Labour's shifting justifications for the capital gains tax

2019-03-05 05:49:06

OPINION: When the United States invaded Iraq in 2003, its president and his supporters laid out constantly shifting justifications as to why.

There was the claim Saddam was developing weapons of mass destruction, of course, but the US Congress actually laid out other justifications when it authorised military action.

These included purported links between Iraq and terror groups, the repressive nature of the regime and instances of Iraqi aggression towards the US.

We all know the results. Brutal dictatorship was replaced with brutal anarchy. The reputation of George W Bush will probably never recover.

Will Jacinda Ardern have her own Iraq when it comes to capital gains tax?

It goes without saying that the question as to whether we should have such a tax is not in the same moral universe, of course.

Nevertheless, motivated reasoning on the matter may well lead to Labour being bogged down in a political war of choice.

The party campaigned on introducing the tax in July of 2011. It was touted a game-changer that signalled the political courage of its then-leader Phil Goff.

Voters failed to be impressed, however, and Labour's position eroded to the point where it received just 27.5 per cent of the vote in that year's election.

The party stuck to its guns and continued to propose taxing capital gains under both David Shearer and David Cunliffe.

By the next election, the party's share of the vote fell to just 25.13 per cent.

This wasn't all due to capital gains tax, of course, but the game changer had clearly failed to excite voters.

In 2014, new leader Andrew Little took clear steps to distance himself from the policy, ruling out legislating for one immediately should he win office.

When he gave up the ghost in 2017, Ardern took over and signalled she was more inclined to favour a capital gains tax. Sort of.

Perhaps understanding the tax would be political poison, Ardern often avoided giving a straight answer when asked if Labour would introduce one.

Instead, she referred vaguely to a "direction of travel" as a kind of code to capital gains tax enthusiasts.

Rather than give any specific commitment, the question of tax was to be studied by a working group that would then lay out recommendations for her Government.

That process has now been completed and – surprise, surprise – the working group recommends a capital gains tax.

Between 2011 and now, the justifications for a capital gains tax have evolved and mutated.

At first, it was a silver bullet to reduce house prices. Then it was about raising more money for government programmes.

Then it was about rebalancing the economy towards investment in things like shares. Then it was about reducing inequality.

As it became clear that none of those things would be cured by a capital gains tax, the justification has morphed into an abstract sense that it just isn't fair not to have one.

In all this there has been one constant, however. Whatever the problem, capital gains tax is supposedly the answer.

The purpose of the tax, therefore, seems to be to have the tax. It has become an end unto itself.

With the working group having reported, and the expectations of tax proponents built up, Labour could be in real trouble now.

The difficulty it has is not like the other problems it has faced. Implementing a capital gains tax poses risks of a different kind and nature than, say, the failings of KiwiBuild.

That programme has also been Labour policy for the best part of a decade.

Its shortcomings and failures have been well documented.

But given how voters reacted to the policy since its announcement – ie near total indifference – its failings were hardly going to inflict material damage on the Government.

People were just never going to be upset about the failure of something they never cared about one way or the other.

That's not the case with capital gains tax.

A February poll for Newshub had a wide majority of respondents opposed to one.

This is a dangerous place for a Labour Government to be.

People forget it was Sir Michael Cullen's infamous "chewing gum" Budget, and not Don Brash's Orewa speech, that almost cost Helen Clark the 2005 election.

For the time being, Labour is paralysed by the fact that it needs NZ First to agree to betray its voters by agreeing to the tax.

On the other hand, Greens co-leader James Shaw has suggested the Government does not deserve re-election if it fails to do so.

Until that is resolved, the monolithic National opposition has a free hand to frame the debate.

There is a word for the situation Labour faces: quagmire.

Liam Hehir is a lawyer and Stuff columnist in Manawatū.

Correction: This piece has been amended to reflect that Andrew Little only ruled out introducing a capital gains tax in his first term, should he win office. Jacinda Ardern initially reversed that pledge, but then agreed to do the same.

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