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Dunne: It’s time to bury the capital gains tax

Former minister and long-time MP Peter Dunne applauds the apparent death of the capital gains tax. He says tax purists and social envy groups who want it are naive and don't realise it won't raise much money.

The spectre of a capital gains tax on residential property sales and other substantial assets has loomed large over the New Zealand tax scene for about fifty years now.

It is often cited by tax experts and academics as one of the few remaining gaps to be plugged; invariably promoted by those least likely to be affected by it as an essential missing rung on the tax equity ladder to be repaired; and, routinely ignored by governments of all colours when it comes to making decisions about future tax policy. Even when a capital gains tax of sorts on property sales was introduced - the Property Speculation Tax introduced by Labour Finance Minister Bill Rowling in 1973 - it was repealed as soon as the government changed in 1975.

Yet that brief experience did not dampen the enthusiasm amongst tax purists and social envy groups for a comprehensive capital gains tax. In the late 1980s, a consultative committee chaired by Dr Don Brash recommended one, but that was ignored by the Labour Government of the time. Throughout the 1990s the National Government rejected calls for a capital gains tax, and the advent of MMP in 1996, meant no subsequent government until now has considered going down that path. As Finance Minister in the mid 2000s, Sir Michael Cullen declined to tread the capital gains route, and later, both Sir John Key and Sir Bill English made it clear they would not be extending the capital gains net to include the property sector, no matter what their Tax Working Group might propose.

The tax consultation process being led by Sir Michael Cullen for the present Government is a little different, but the outcome seems likely to be the same. While this time the Government has left open the possibility of a capital gains tax, it is the Tax Working Party that looks likely to rule it out, saying the issue is ultimately a political one. And, given the Government’s commitment not to introduce such a tax before it gets a specific renewed electoral mandate, the prospects look as distant as ever. Very few governments win elections promising to introduce more taxes.

All of which raises the question as to why the capital gains issue keeps getting raised, especially since the arguments in favour from both a revenue gathering and efficiency perspective are not that strong.

After all, given both the long and variable lead times involved between the purchase and sale of taxable assets, a comprehensive capital gains tax is at best likely to be a somewhat unreliable and unpredictable contributor to annual revenues. Advice I received when Minister of Revenue was that it could be over a decade from the time of introducing a broader based capital gains tax until it produced any significant revenue gain for the Government.

Also, it has been long accepted that the family home would have to be exempted from any such regime, further diminishing its likely impact. Even in the rental sector, the impact would likely be negative for tenants, with landlords boosting rents to offset any negative tax impact when those properties are sold.

Others might just decide to hold onto properties for longer, dashing the naive hopes of those currently shut of the market that a capital gains tax on others will free up homes for them as first home buyers. These factors further boost the view that while a more comprehensive capital gains tax might better square the tax circle, there is no guarantee that it will lead to a more efficient allocation and use of resources.

And the application of a capital gains tax to other substantial items would be just as fraught, as items will appreciate over time at different rates, while some will depreciate. The administration of such a tax will impose additional strains and complexities on an already struggling tax system for not much revenue gain.

These realities mean that the introduction of a comprehensive capital gains tax would be little more than a conscience salve in the direction of envy politics, rather than an effective addition to our tax armoury. The aim of efficient tax policy should always be to collect in the cleanest way possible the amount of revenue a government needs to fund its expenditure.

When tax policy moves too far into the area of engineering income redistribution or social equity complicated issues invariably arise at the margins, which the tax system, by virtue of its blanket approach, is not well designed to cope with. The constant debates about effective marginal tax rates and abatement levels for tax related income support systems, like, but by no means limited to, Working for Families tax credits, are clear testimony to that. The inherent complexities of a capital gains tax regime make it inevitable that similar debates would arise if the capital gains tax net was to be widened.

All of which means that the Government would do far better to focus its ongoing attention on ensuring that the greatest amount possible of all taxes currently levied is collected before embarking on the imposition of new or additional taxes.

For all these reasons it is time to bury the capital gains tax argument for good, and focus afresh on tax policy that works, rather than just feels good.

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