I wrote an article today for the National Business Review called "Capital Taxes Will Not Work in New Zealand". You can read it here: https://www.nbr.co.nz/node/228452 or below.
Capital Taxes Will Not Work in New Zealand by Robert MacCulloch
The blow out in property prices, particularly in cities like Auckland and Wellington, has led to a resurgence of supporters backing a capital gains tax. However, the reasons why such taxes would be bad for NZ mostly get short shrift in our media.
A powerful argument against capital taxation is that it discourages savings, leading to less capital accumulation. A lower capital stock cuts productivity and workers’ wages. Given that we already have a poor savings and productivity growth record, with a low capital base, compounding such a weakness would be unwise.
Proponents of capital taxation in NZ usually reply with the same old argument. Namely that too much of our savings go into property and not enough into business investment. However, their proposals, like the ones touted last year by the Ardern Government’s Tax Working Group, typically advocate fully exempting the family home. As a result, the decision to buy a house to gain a tax advantage would remain for the majority of people, or even be strengthened. Furthermore, our entire political class is encouraging Kiwis to buy, rather than rent.
In other words, we have a political consensus supporting both home ownership and its’ full exemption from any potential capital taxation. Hence, the idea that capital taxes would “fix” the housing affordability problem in a Kiwi context has little standing. Talk of extending the “bright line” test to tax speculators is a PR stunt. It would have little effect. By promoting tax-free homeownership, limiting supply and slashing interest rates, our government has its foot hard down on the house price accelerator. Jamming on the brakes at the same time is madness.
In the political frenzy to muster votes from “first home buyers”, we rarely hear of the disadvantages of home ownership. Evidence shows owners are less mobile and unlikely to relocate to get a job compared to renters, leading to more unemployment. What’s more, government encouragement and subsidization of home ownership was a cause of the Global Financial Crisis, which now seems forgotten. In Switzerland, 60% of the population are renters. By contrast, over 60% of New Zealander’s are owners.
About 80% of people in this country have already built up capital in the form of a Kiwi Saver retirement account. Dealing with the negative effect of capital taxes on these funds became a great weakness in the recommendations of the Tax Working Group. To smooth things over, the Group tried designing compensating subsidies. That just made things worse. The majority of NZ families hold their wealth in the form of a house and a Kiwi Saver account. How can one promote taxation of capital but not on most peoples’ two primary sources of capital? Who would that leave to pay such taxes? A penniless, young Kiwi entrepreneur trying to build up a business from scratch, who gets caught up in the fishing net for property speculators?
Whether capital taxation is a good idea or not ultimately depends on our national goals. Do we wish to encourage aspiration? Do we want to reward those who have worked hard and done amazing things by allowing them unfettered ownership of their property, which anyhow is becoming increasingly of an intangible, intellectual type and hard to even value?
Or do we want to play the politics of envy and go after the wealth of those “tall poppies” who have been successful? New Zealand is one of the least corrupt nations in the world. The vast majority of wealth located here is legitimate. We enjoy one of the highest rates of philanthropic gifting in the world. This nation has relatively few financial services workers, who were the ones under most scrutiny in the US and UK for acting unethically in the lead up to the last Financial Crisis.
Proponents of capital taxes argue that the wealthy in NZ should be paying more. However, unlike the US, we already have a national tax that catches out big spenders. It is also harder to avoid than many income and capital taxes. Namely, our goods and services tax. Whenever one hears of a wealthy Kiwi building a $3 million house, they have also just gone and paid nearly half a million dollars in additional GST. That is a lot of tax.
In the midst of the coronavirus pandemic, there is now a chance for NZ to become a safe sanctuary for international businesses and entrepreneurs. Many countries hard hit by the virus are proposing huge hikes in taxation, including on capital. Take Argentina for example, where their Congress is debating a bill that would tax large fortunes. What has been the result? An exodus of entrepreneurs and businesses to neighbouring countries like Uruguay. Now is the time to be attracting capital and creative people, not frightening them away.
In summary, capital taxes won’t work in NZ. Proponents of them had their chance. However, the proposals they offered up did not make sense. Instead of bringing that topic back into our national debate, we should be announcing to the world how we are a place that embraces entrepreneurs and are happy to see them get wealthy. A place that celebrates, alongside our leading sports-people, business successes and ownership of assets. Such a commitment brings with it jobs, skills, higher wages and a greater degree of cultural vibrancy.