The Government's decision not to introduce a capital gains tax has been characterised by various groups as everything from a betrayal to the end of civilisation as we know it. In particular, the most vocal commentators and activists are describing it as a blow to first-home buyers and the squandering of a chance to bring "fairness" to the tax system and broaden the base of activities in which Kiwis invest.
All three claims are nonsense.
1. The CGT proposed by the Working Tax Group would not have made the tax system fairer.
While most of us accept taxation is a necessary part of a civilised society, we have different views on the extent to which it should be levied.
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Conservatives focus on the purpose to which taxes are put and believe they should be raised to a level sufficient to fund the services required to run a functioning society whereas left-wing movements focus on the ability of the taxpayer to pay and believe that the state should raise as much as it can from those who are deemed "wealthy", with the purpose to which those funds are put being very much a secondary concern.
With that in mind, the purist argument in favour a CGT - that income is income and should be taxed whether it is derived from the growth in the value of assets (savings, shares, property, artwork etc) or as the result of waged or salaried work - is reasonable.
In fact, it’s a position I would support if it was being promoted as part of a fundamental review of the basis of the tax system – but that’s not what was being proposed by Labour.
Labour's early decision to exempt the family home from any proposed capital gains tax demonstrated that their proposal was about envy and political posturing and had nothing to do with "fairness".
To reinforce this point, it’s also worth noting that just 11 percent of Kiwi taxpayers (those earning over $90,000) already pay almost 50 percent of all PAYE – and, given that many of these people are also property investors, there’s a strong argument to suggest that they’re already paying too much tax and that any move toward fairness would mean reducing their tax burden, not increasing it further through the imposition of a CGT.
This, of course, would fly in the face of the belief of those on the hard left, that the so-called wealthy should be taxed as much as is possible.
2. The proposed CGT would not have made things easier for first-home buyers.
The idea that a CGT would have improved the lot of first-home buyers is based on the assumptions that these people have been closed out of the market and that house price competition would reduce – or even drop – if they didn’t have to compete with investors.
Putting aside the cynical observation of the speed at which activists have changed their narrative to replace "foreign buyers" with "investors: as the market bogeymen, the claim demonstrates the lack of a basic understanding of the realities of the housing market.
Firstly, we now know that first-home buyers purchased more houses than any other group in every part of the country, except Auckland, in each of the years between 2013 and 2018, so the idea that they were being closed out of the market is simply wrong.
Equally important, we know that the primary barrier to first-home buyers getting into the market isn’t other buyer groups, it’s the 20 percent deposit requirement imposed by the Reserve Bank.
If activists are really concerned about helping first-home buyers, their energies would be better expended putting pressure on the Reserve Bank to reduce, or drop, the LVR deposit rules on this group, not chasing imaginary shadows in an attempt to attribute blame.
3. A CGT would not have diverted investment into so-called ‘productive’ activities.
This third idea, that a CGT would bring about a flow of investment into venture capital and business startups is also the result of flawed logic.
It presupposes that property investors are sitting on mountains of cash and that if property investment proved unattractive, they would quickly invest in other parts of the economy.
It’s a naïve viewpoint based on ignorance of how property investment actually works. Most Mum and Dad property investment is based on something called "leverage', which takes advantage of the fact that banks will lend up to 70 cents of every dollar that an investor invests in property, which means that your average Kiwi can buy a second property using the equity that they’ve built up in their home to cover the other 30 percent of that purchase.
Banks will do this because property is regarded as very secure and they would certainly not do so for any other form of investment because the risk of investing in most of these is simply too high. For this reason, a regressive CGT wouldn’t have diverted Mum and Dad investment, it would have killed it off altogether. This would have stopped thousands of kiwis from providing for themselves in retirement – and would also have had a devastating effect on the supply of rental accommodation, and the cost of renting, within a few short years.
- Ashley Church is the former CEO of the Property Institute of New Zealand and now writes on behalf of OneRoof.co.nz
