Could anyone but Luxon lose the CGT fight for National?

Politics should be about policies, not people. But it isn't.

Hello again. Since we last spoke I’ve been writing a few pieces for The Post - one on whether Chris Hipkins could learn how to talk about tax from Keir Starmer, and another from an interview with him where he revealed Labour’s polls have the left bloc just two points behind the Government.

One of the many shibboleths in NZ politics is the impossibility of diversifying our tax system.

The last true change was in those pre-MMP days of major reform when you could get away with a lot more. Roger Douglas created GST in the mid-1980s - aiming to tame inflation and give our tax system a major new income source. Four decades later it contributes a quarter of our total tax take, and its simplicity and ease-of-use is world-leading.

Indeed, our tax system is very simple across the board. This makes it very easy for individuals and companies to understand how much tax they owe, and IRD’s recent technology upgrade means no normal wage earner ever needs to bother with those shady ‘we get your tax return for you’ charlatans¹. Each $100 in tax costs IRD just 43c to collect. That’s better than the UK (51p/£100), and surprisingly worse than the federal US Government (34c/$100).

But how simple is too simple? As many have pointed out, we are unusually reliant on income taxes - either on individual income (about 52% of the total) or corporate income (18%). That means about 70% of our tax take is from the money people bring into either their company or their wallet each year. We’re not in this table from Australian Tax Office, but we’d be right near the top of the table.

The problem many people see with this - including the OECD, the CEO of ANZ, the CEO of BNZ, the IMF, Jim Bolger, Treasury, and the Labour Party at various times - is that our reliance on regular income taxes leaves us in quite a pickle demographically and economically. For one, if the demographic predictions are right and we end up with far more retirees relative to working age people, the tax system just won’t be able to keep up with the massive demands these older people will make on our health and social security systems². And for two, although not all of those CGT-proponents agrees with this in the exact same way, our taxation system unbalances the economy in such a way that we all invest in real estate too much, driving up house prices.

Yet a proper CGT has never even made it to select committee because the forces against it are very strong: the National Party, the huge bloc of New Zealanders who quite like their real estate investment, and the desire within the Labour Party to win elections. Will that ever change?

Well, I’m not sure. But if the Labour Party was dreaming up an opponent for such a fight you can imagine them sketching Christopher Luxon.

Luxon is nowhere near our richest Prime Minister. Yet he carries that wealth in a very different way to Key, who never took the Wellington accommodation allowance, put all his properties into a blind trust, and could simply talk about his wealth in a way that didn’t sound weird. And that was all before this week - when it emerged that Luxon had sold two properties for hundreds of thousands of dollars in capital gain. It appears (I’m not his tax lawyer) that one of those sales would have been caught under the Bright Line Test, with a tax bill of up to $70k³, if not for his Government changing those rules on coming to office.

To be clear, I don’t think Luxon changed the rules to benefit himself specifically, as hundreds of people in my Twitter mentions seem to. I think he changed those rules because the National Party has had a clear policy to do so since long before Luxon was in Parliament, and it would have been in that party’s manifesto whoever led it. National are in general a party that represents the status quo of our taxation system. Any leader of the party - even one that rented - would have enacted the same change. The amount of money Luxon is saving is not hugely material to a man of his means.

Yet it looks terrible. Getting really excited about abstract concepts like capital gains is not the easiest thing in the world, but it is a lot easier if you associate it with one guy you don’t like. And people simply haven’t warmed to Luxon as they’ve warmed to previous prime ministers who came to power in general elections, as the preferred PM polls show. The world would be a better place if all of politics was focused on policy issues and party positions on them, rather than the fairly insignificant personal details of our political leaders. But that’s simply not the world as it is.

Is this enough to get Labour over the hump and able to win an election while promoting a change to the tax system? Probably not by itself. It’s especially hard to know when Hipkins still hasn’t decided what to run on. The problem with running on a CGT versus a wealth tax is that the income from the CGT will be patchy (especially if you exempt the ‘family home’) - meaning it’s hard to immediately start spending it on something voters might like, like new hospitals or commensurate income taxes. The Tax Working Group thought it would raise about $8b over five years, which could be spent on a decent income tax cut worth $15 or so a week. It wouldn’t surprise me if Labour simply update those numbers to match the current circumstances. But they were only projections.

Which is one of the reasons David Parker and Grant Robertson instead were looking at a wealth tax, which would tax the richest 46,000 Kiwis annually on their assets, instead of just when those assets were sold. This kind of tax has the advantage of being a lot more regular and less patchy, while avoiding the prospect of people just holding onto their assets to sell the next time National are in Government. The principle is a bit harder for many to stomach - you’re taxing something sitting still rather than being transacted - but this is also the principle behind rates, to be fair.

Whichever path Hipkins chooses - including just ignoring this issue altogether - is fraught with massive political risk. But Luxon just gave him a helping hand.

Recommended reading/watching

• I went to see Alien: Romulus last night and it ripped. If you like claustrophobic horror with 70s style sci fi tech you will have a great time.

• I just finished Character Limit: How Elon Musk Destroyed Twitter by Ryan Mac and Kate Conger. Highly recommend if you are an addict like me and want an insight into how the world’s biggest addict ruined your favourite drug.

• I found this piece on Ukraine losing from John Ganz useful.

1. There is a whole huge lobby group in the US dedicated to stopping that country implement a system like ours, which make tax refunds and returns essentially automatic.

2. Of course, capital gains are just income in another form. Which is why some favour a straight wealth tax - more on this later in the piece.

3. It would probably be quite a bit less given he presumably paid a real estate agent and may have done work on the property, all of which could be deducted.