Don’t worry, business owners: Jacinda has your back

Jacinda has clearly had a serious wake-up call with the public reaction to the TWG’s report. It is as if, after the voters rejected the idea of Capital Gains Tax (CGT) in 2011, 2014 and even during her own election campaign in 2017, she thought that a bit of fairy dust would change everything. Now she knows that CGT is as politically toxic as ever and she is reacting as if she has just taken a cold bath. quote.

Prime Minister Jacinda Ardern says small business owners and farmers will be at the top of her mind when it comes to making final decision on a capital gains tax in the next two months.

“Small businesses and farming are crucial to New Zealand’s economy and I want to be clear that the effects on them will be top of my mind when assessing options,” she said at her post-Cabinet press conference yesterday.

“I want them to know that I hear them.” end quote.

If that were true, she would have dropped the idea when it was rejected by voters at the last election, instead of opting to farm it out to a working group who were told what answers to give. That is not listening to voters. That is refusing to accept that your ideology is not popular with anyone other than your own elite group. quote.

Ardern also cautioned against turning the debate into a generational one.

“I do think we gain nothing by pitting this as a generational issue.” end quote.

By taxing the proceeds of business sales, inherited property, shares and Kiwisaver, the TWG has made sure that it is not a generational issue. Young people are being taxed out of existence as well. quote.

Ardern said she was not going to give a definitive view on the recommendations while she was trying to get consensus among three parties, Labour, New Zealand First and the Greens.

But she used most of her post cabinet press conference in defensive mode, laying the groundwork for what looks likely to be a diluted capital gains tax.

end quote

This tells you all you need to know. The government has said repeatedly that they have not made a decision on the TWG’s report yet… but she spent yesterday defending the introduction of CGT. If that does not make CGT a foregone conclusion, I do not know what does. quote.

“I grew up in Morrinsville. I grew up in a rural community. I certainly hear and know some of the discussion that is being had in that quarter,” she said. end quote.

You have no idea what those discussions are Cindy, because you have never worked like these people do. So far, your entire working life has been spent at the trough, where the living is easy, and the money rolls into the bank account no matter what. quote.

She said the recommendations of the Tax Working Group amounted to 0.4 per cent of the Government’s annual tax income in Year One and four per cent in Year 10 – and anything gained through a capital gains tax would be returned through a tax switch, Ardern said. end quote.

This type of tax policy invariably gets governments into trouble. Any numbers bandied about by the TWG regarding a likely tax take from CGT are pie in the sky. Nobody knows who will do what when it comes to selling assets. Most likely, the majority of asset owners will restructure their affairs before the tax comes in; meaning that asset sales will fall dramatically over the following few years. If the government promises tax cuts on the back of a tax take that never eventuates, they have only one option, and that is to INCREASE taxes at a later date. quote.

“Past generations have operated under the system that was operating at the time. They’ve made investment decisions based on that.”

That was why it was fair the proposed CGT not be retrospective, because people had acted in good faith in their investment decisions. end quote.

That is not the reason, and anyone with half a brain knows it. Applying tax retrospectively is an absolute no-no. It is simply never done, because it would put people into hardship. One could also argue that the only truly fair way to apply a CGT is to make it applicable only to assets actually purchased after the date the tax is implemented. As Jacinda rightly says, people made their investment decisions based on the the tax rules at the time of purchase. Applying new rules now, even if it means that part of the gain is exempt, is also applying a tax retrospectively.

However, Jacinda has sent a strong signal that farmers and businesses will be exempt from the tax in some way, which means only housing, equities and retirement savings such as Kiwisaver funds will be taxed. That $8 billion over 5 years is starting to look very shaky. Maybe she does need some more fairy dust after all.