CGT may well be central poll issue

The upshot of the Labour Party’s go for broke game plan to bring New Zealand’s longtime political hot potato – the capital gains tax – to centre stage is that it has brought the fiercely debated tax into the realm of serious public discourse, strongly enough to become a central election issue.

Trailing light years behind National in the popularity stakes and recent polls showing support at an all time low, Labour had nothing to lose when it decided to bring back a tax that it had avoided all along when it was in power. In fact all its policies steered clear of any such possibility despite its socialistic ideology.

But that was when it was in power. It’s different now. And with the polls showing popularity that doesn’t seem to be creeping up from rock bottom, this was the best that its think tank could come up with to stay in the fray with any sort of programme that could at least generate a debate and keep Labour’s political pot simmering in the run up to the November elections.

A well thought out capital gains tax regime is something that most OECD countries and a number of developing nations’ governments have evolved into an efficient mechanism to mop up revenue. There has all along been a strong argument for implementing such a tax in New Zealand but no political party has had the gumption to introduce it while in power.

With severely limited avenues for investment in the country, housing and property have over the years emerged into the most popular investment options. Easy credit availability in the years before the global financial crisis fuelled the property market into a huge bubble here in New Zealand as elsewhere in the world. Valuations went through the roof, feeding New Zealanders’ notorious collective financial imprudence of borrowing beyond means.

It was on Labour’s watch that the property bubble grew to monstrous proportions and it knew very well then that any move to introduce a capital gains tax during that time would most certainly result in political hara-kiri. So the issue was never in the reckoning. In any case, the government had neither the imagination nor the political will to intervene in the runaway ballooning of the property bubble.

Now, with all options run out and nothing to lose, Labour has exhumed the idea of a tax that had long been buried. And it has succeeded in not only gaining attention but also capturing the imagination of a substantial number of thinking New Zealanders. It has been hugely successful in making it potentially an election issue and forced National into doing something about it. In that sense it has proved to be a masterstroke.

But its position lacks credibility because two reasons: its past stand – or the lack of it – on the issue and the complexity of implementing the tax that it has proposed. Riddled with exceptions and contradictions it would be a compliance nightmare that could only be profitable for tax advisers, accountants and lawyers.

Moreover, the real benefits to the economy will not be immediate, kicking in years later, to speak nothing of the effects it would have on the property market – especially spiraling rentals.

Having dragged a dead horse on to centre stage and flogged it enough to cause it to stir, the ruling National led government cannot help but take notice. Neither can it debunk in an outright manner the idea of a capital gains tax. It will have to take a stand and come up with its own credible proposals.

Most agree that a sensible, pragmatic, well thought out capital gains tax would benefit the country. It will be interesting to see the debate between good sense and political expediency in the run up to November.