Game Changer

If David Cunliffe gets his way, New Zealanders will farewell their long-held faith in investment property as it loses its tax-haven status to Labour's scythe.

Last week Prime Minister John Key labelled the opposition's prematurely leaked tax package "a dagger to the heart of Western democracy", and yet it's the holier-than-thou rhetoric that Cunliffe thinks is most likely to boost Labour's public standing in the months leading up to the election.

"Our very own Government has argued both sides," says Cunliffe. "They can't make up their mind if it [the tax package] is too big or too little. They've made idiots of themselves because they haven't been arguing from a principled basis."

Cunliffe frames the choice Kiwi voters face as a game pitting tax reform against privatisation. Running scared as the United States' multi-trillion dollar indebted super-economy heads into default territory, both Labour and National have put economic policy at the forefront of their campaigns, each claiming their tax packages' ability to achieve surplus by 2014-15. National's leadership is visibly squirming as the Opposition resets the election agenda, asking Kiwis whether they would prefer to hock the family silver or to fill the voids in the country's swiss-cheese tax landscape.

From what can be surmised from Labour's tax package so far, how Key believes CGT is offensive to Western democracy is unclear. The lack of a united front from his camp is a chink in National's armour, with Don Brash for ACT on July 11 saying: "I think you will find most economists feel uneasy about the fact that someone who works for wages can pay tax at 33 percent... and someone who makes a capital gain pays no tax on that. It does on the face of it seem unfair."

But New Zealand voters would be wrong to think that Labour's tax package is as fresh as its fruit and vegetables policy, because in fact CGT is nothing new. New Zealand is one of the last developed countries in the OECD yet to implement the system.

Capital Gains Tax vs. Selling State Assets

CGT is based upon the assumption that vertical equity in the taxation system serves to redistribute wealth from each according to their means, to each according to their needs. Broadly speaking, a CGT is a tax charged on all capital gains made by individuals and companies, most commonly taxing profits made on appreciable assets purchased at a lower price initially, such as property, stocks, and bonds. In New Zealand, current tax law does not treat the profits gained on those assets as income, resulting in a loophole that fosters what might be considered "legal" tax evasion. Without a CGT, New Zealand's distribution system does not work for the people most in need, explains Cunliffe.

"At the moment, of the 100 wealthiest New Zealanders, only half of them according to the Government's own Tax Working Group pay the top tax rate. The other half manage to shelter all their income in fancy trust and company structures. We are basically going to close down those loopholes."

Should Labour win this year's election, New Zealanders' tax structures would be reshaped to recognise capital gains as income, which, with the exclusion of the family home, would be taxed at a rate of 15 percent. Some analysts have noted that implementing CGT could free up funds for another round of tax cuts. Thus, Cunliffe reckons his party's line is right on the money for most New Zealanders— including students— who are struggling with their daily expenses.

"With Labour's tax package we get to keep all the assets, we get to pay debt down to zero, we get to fund jobs and growth, and we still give 98 percent of New Zealanders a net income tax cut— which is a fair one, which does the most good at the bottom including for students, as the first $5000 you earn is GST-free and the same for fresh fruit and vegetables and beer."
"Sorry, I was lying about the beer. Marijuana is not a vegetable."

Cunliffe and Labour claim that if National were to sell State-Owned Assets (SOAs) already owned by Kiwi "mum and dad" investors, the approximately $700 million dividends netted would cover New Zealand's debt repayments for just two months, and would cost the treasury a further $300-$350 million in administrative costs. After a decade, offshore owners would pocket the $6-$7 billion in profits the country made from selling them in the first place and the likelihood of ever purchasing back our trains and planes, as Labour did in 2008, is nil.

By comparison, National says its privatisation package will garner 170,000 jobs for kiwis by 2015, and aims to reduce government borrowing from $380 million to $100 million a week. Key has argued that Labour's tax package is too focused on redistributing wealth rather than on reducing government expenditure. But referring to Transport Minister Steven Joyce's desperate bid last week to quash Labour's tax package by numbers, Cunliffe says the National party has resorted to "making up stories". Cunliffe appears assured that the real issue National has with Labour's tax package is that they didn't think of it first. "The Prime Minister said it was too comprehensive; it was 'a dagger through the heart of capitalism', 'aliens will eat your pets', and his Minister of Finance said that the only problem is that we had too many loopholes."

Cunliffe confirms that Labour is targeting property — a mainstay of Kiwi investors for generations— to incite younger generations to invest in more productive markets. He believes this will hold benefits for younger Kiwis, warned for years that they will not be able to afford to buy a first home. He says they will find that house prices rise more slowly as mainstream investors look to more diverse opportunities.

"What the economists say is that the best tax system is one where people make investment decisions based on the underlying economics of the investment, not for tax reasons, so a CGT fills in a hole, [because] property is currently under-taxed and it will allow capital to flow to where it can do the most good based on the best return."

Cunliffe has further confirmed that Labour will continue to refuse to pander to farmers, who have cried foul in response to its tax package. He predicts that the income whittling behaviour of some New Zealand farmers under the current tax system will reduce under CGT, reducing the rural property bubble.

"Farms are businesses; farms are being treated in exactly the same way as every other business. That is, the family home is exempt; the farmhouse is exempt, the garden is exempt; the paddock is exempt. But the business end of the farm is treated as a business. What are the effects of this? Over time, there will be a shift of behaviour from treating farming as a capital gains exercise to treating it as an income producing business."

Cunliffe has revealed that Labour plans to expose capital hidden in trusts too, saying the Law Commission is also behind an inquiry into "antiquated" trust law which lets people hide business assets in family trust accounts. "We are basically going to close down those loopholes. We are going to move towards tax in trusts [calculated to] the underlying marginal tax rates of the main beneficiaries."

From the Leftfield – The Big Kahuna

Gareth Morgan and his son Sam, of Trade Me fame, have both been vocal supporters of Labour's CGT model. The younger Morgan has admitted the absurdity of his $700 million Trade Me sale settling practically tax-free. But according to Gareth and his co-author Susan Guthrie for the upcoming book The Big Kahuna, Labour's policy doesn't go far enough.

The Big Kahuna's push for a Comprehensive Capital Tax (CCT) model will be released in August. Guthrie told Canta a CCT would bolster the economy more efficiently than Labour's CGT by treating all assets as income— providing the funds required to reform the troubled beneficiary system.

"Our tax policy extends to all capital, including the family home. Our proposal is to tax all capital comprehensively, each and every year. The effect is to tax capital as if it produced a minimum return each year. The other aspect is to give each and every adult a cash grant each year. This is not generous by any means but is hopefully sufficient to live off for those who choose to do non-paid work and other activity. Both aspects of the policy work together to improve productivity – the tax proposal encourages capital to be used more efficiently, and the grant aspect removes disincentives for people who rely on transfers (benefits) to get some paid work if and when they can."

But Cunliffe says the Labour party won't budge on it decision to exclude the family home— worth half of the revenue forecast— from the CGT: "I don't believe it's politically possible to [include] that".

The Score?

Three months from the big day, Key the "smiling assassin" is going to need to need to arm himself with more than snide remarks if National is to shoot down Labour's tax package before the election.

Cunliffe appears smug about the feasibility of Labour's policy. Parroting Labour leader Phil Goff in recent days, he deals in hyperbole  his party will win the election. But what other prizes are up for grabs for the Finance Minister not so long ago implicated in Labour's mutiny?

"Yes, there is another job I want." Cunliffe pauses.

"Bill English's job. I want to be the Minister of Finance in the next Labour Government".