Just briefly, I spoke with Simplicity Chief Economist and Head of Policy Shamubeel Eaqub last night about Labour’s Capital Gains Tax policy announced yesterday. He described it as a small step in the right direction, but that eventually voters would have to look at bigger reforms because the cost of NZ Super and Health would overwhelm tax revenues from work within 25 years as the population aged.
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“It’s very, very much the beginnings of our much, much bolder conversation we need to have around our tax system and public services, both in terms of quantity and quality that we want as a country.” Shamubeel Eaqub
A lightly edited transcript of our conversation
I asked Shamubeel for his initial reaction to Labour’s proposal, which is to tax capital gains on residential and commercial property after July 1, 2027, beyond the family home, and excluding other business or financial assets such as shares or KiwiSaver. The funds are to be set aside to pay for three free doctor’s visits per resident per year.
He described it as a small step in the right direction, given Labour had estimated it would raise around $1.4 billion in its fourth year, which represented around 1% of total tax receipts.
“It’s good in that we are finally kind of talking about and hoping to implement a tax on capital income, but it is going to be very small to start with. And really it’s that wider thing of is it going to solve and move the dial? Probably not,” he said.
I asked him about the limiting of the tax to just commercial and residential assets, rather than a more comprehensive capital gains tax. He said it made sense politically.
“We know that the political support for our capital gains tax is quite partisan. And if it included funds and businesses, you would spook pretty much anybody on the right of center. So from a progressive perspective, it’s really saying: ‘we think we need to have a tax on capital. But if we went full bore, it would be unacceptable to large majority of New Zealanders.’”
He said the tax net was already fairly broad, with financial returns on KiwiSaver or shares and bonds already taxed.
“The expected tax revenue is such a small number in the scheme of things. But when we also know that when it comes to our demographic issues, we do have to tackle how we think about tax systems in the future. We’ve got to get started somewhere.”
‘Will it force investors or workers offshore?’
I asked then about criticism put forward by opponents that it would restrict investment in business or force investors offshore.
“People are not leaving Australia for New Zealand because of tax rates. They’re going to Australia because there are higher incomes. So the reality is that, yes, at the margin, taxes are a disincentive, but the alternative is if you don’t have that income, are you not doing things that would be good for businesses? What are you giving up by not paying those taxes?
“It was quite clever of the Labour Party to hypothecaste or ringfence the tax specifically for health, because health is something that we care about a lot in New Zealand. It creates at least a little bit of a connection between charging you more, but for something that you value quite a lot.”
I then asked Shamubeel how our current tax system skewed incentives for investing.
“I think we can all agree that our tax system as it stands is not sustainable.
“When you buy and sell houses, when you buy and sell buildings, you’re not paying tax on the income, the capital income that you earn. As a result, it’s privileged relative to other assets. So we put more money into it. Not all of it is bad, but I think we can quite clearly clearly see that in New Zealand we have under-invested in the productive parts of our economy, whether it’s in our businesses or in our infrastructure, or whether it’s in deepening the kind of the quality of the technology that we use in businesses.
“We’ve essentially said, look, if it’s income from work, it’s heavily taxed. But if it’s income from wealth and if it’s income from capital, that is not income at all from the taxman’s perspective, which is bizarre, right?
“Essentially what we’re saying is you should pay less tax rather than more tax because you are able to and you benefited from the wider public system as it exists. Compared to other countries, we put a lot more of a tax burden on middle and lower New Zealand than should be the case.”
“If you had a blank page and there was no politics to navigate, then of course you’d have a wealth tax or a land tax that’s broad and clean and beautiful for geeks, right? But that’s not the reality of tax. It’s a very political thing.” Shamubeel Eaqub
‘What other options are there?’
I then asked him what other options could be considered.
“If you had a blank page and there was no politics to navigate, then of course you’d have a wealth tax or a land tax that’s broad and clean and beautiful for geeks, right? But that’s not the reality of tax. It’s a very political thing. And our politics is very fragmented and very ideological and taxes are right at the core of it. So my sense is that there were actually very few options for a Labour government or a Labour Party to put forward.
