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July 25, 2011 | by  | in Opinion | [ssba]

Politics With Paul – Capital Gains

Labour’s capital gains tax (CGT) has been at the forefront of political discussion for a few weeks now, despite only officially being announced within the last ten days.

It is important because it is the first sign that the Labour Party might be gearing up to play an effective role in contesting November’s election, as well as tabling a long-overdue policy debate.

Of course, last week’s TVNZ Colmar Brunton poll that showed support for Labour had dropped to a ten-year low at just 27 per cent doesn’t appear to reflect a positive response for the proposed CGT. But, as Goff correctly pointed out, the poll shouldn’t be taken as a judgment on the CGT: “It’s too early on in the piece.”

To be sure, the polling data—or some sections of it—could actually give Labour some confidence in their new policy. The poll registered 43 per cent in favour of a CGT, with 49 per cent against. Admittedly this isn’t anything near the support needed, but it is certainly an adequate showing for a policy that remains to be convincingly sold to voters.

Furthermore, polling that pits the CGT against asset sales sees support increase dramatically, and it is this dichotomous debate on which this year’s election will no doubt be fought. Which is the lesser of two evils? Or, put another way, which party’s policy do the voters dislike less?

New Zealand is an anomaly in that we don’t already have a CGT. Economists from the OECD, the IMF and from Treasury have been calling on successive NZ administrations to introduce such a tax, and many academics, analysts and commentators are welcoming the debate.

The key argument for a CGT is that without it, there is an incentive for investors to funnel their money towards speculative investments—primarily housing—which is unproductive for the economy. A CGT, it is argued, would direct this investment toward export-oriented industries, which would actually benefit the country as a whole.

Furthermore, in the short-term, Labour have illustr-ated that their proposed 15 per cent CGT would allow for the introduction of a tax-free first $5000 of earnings, the removal of GST on fresh fruit and vegetables (which is becoming more relevant with current inflationary pressures), and a significant increase in research and development spending. And Labour’s good news doesn’t appear to end there.

In making the policy as palatable as possible, the tax has been set at an indisputably low rate—lower than the income tax for anyone earning over $14,000—with numerous exceptions ranging from the family home, to many of those Cantabrians affected by the Christchurch earthquakes.
A CGT does have significant credibility, and despite being a tax, if Labour can sell it to the electorate, while continuing to set it against National’s plan for asset sales, we could be in for a closer result in November’s election than has long been anticipated.

The technocratic element of the proposed CGT will be a barrier Labour needs to contend with in convincing the electorate. Scoop’s Gordon Campbell has set out clearly in the following (lengthy) argument how it should be sold, and it is worth quoting in full:

Do you continue to vote for a programme that (a) consists of income tax cuts that disproportionately benefit the rich (b) exempts their speculative activities from tax almost entirely, while taxing your wages (c) cuts back social services and (d) sells high earning state energy companies to make up the shortfall…? Or do you keep the assets (and reap the dividends and strategic planning benefits involved) and treat the income earned from speculation and capital gain in the same way that you treat the income earned from wages? Who’s the freeloader here, and who is intent on defending the freeloader?

Of course it’s going to be a push to appeal to the rational side of a voting population who have an emotional attachment to housing, but if Labour can do anything to take the focus of the election away from a Key vs. Goff question of personality, this is the ticket. *


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