A Big Victory
There is much to celebrate in the capital gains tax’s demise. As usual, success has many fathers, with almost everyone except Labour claiming the credit. ACT is proud to have played an honourable role. Our campaign signed up thousands of people and hundreds of thousands saw ACT’s anti-GCT campaign on social media.
The real victory is for New Zealand as an achieving society. As a country we’ve now rejected four serious attempts to introduce a CGT in fifty years. Poor old ‘we won, you lost’ Michael Cullen has a lengthy whine in the Herald about how ‘New Zealand remains almost the only rich democracy without a broad-based CGT.’ We agree with him New Zealand is exceptional, and what a mighty fine thing that is. This week Free Press borrows from Melinda Jacombs’ very elegant history of capital gains tax proposals to tell the story of how we’ve remained CGT Free.
The Original Income Tax
The original 1891 income tax was five per cent and only 2.5 per cent of New Zealanders were expected to pay it (a good example why you should never introduce a new tax). At the time, it was not intended to tax capital, following English common law that differentiated the ‘res’ of a trust, or the capital, from the interest that beneficiaries were allowed to take as income. However, the law was vaguely written and the Income Tax Act 1900 was needed to clarify that capital was not to be taxed.
The Ross Report
By 1967, many other countries had introduced capital gains taxes, and the ‘Ross Report’ of that year was the first to recommend New Zealand follow suit with a comprehensive capital gains tax. Thankfully, for these purposes, National was in power so no policy changed. Norman Kirk’s Government was less lethargic but stopped short of actually introducing a CGT. Instead it foreshadowed the ‘bright line’ test with a 90 per cent tax on gains from properties flipped within six months.
As Muldoon attempted to hold together a muddle of a taxation system and his own grasp on power, he introduced a tax on properties that had been used to offset income tax losses (income taxes were 66 per cent and a staggering number of doctors and lawyers owned orchards at the time). In the worst of Muldoon’s traditions, it was retrospective, clumsy, ad hoc, and barely came into effect as power was finally wrenched from him in July 1984.
The Brash Report
The next major tax review, the Brash (yes, our Don’s) Report recommended a capital gains tax and was championed by none other than Sir Roger Douglas as part of a comprehensive CGT in the late 80s. Sir Roger has more recently lambasted the GGT as a ‘joke.’ His own proposal was part of sweeping tax proposals including a flat income tax that was a casualty of David Lange’s loss of nerve towards the end of the Fourth Labour Government. The net result, though, was CGT-free New Zealand.
The McLeod Report
The next tax report to recommend a CGT was Rob McLeod’s report in 2001. This was soundly rejected by none other than Finance Minister Michael Cullen with his usual choice phrases. ACT published a list of Cullen’s statements against the CGT as Finance Minister as part of its anti-CGT campaign.
The Cullen Report
The Cullen Report is the latest, and likely the last for a long time, attempt at introducing a capital gains tax. In a bizarre role-reversal, Cullen became the only advocate for the tax (in his Herald article he now complains that nobody helped him) while the Prime Minister and Finance Minister hung him out to dry. Thus, New Zealand rejected a CGT for the fourth time in half a century while nearly every other developed country has gone down the path.
New Zealand Exceptionalism
Politicians of all stripes have been on both sides of the capital gains tax argument, but the people have never gone for it. That’s why Winston Peters’ role in recent events are overegged. If anything, he deserves the blame for subjecting us to 483 days of uncertainty through his choice of going into Government with two parties who have campaigned on a CGT for three elections in a row.
It’s Who We Are
The New Zealand exception is this: all of us, or our ancestors, have literally gone further than any other people on earth for a better tomorrow. As ACT has argued for the past year, we are taxed on every dollar of income from our investments, so a CGT is double taxation and amounts to punishment of aspiration. We tell our children to save something today, invest for a better tomorrow, but a CGT sends the opposite message by double taxing savings and investment. Lots of people claim the credit for defeating the CGT, but it’s really the New Zealand spirit that deserves praise.
But Who’s Our Prime Minister?
Many commentators say the Prime Minister has suffered a loss on a policy she truly believes in, but they are being too kind. Our Prime Minister doesn’t believe in any policy and never tried to sell this one. The most damning critiques are those contrasting her with John Key’s selling minority stakes in competing state-owned electricity generators. That’s the standard for bold leadership now. In truth, we have the world’s best retail politician who doesn’t know the difference between GDP and Government accounts and can’t give a brief precis of what’s in the Treaty of Waitangi.
As with gun laws, the PM is following an increasingly familiar cycle: public adulation leads to a captain’s call followed by a painful and lengthy backdown. We got the CGT debate because a position she took after winning the Labour leadership. The recent gun legislation happened while she was being feted by the global media, and poor old Police Minister Stuart Nash now has to make it work. We wish him luck.