“If Labour is elected in the next election, they would not be elected if they had promised a really big capital gains tax or a really big wealth tax. It simply would not have flown. And I think they could have kissed goodbye to being in power.
“If you kind of took a nerd option, there are lots of other ways that you would have done it. Gareth Morgan’s been talking about a comprehensive capital gains tax for years. On paper, it’s beautiful, but who the hell’s gonna vote for it?”
‘So how do we kick the drug after over $1 trillion of untaxed gains?’
I then asked whether it would ever be possible to tax capital gains, given New Zealand’s housing market was now worth $1.6 trillion, which was almost four times GDP and eight times the value of the stock market. For comparison sake, the US housing market is worth the same as its stock market and two times GDP. Australia’s housing market was worth four times GDP and under four times the value of its stock market.
“We’re not alone in this. Lots of countries have been addicted to the same drug. Australia is not that different to us. So in New Zealand, roughly 56% of our net wealth is in real estate. In Australia, it’s two thirds.
“They’re even more addicted than ours, and their pension system is massive. Their pension system, they have huge amounts of financial investments, although lots of people do borrow against their super to invest in housing.
“We are stuck now because there is just so much wealth, there is so much debt that’s hung off the back of it. You can’t suddenly just switch away and that’s where the political reality comes in.
“You can’t sit there as an accountant or an economist and go: ‘there is this beautiful tax system I’ve designed and we should just do it. I don’t think that would have worked. You do have to find a politically palatable option.”
“Things will shift. Within the next 25 years, all the taxes we pay on work will be taken up in health and super. That’s when those political choices will become really tense. And we will see some really big shifts taking place, both on the taxing side and on the spending side.” Shamubeel Eaqub.
Is this bomb too big to defuse?
I then asked if the capital gains locked into the housing market’s value was simply too big to tax and had become ‘too big to fail’.
He said political choices would change over time.
“So what’s possible today is not what will be possible in 10 years time. Things will shift. And the reason I think things will shift is, within the next 25 years, all the taxes we pay on work will be taken up in health and super.
“That’s when those political choices will become really tense. And we will see some really big shifts taking place, both on the taxing side and on the spending side. And you do have to make all of those different choices. It’s about trade-offs.”
“House prices relative to incomes are back to where they were pre-pandemic. So they actually haven’t fallen a hell of a lot. They’ve gone from insanely expensive to just obscenely expensive.
“We’re just running out of people in those peak house buying ages. So we’re not going to have the kind of baby boomer-led boom that we had in the last couple of decades.” Shamubeel Eaqub
Will there be capital gains to tax in future?
I then asked if the housing market may not generate much more in capital gains, given the big shifts from 1990 to 2020 of a lowering of average mortgage rates from 8% to 3% and a trebling of household debt to disposable income from about 60% to 180% could not be repeated.
“House prices relative to incomes are back to where they were pre-pandemic. So they actually haven’t fallen a hell of a lot. They’ve gone from insanely expensive to just obscenely expensive.
“We’re just running out of people in those peak house buying ages. So we’re not going to have the kind of baby boomer-led boom that we had in the last couple of decades. That’s going to be much harder to happen in the future. There is a transition that will take place and I think it’s going to be very messy. We are going to find other ways of doing things.”
Shamubeel said he was hopeful some areas could benefit from lower valuations.
“When you look at the reforms of the 1980s, some of the places that were hardest hit also were able to come out of it because their land prices fell and new opportunities, change of land use, change of people happened and that catalyzed things. Not always, but it’s possible. So I’m optimistic that it’s possible that we’ll do something different.”
“It’s very, very much the beginnings of our much, much bolder conversation we need to have around our tax system and public services, both in terms of quantity and quality that we want as a country.”
Many thanks.
Bernard
