Hooton: CGT is DoA

Photoshopped image credit: Pixy

Matthew Hooton seems to think that CGT will never be implemented because Winston will not support it. I am not sure I agree with Hooton on this; I think we will soon see how a bit of horse trading will mean that all the parties to the CoL will support it and CGT will be a reality for New Zealand for ever. quote.

The probability of Michael Cullen’s capital gains tax (CGT) ever being implemented is close to zero.

Labour’s plan was that Cullen’s Tax Working Group (TWG) would unanimously recommend a modest new tax, Parliament would legislate for it to come into force in 2021 along with compensating tax cuts, and the 2020 election would be a referendum on a done deal, proposed not by politicians but by so-called experts.

It hasn’t worked out this way. Cullen has recommended the world’s most severe CGT, with a rate of 33 per cent for those earning over $70,000 a year in their ordinary job.

Not unrelatedly, a quarter of the TWG rejected the proposal. The dissenters were perhaps New Zealand’s most respected tax-policy guru Robin Oliver, well-regarded tax lawyer Joanne Hodge and Business NZ head Kirk Hope.

end quote.

It is very important to note that a former deputy commissioner of IRD does not agree with CGT. Business New Zealand does not like it either. quote.

The upshot is that when Jacinda Ardern and Grant Robertson make decisions in April, they cannot claim to be reflecting the unanimous advice of so-called experts. They will have to choose one side over the other.

This may be academic, because Ardern and Robertson will not get Cullen’s CGT through Parliament this side of the election, or ever.

With his party well below MMP’s 5 per cent threshold, Winston Peters has no intention of seeing his quarter-century project fail, let alone by backing a tax he has always opposed. NZ First will not vote for the proposal.

end quote.

I am not so sure about this. Nobody thought Winston, who has been anti immigration for decades, would ever sign the UN Migration Compact either, but he did. I struggle to believe that Labour would go through the very expensive and public exercise of having the TWG make these recommendations (which Labour has already admitted it is going to adopt) only to have the whole thing fall over at the hands of one of its coalition partners. There will be a plan in place to avoid that. It is only a matter of time before we find out what that plan is. quote.

The long-standing argument for a CGT is to rebalance investment away from unproductive residential property towards productive businesses and the capital markets. Cullen’s proposal does the opposite.

The one major asset class to be exempt from the new tax will be the two-thirds of residential properties that are owner-occupied. As the TWG itself noted, this risks a “mansion effect”, with homeowners investing in their CGT-free homes, rather than in their businesses or the capital markets, to escape the new tax. end quote.

Yep. Sell your rental property and buy a magnificent family home. A first time buyer will benefit from the sale of the rental, which is a good thing, but those who cannot afford to buy will be badly affected by this policy. quote.

Other exempt assets are private art collections, jewellery and family boats, none of which seem especially productive compared with shares, investment properties, business assets, intellectual property, farms and other productive land, all of which would be included. end quote.

Why is art excluded? People can make a fortune when they sell paintings. Is it because collecting art is a favoured pastime of many socialists? Art prices will now go through the roof. quote.

KiwiSaver is also caught, although the TWG has recommended complex measures to try to counter such an obvious new disincentive to save. end quote.

I am staggered that Kiwisaver funds will be affected, particularly as Cullen was the architect of the original scheme. The annual adjustments on Kiwisaver funds will be small, but make no mistake, they will eat away at your retirement savings over time. quote.

Cullen claims his tax will bring in $8 billion in its first five years but eventually over $3b annually. To be much more than numbers plucked out of the air, such forecasts require Treasury officials to have insight into how the value of non-owner-occupied residential property, privately-owned businesses, the NZX, and KiwiSaver and other managed funds will track in the decade ahead. end quote.

Such numbers are extremely unlikely, and this is the dangerous part. Markets will immediately adjust to the tax, as property and share prices are depressed and the expected revenue will not be collected, causing a shortfall in tax revenue that will then be corrected by … you guessed it – tax increases. quote.

Coalition realities and the CGT’s political unsaleability give Ardern and Robertson an easy way out. If they proceed, Peters has his issue on which to differentiate or even split from Labour.

Off the back of the CGT, he can get above 5 per cent, again secure the balance of power, then put a stop to the CGT in coalition with either Labour or National.

Either way, Cullen’s scheme is best judged dead on arrival.

A Newspaper. end quote.

I’m not so sure. If Labour gives him something he wants, Peters may well cave in to this. Time will tell.