John Armstrong's opinion: Labour's capital gains tax push is political Russian roulette

Don’t hold your breath in anticipation of Grant Robertson detailing any time soon how a capital gains tax will function in practice and — more to the point — exactly which assets will end up being subject to such an impost.

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A group looking at our tax system has put two options on the table. Source: 1 NEWS

Despite being in receipt of the second and final report produced by the Sir Michael Cullen-chaired Tax Working Group, which Robertson set up in late 2017, the Finance Minister has so far refrained from saying anything about that task force’s findings and recommendations.

Don’t expect him to be more forthcoming when that report is made public later this month.

It is likely that Mr Robertson will still be immersed in what will be high stakes discussions with New Zealand First and the Greens centred on the favoured design — or designs — put on the table by the Cullen review.

Indeed, Mr Robertson has indicated that a "full response" to the Tax Working Group’s yearlong review of the country’s tax system will have to await the Cabinet’s finalising of the detail of a capital gains tax, which can then be incorporated into the required enabling legislation — that is assuming Labour is still keen on sojourning into what many would regard as politics version of the Valley of Death.

Robertson should have few problems getting the Greens to come on board.

That party has long included a capital gains tax amongst its manifesto commitments.

It is a different story with New Zealand First.

Source: 1 NEWS

Prior to the last election, Winston Peters was emphatic that a capital gains tax was off the negotiating table as far as his party was concerned. He argued that such taxes did not work; that they were unfair if they did not compensate tor capital losses as well as taxing gains; that such taxes could take up to seven years before they started to generate worthwhile levels of revenue; and that putting a hold on immigration was far more effective in reducing pressure on the local housing market.

Since then, he has gone mum, only saying his party will undertake a thorough scrutiny of the Tax Working Group’s report before commenting further.

What Mr Peters has to work out is whether he can secure more kudos from being seen to soften the legislation which Mr Robertson puts on the table instead of imposing a blanket veto.

Mr Peters would probably demand that second houses purchased prior to the implementation date for any capital gains tax would be exempt from that tax.

He might well seek exemptions for small businesses where capital has been built up by the owner to provide a retirement nest egg on the sale of the enterprise.

Mr Roberson could live with that. He knows he is going to have to contemplate compromises and concessions in order to buy the backing of New Zealand First.

That is one reason why Mr Robertson will prefer to say little until he has secured a deal with Mr Peters and the latter’s colleagues. Mr Robertson must keep his powder dry for the nitty-gritty of negotiations in the back rooms of the Beehive.

As much as Mr Peters now wishes to be seen as a "constructive" figure in the three-party governing arrangement, he could just as quickly revert to type. Trying get a fix on his willingness to be flexible and help Labour enact a policy at the top of that party’s reform wish-list is about as easy as trying to pin jelly to a wall.

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The outspoken MP also said if business leaders participate in political debate, they should expect to receive “political fire”. Source: Q+A

The bottom line, however, is that feuding over the desirability of a capital gains tax would be catastrophic for both Labour and New Zealand First — and Mr Peters well knows it.

For his part, Mr Robertson knows that income tax cuts and other sweeteners will inevitably be required to buy public acceptance of a capital gains tax.

In orders to soothe the nerves of his Labour colleagues, Mr Robertson needs to dispel the notion that flirting with a capital gains tax is the kiss of death for any politician.

To try and eradicate that long-held shibboleth, Mr Robertson has called for a "national conversation" to answer the question which the country has refused to ask — namely what makes New Zealand so different from other similar-sized economies that, unlike them, it has no need four capital gains tax regime?

The answer is that there is no difference. Once you realise that, the argument for such a tax becomes compelling.

Embarking on such a course of action remains no less daunting, however.

Ignore the opinion polls which have generally spoken in unison in showing a small majority of voters apparently backing the introduction of a capital gains tax.

The respondents in such polls tell pollsters what they think is the right or responsible thing to say.

Given all that, the obvious question is why is Labour playing the political equivalent of Russian roulette with a pistol whose every chamber is seemingly loaded with a bullet.

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The New Zealand First Leader said a capital gains tax doesn't work, and that they would oppose such measures. Source: Q+A

The answer is that Labour has long had a love-hate relationship with the concept of a capital gains tax.

Phil Goff managed to insert a detailed version of such a tax into Labour’s election manifesto during his stint as the party’s leader.

Andrew Little dumped the policy as fast as was humanly possible during his tenure in that role.

Jacinda Ardern made a hash of tax during the last election campaign. The matter was quickly cleared up by referring the matter to her party’s promised tax review to be dealt with at a later date.

"Later" has now arrived. The findings of the Tax Working Group pose ultimate test of the Prime Minister’s mantra that governing is all about "doing the right thing".

Therein lies the big dilemma for Ms Ardern and Mr Robertson.

Should they pursue their preference for a tax which might make a major contribution if not in reducing the gap between rich and poor, but which might see Labour crash and burn?

Or do they put up a tame measure which Middle New Zealand will buy, if still somewhat reluctantly?

As deeply steeped in Labour’s core values as he is, Mr Robertson is a realist.

He knows it will likely prove difficult to get even the weakest, meekest version of a capital gains tax up and running.

What matters is getting some version into the statute books. No matter the end product is riddled with inconsistencies. No matter whether it is feeble in effect. No matter that if it is easy to avoid. No matter if it likely raises little revenue.

Rectifying the flaws, defects and anomalies can wait until later.

Given Labour’s current better-than-even odds of securing a second term in power, the party may not get more favourable circumstances "to do the right thing".

That said, bringing such a change to the tax system to fruition remains pretty much mission impossible.

It will require a massive selling job on Mr Robertson’s part. It will require the Finance Minister getting out of Wellington at any and every opportunity.

It requires that he consult, consult and consult. It requires that he listen, listen and listen. And when he has finished doing that, he needs to consult and listen a bit more.

Securing even a modicum of public buy-in to any capital gains tax is something that can only be done in tiny, incremental steps.

Mr Robertson is unlikely to build a consensus for a tax on capital gains.

What he must build is an acceptance of change.

That won’t be easy. Well might he give assurances that the overwhelmingly majority of New Zealanders will not have to pay a single cent in capital gains tax.

That will cut no ice with those who fear they might be facing a very unwelcome tax bill, if not now, then in the future. Many in that segment of the population will be middle income earners. Many of those will be Labour voters. Or rather would have been, but no longer.

It is a fear which National will exploit to the hilt — and ruthlessly and shamelessly.

The prospect of a capital gains tax should be regarded as litmus test of National’s willingness to do the right thing, but National is instead doing the wrong thing. Turning a blind eye to the distortions in the tax structure makes a mockery of National’s claim to be the party best entrusted with running the economy.

That stance will not damage Simon Bridges one iota, however. He instead is likely to win plaudits for not sounding ambiguous as was so frequently the case during his first year as National’s leader.

When it comes to a capital gains tax, he has a simple message.

National would abolish it.

He also has another. simple, but arguably more powerful message. The Government’s accounts are in such good health that Labour does not need the extra revenue generated by a new tax. So why go to the bother of constructing one?

Mr Bridges will paint any capital gains as a tax on aspiration and achievement.

Mr Robertson will pitch his promotion of such a measure in terms of fairness.

The winner is likely to be the one who succeeds in framing the argument on their terms.

One thing is for sure though. Should Mr Robertson’s "national conversation" be supplanted by National’s conversation, then Mr Robertson might as well wave the white flag right here and now.