Game on as Labour prepares to sell capital gains tax plan

Advocating a capital gains tax has long been seen as the political equivalent of a kamikaze attack. It may be in the interests of the overall economic cause but, for the individual politician who tries it, there is only one result; especially in a society such as New Zealand that has a love affair with house ownership - and likes to have a bit of rental investment on the side as well.

That Phil Goff and his senior team have been prepared to put it on the table - full details next Thursday - says several things loud and clear.

They have accepted they cannot get back into the race in November without a bold strategy that will differentiate Labour from National.

However much people object to asset sales, Labour was facing a fiscal trap set by John Key and Bill English. They need to find revenue to fill a $5 billion to $7b hole in the accounts if they want to make opposition to asset sales a cornerstone of their policy.

And in the current climate, extra spending should take second place to a clear debt-reduction path and a route back to surplus.

Labour needs to find enough revenue to cover not only the money released by the asset sales programme, but also up to $2b a year in tax cut promises - about $350 million to take GST off fresh fruit and vegetables and between $1.3b and $1.6b for its promise to create a tax-free $5000 band - though it is not committed to introducing both in full in year one.

In essence, Labour will sell its plans as a "tax switch" - borrowing the language National used to sell its tax cut and GST rise package last year.

A capital gains tax (CGT) will need to raise a large chunk of that extra revenue, and there are spending commitments in the pipeline too. But Labour also has in mind a tax hike for those on the top income - likely to cut in on income above $120,000.

(Inside Labour the jury is still out on whether that will be released at the same time as the CGT or saved up for a second hit.)

Until details are known, it is impossible to say how much Labour will be able to raise from a CGT. But there are some markers in the road.

The tax is expected to be set at a flat 15 per cent for simplicity's sake.

An alternative was Australia's regime, where a higher rate is set but only 50 per cent of the capital gain is taxable. The political downside of having a higher "headline" rate for National to attack made the choice a no- brainer.

Based on the Tax Working Group's estimates, a 15 per cent rate would deliver $700m if it was levied on residential property investment alone. National has pounced on this figure and thrashed the strawman to death.

It seems certain, though, that Labour will cast the CGT net much wider.

Excluding the family home is a given. But including business property, rural land and shares would push the total up to about $2.3b a year - in the ballpark of what Labour needs.

Taxing capital gains when they are realised on sale, rather than as they are accrued year by year, would lower that a little but, according to the Tax Working Group, revenue would still be "something near" the accrual figure - so National is over-egging that problem.

JOHN KEY and Bill English are on stronger ground attacking the time it will take for the income to ramp up, especially if existing investments are "grandfathered" and made exempt. In Australia, it took 15 years before CGT revenue peaked after the tax was introduced in 1986.

On the other hand, Labour's income boost is "forever", while National's asset sales deliver a one-off $7b sugar fix for the Crown accounts. It would let National lower debt more quickly in the short term, but Labour's forecast debt track should go lower than the Government's during a longer period.

National will try to paint a CGT as a socialist revenue grab that will damage the economy but, in reality, both sides have some reputable allies. On National's side are two tax reviews in the past 11 years and the IRD, which sees a CGT as difficult to police.

In Labour's broad camp are some distinctly un- leftwing agencies; the Treasury, the Reserve Bank, the IMF and the OECD; which favour a CGT for reasons ranging from its impact on monetary policy and housing bubbles, to tax fairness, and the promotion of an efficient investment environment.

In a policy sense, it is game on.

Whether Labour can sell its CGT as a fair tax that will impact only a small section of the voting population is another question altogether. In the meantime, National is gearing up to fill a week's policy vacuum until Labour can fill in the gaps.

The Dominion Post