Top Ten Reasons to Oppose a Capital Gains Tax

The Haps

Last week ACT had (another) big week of fixing what matters. David Seymour passed the ‘Rule of Two,’ where medicines allowed in two other countries are fast-tracked here. He also passed the Regulatory Standards Bill, a twenty-year ACT project to make politicians declare the impacts of red tape they make. The law removing Treaty Obligations from School Boards passed. To top it all off, Nicole McKee unveiled a replacement for the 1983 Arms Act that will improve public safety and treat legitimate firearm users with some respect. Even ACT’s worst enemies have to admit the party drives real change.

Top Ten Reasons to Oppose a Capital Gains Tax

If you’ve made up your mind and want to win arguments, or you’re just curious, Free Press has compiled the top ten reasons to oppose a Capital Gains Tax.

1. Taxes are like acorns, they grow, and so will a Capital Gains Tax

Every tax in history has increased its rate, been extended to more people, or both. What starts as a tiny acorn grows into a mighty oak, shading more and more of your income, spending, and assets.

Take income tax. It was introduced to New Zealand in 1891 at 5 per cent. You only paid it on income over £300, the price of a nice house at the time. In fact, it was on income so high that less than two per cent of people paid it. Now everyone pays income tax, and it’s not five per cent. The bottom rate is 10.5 and the top rate is 39. Then there’s GST. It started at 10 per cent in 1986. Then it was raised to 12.5. Now it’s 15 per cent of everything you buy. Then there’s the brightline test. ACT said it should never be introduced because Labour would grow it. They got in and extended it to 10 years. Now it’s back to two years until Labour eventually get in and extend it.

What will happen if Labour introduce a small Capital Gains Tax on things you don’t care about? If history’s anything to go by, they’ll get short of money and start adding it to things you do care about. If you vote for a tax because you think other people will pay it, it’ll be a matter of time before ‘other people’ is you.

2. It’s a gift to tax accountants

Taxing income and purchases is complicated enough, but at least it is taking a percentage of a transaction. Taxing assets is a whole ‘nother kettle of fish. Which assets? Does the family home include a beach house, what if some family members live there? What about a lifestyle block, how much farming can be done on it before it’s a business? If the tax is on gains in value then how does an asset get a value in the first place, is it the last sale, the next sale, or some sort of giant ‘valuation’ day when the value of everything is guesstimated? They all have their problems. The net result is more of New Zealanders’ time spent arguing and less time producing.

3. It’s a tall poppy policy

There are two basic views in politics, and most people hold one or the other. The zero-sum view says there’s only so much to go ‘round and the politicians’ job is to decide who gets it. The positive-sum view is that human creativity is infinite, and the politicians’ job is to create the conditions where it can flourish.

The capital gains tax is a tall poppy policy. Its underlying logic is that there’s only so much to go ‘round, so the way ahead is to take what someone else already has. If you are a positive-sum thinker, who believes in work, saving, and investment, you’ll be dragged down by this tax.

A capital gains tax is the opposite of what we tell our children. We tell them to listen to their teacher, do their homework, and get good grades. We tell them that will turn into qualifications that turn into jobs that turn into careers. Then we tell them to save some of their earnings from that career, and invest it carefully. If you do all of that, we say, then life will turn out well in this country. It’s part of a deal. A capital gains tax says, don’t do any of that: Labour will take money off someone who did and give it to you.

4. It’s double taxation

The value of an asset is equal to the future income it will produce. A building produces monthly rent, a company produces dividends, a cow produces milk. That income will be taxed, so the price of an asset is really the future income minus the future tax on that income. A capital gains tax means your asset is devalued twice by future tax. First you lose value to future tax, then they take a chunk of the asset value at the time of sale. It’s one thing to pay your share, it’s another thing to pay twice on the same thing.

5. It won’t affect house prices or redirect investment

“But taxing houses will put more investment back into the right things, like business.” That’s the theory but it hasn’t worked anywhere else. Los Angeles, London, Vancouver and Sydney have all had housing at 10x income despite a capital gains tax. But, U.S. cities in places like Texas and Georgia have the same tax laws as California but never get property bubbles.

House prices are driven by supply shortages, if there’s a shortage people will speculate, and the price will go up. Having a capital gains tax just makes the Government a silent partner in the speculation, it doesn’t solve the problem. If you want affordable houses you don’t need more taxes, you need more houses.

6. New Zealand doesn’t have a revenue problem

Tax in New Zealand is 34 per cent of GDP. That compares with the average OECD country at 33.9. Despite not having a capital gains tax, the New Zealand Government collects above average revenue, just. Except the OECD is not the most relevant comparison for New Zealand. Most OECD countries are in Europe, and we’re not. New Zealand’s top three trading partners are in the Pacific (the E.U. is fourth and Japan is fifth). We are a Pacific nation with most of our trade, investment, and migration in the Asia-Pacific region. On the Pacific rim, we’re the second highest taxed country already. Australians pay only 29 per cent of GDP in tax, and we wonder why people are crossing the ditch. More Government revenue is not what we’re missing.

7. Believe New Zealand is Exceptional

It’s true, most other countries have a capital gains tax. It’s also true that ‘most countries’ have done lots of silly things at one time or other. Other countries doing something is not always a reason we should. Pioneering is in our DNA, and New Zealand at its best is not as a follower but as a trailblazer.

8. A Capital Gains Tax is not Inevitable

Occasionally even the righteous stray from the path. People who oppose a Capital Gains Tax say things like ‘maybe we should just support a Capital Gains Tax and hope a right-wing party introduces it so Labour don’t get to screw it up.” There’s two reasons not to support this woolly thinking.

One is that Labour will still get in and screw it up eventually. A party on the right introducing it would really just be laying the groundwork for them.

The more important reason is that there’s no reason New Zealand ever needs to have a Capital Gains Tax. People say the country can’t resist it forever, but that’s exactly what we’ve done for generations and there’s no reason we can’t continue.

9. It will affect you in ways you least expect

The economy is an intricate and complicated beast. Labour say their capital gains tax won’t be on your KiwiSaver, but we’re all connected now. A tax on property means any company paying to occupy commercial property will have capital gains tax built into their lease.

10. You can’t trust Labour on this, because it won’t just be Labour

The Greens believe Labour’s Capital Gains Tax is a sellout. They want a true socialist economy, where it’s a privilege to own anything and they decide how much. If Labour were to get in, it would almost certainly be with Chloë, Marama and their merry band who seem to dislike modern New Zealand. They would expect any new Labour tax to give them a ‘win,’ and that would be the first step in the acorn’s growth.  You can’t trust Labour, because the final version will be much worse than the policy they promote.