complex matter and extraordinarily difficult to predict. All Cunliffe knows is that the $5 billion will somehow be extracted from the people of New Zealand so that it can be spent in ways that he figures will buy him the most votes.

At least, that is what Cunliffe thinks he knows. In fact, he has almost certainly over-estimated the amount he will be able to squeeze out of tenants, consumers and entrepreneurs because taxes can be avoided.

When it comes to income tax, people can divert their activities from highly taxed activities, such as working in productive jobs, to low taxed activities, such as playing golf. When it comes to a capital gains tax, they can divert their investments from rental properties to bigger homes for themselves (which will not incur capital gains tax at sale). They can invest overseas rather than in New Zealand. They can delay selling assets to avoid realising a gain and paying the tax. And they can spend money on accountants and tax lawyers to devise all sorts of other ingenious schemes

Such avoidance activities will reduce the loot Cunliffe can get his hands on. That’s good. But they will also reduce the growth of the New Zealand economy. Resources will not flow to their most valuable uses. They will instead flow to the uses that are farthest from Cunliffe’s grasp.

A capital gains tax is a very bad idea.

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