Capital gains tax: Labour's long road to nowhere

2019-04-17 21:52:22

ANALYSIS: One July day eight long years ago, then-leader of the opposition Phil Goff presented the country with a deal.

Tax capital gains at 15 per cent, add a new top tax threshold, and cut income tax for those at the bottom, allowing the country to take the GST off fruit and vegetables without selling off its public assets.

"These changes won't be easy and some people won't like them," Goff said.

This was quite the understatement. Labour went on to lose the next two elections while holding tight to the policy, then almost lose another when it looked to waver on it.

On Wednesday, Prime Minister Jacinda Ardern put an end to that, promising not only that this Government would not implement a capital gains tax, but that any party she led would never implement or campaign on one.

The road to this remarkable captain's call began during the heat of the 2017 campaign, when Labour looked to be losing the ground Ardern had just won thanks to an onslaught of attack ads on tax. Labour were not campaigning on a CGT, but instead on implementing the recommendations of a "tax working group". As the attacks mounted, Ardern blunted them by promising that any changes would be legislated into law quickly, but wouldn't actually come about until after the 2020 election - meaning Labour would go into a fourth consecutive election defending the law.

This made sense at the time, but presented an immediate problem for the coalition partner they would likely need to govern, NZ First. NZ First, who had long opposed a CGT, had a history of going into every election with no promises about which side they might govern with. It would be extremely awkward for them to pass a law they clearly disagreed with and then go into an election saying they might side with National, who would be promising to immediately abandon it.

Tellingly, the CGT and the tax working group were not mentioned once in the coalition agreement between Labour and NZ First. The problem was again punted down the road until after the working group delivered its report in February of this year.

Conversations with several people close to the negotiations say that from the outset it was clear NZ First had little interest in the full-bore CGT suggested by Sir Michael Cullen. The party had researched its base and knew they were exactly the kind of people who would hate a CGT: Small-to-medium sized business owners and older people likely to be asset-rich and income-poor. A CGT would also interfere with the new vein of support the party was after - farmers.

It does not appear that any of the variations offered in the report, such as applying the CGT to rental properties only, were ever seriously considered by NZ First either, although Labour MPs seemed to have held out hope for them. NZ First's caucus were pretty clear early on in the piece that things weren't moving - which probably explains why you can't find a single video of any of them defending the CGT in the House.

NZ First MP Shane Jones, who knew the pain of CGT all too well from his time as a Labour MP, notably pointed to the minority dissenting report of the tax working group in an interview with RNZ in February, saying that Cullen's recommendations had not been accepted by the "cracker-jack of New Zealand tax Robin Oliver". It's understood NZ First paid of a lot of heed to the views of Oliver, a former IRD deputy commissioner.

Meanwhile on the other side of the coalition, Green Party co-leader James Shaw had planted a big stake in the ground just before the working group returned its report, telling Parliament his Government wouldn't deserve to be re-elected if it did not implement a CGT.

While their distaste for the tax was palpable and obvious to Labour MPs, NZ First MPs didn't revile from hearing what Kiwis had to say. But if you followed the headlines, Kiwis mostly seemed appalled with the plan - although a TVNZ poll actually found that a CGT paired with an income tax cut actually had slim majority support. Still, NZ First isn't in the business of winning majority support of the country, and subsequent polls showed NZ First voters themselves were clearly against it.

Late last week with the immediate aftermath of Christchurch dealt with, the decision was finally nailed down and the final Cabinet paper circulated. Ardern rung Shaw late last week to break the news.

Needless to say, the Greens were furious - especially once the decision was made public, and NZ First rolled out an email to members and branded social media posts that had clearly been prepared long in advance.

It was in these last few weeks that Ardern made what would be a much more consequential decision all by herself - that a party led by her would never again campaign on or implement a CGT. She might support it herself but had clearly decided it was never going to be worth the pain.

This decision was circulated to her Labour caucus on a Wednesday morning conference call. For the first time this decade, Labour would go into an election not having to defend a CGT.

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