3 days ago
A Poser For Labour Party: Tax Wealth Or Tax Capital Gains
Veteran political journalist Vernon Small's latest regular paywalled column in Stuff's Sunday Star Times (3 August) has brought to life a subject that by its very nature can put many people to sleep – tax wealth or tax capital gains: A choice Labour may come to regret. Small was previously an advisor to the former Labour government.
Both taxes seek to address tax avoidance. Avoidance involves exploiting or dodging (if there is a difference) the taxation system in order to reduce the amount of tax one might otherwise have to pay.
Tax avoidance can be ethically grey This is in contrast to tax evasion which involves concealing income or other relevant information. The latter is illegal and punishable.
Wealth taxes involve annually taxing valuable assets such as land, shares, art works, or other valuable collectables.
Some prominent economists, such as France's Thomas Piketty, argue that wealth taxes are both necessary and practicable.
Drawing upon empirical research Piketty has a particular focus on inherited wealth (think Donald Trump for example). Interestingly Labour leader Chris Hipkins cites Piketty among his reading material.
Capital gains taxes (CGT) also tax wealth. However, they tax the gain in value of an asset. Consequently they apply when the asset is sold. CGT is therefore usually paid only once per asset gain unlike an annual wealth tax.
Shifting the dial on tax avoidance
Former Labour MP and cabinet minister David Parker has for many years been a strong advocate of achieving taxation fairness by addressing tax avoidance.
In his recent valedictory speech to Parliament he described his advocacy as 'shifting the dial' over this issue as his most significant achievement.
On 26 April 2023, as Minister of Revenue, Parker gave a major speech advocating a wealth tax: David Parker's wealth tax.
His proposed wealth tax, supported by Finance Minister Grant Robertson, was not as broad as discussed above. It was based on research undertaken by Inland Revenue that provided 'hard data confirming fundamental unfairness in our tax system.'
The study revealed that 311 people had collective wealth of $85 billion. Further, the effective tax rate of middle-income New Zealanders was at least double that of the wealthiest.
Subsequently then Labour Prime Minister Chris Hipkins pulled the plug on the Parker-Robertson initiative; a decision which shocked many and helped contribute to Labour's heavy defeat in the general election later that year.
Insightful column
Vernon Small's above-mentioned insightful column needs to be read in the above context. He reports that the Labour Party's Policy Council has narrowly endorsed a CGT as the centre piece of its tax reform for next year's election.
This reportedly is also Hipkins' preferred position. However, this is not the end of Labour's internal decision-making process.
Taxing wealth preferred to taxing capital works (Vernon Small)
Small described this choice as one that 'it may come to regret.' Small's argument for this conclusion is as follows:
CGT would deliver much less revenue initially and takes a long time to build revenue, if applied only to realised gains.
CGT requires a 'difficult sales job' as National and its rightwing allies '…whip up a smorgasbord of concerns over the devilish details with a side salad of misinformation.'
By comparison, a wealth tax targeted at the very wealthiest '…should be an easier sell.'
The claim, which apparently influenced Hipkins' position, that a wealth tax would lead to fear of capital flight is 'over-wrought' and debunked by Treasury
There is political advantage of a wealth tax also being the preferred option of Labour's potential coalition allies, the Greens and Te Pāti Māori.
It would be easier for a future rightwing government to reverse a CGT because it is slow to accumulate.
Widening the thinking beyond either/or
It is hard to argue with Vernon Small's logic; it certainly resonates with me. However, while not critical of his column, the debate should be widened including not constraining it to either/or options.
The starting point should be recognising the need to address both the unfairness of tax rate inequity favouring the wealthy at the expense of the rest and untaxed income derived in various ways from speculation.
It should also differentiate between getting early 'runs on the board' (I'm a cricket addict, just saying) and longer term measures and longer term benefits.
Logically this favours a wealth tax for the reasons discussed. Beginning with something like the Parker-Robertson proposal would produce quicker tangible and identifiable fiscal returns.
This would be more likely to be sufficiently bedded in to make it more difficult for a subsequent rightwing government to overturn.
While this implementation is underway, work should be undertaken on broadening the range of wealth taxation taking the lead from economists such at Thomas Piketty.
This does not mean waving goodbye to a capital gains tax. But it is politically savvy to recognise the longer time required to 'reap the benefits' .
Taking advantage of the report from the Michael Cullen led working group, further work should be undertaken in order to develop a practical CGT without unintended consequences.
The importance of messaging a good narrative
Vernon Small correctly observes that the rightwing government parties will quickly get into attack mode once Labour announces its taxation policy.
They know full well Labour's past inability to counter such an attack and to look like a possum in a car's headlights. Expect Finance Minister Nicola Willis to lead the charge.
The political right are experts in messaging. My way of describing this politically is as follows:
the far right communicates in gestures and soundbites (and sometimes violent threats);
the political right communicates in sentences reinforced by soundbites;
the political left communicates in paragraphs (social liberals in longer paragraphs); and
the far left communicates in footnotes.
Labour in my view is more technocratic social liberal than leftwing. I have discussed this previously in Political Bytes (30 April 2023): What leftwing really means.
Regardless, however, Labour needs to deliver a good narrative on the unfairness of tax avoidance by taking a lead from the political right.
Show more spine and do it in crisp succinct sentences further enabled by smart soundbites.
