The Post: How a capital gains tax could help fix the economy

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The fundamental flaw in the New Zealand economy, I have come to think, is that we’ve never married our pragmatic, “number 8 wire” mentality with a long-term investment mindset.

We’re good at fixing things without a fuss, making the best of what’s there, building machines out of scraps left in a garden shed. What we’re not good at is planning, establishing a shared national vision, making investments that have a long pay-off. Number 8 wire can patch up a broken piece of kit; it can’t build a new national grid.

We also work harder, not smarter. The average Kiwi labours for 1748 hours a year, against 1415 for the vastly richer Dutch. That’s 333 hours a year – nearly a whole working day each week – of extra work. We get by on the sweat of our brows rather than the speed of our thought.

We also “sweat” our assets, extracting the most from ageing machines rather than investing in new ones. Our infrastructure spending “gap” is estimated at around $100bn.

Even if our infrastructure spending is now about average, we have years of under-investment – especially the “lost decades” of the small-government 80s and 90s – to make up. And what we do spend, we spend poorly, owing in part to a stop-start investment programme that, once again, stems from the failure to plan long-term.

Compared to our OECD peers, we don’t invest in either plant or people. When it comes to capital investment – including machinery but also software, intellectual property and the like – we have a woeful record.

According to a report from the now-defunct Productivity Commission, South Korea’s capital per worker was, in 1970, a mere 15% of ours; by 2019, it was almost 50% higher. We’ve long been falling behind. Our investment in research and development (R&D) is also lacking, even if it did increase under Labour.

On the people side of the ledger, we currently permit 12% of children to grow up in poverty. The permanent scars of that early hardship will drastically limit their lifetime ability to be productive workers and entrepreneurs. In Finland just 3% of children are poor: the country enjoys a stronger workforce, and is richer as a result.

Another under-investment story: we don’t properly fund the retraining and skills schemes that can help people move from welfare to paid work. Our spending on such programmes is well below the developed-country average – roughly half the Finnish rate and a quarter of the Danish.

We need, in short, a little less sweating and a lot more investing. Sadly the government doesn’t seem to have got the memo.

Its cuts to investment have been sweeping, and rapid. Social house-building by both community providers and Kāinga Ora has ground to a halt. Scrapped completely is Labour’s plan for a $450m Wellington-based “Science City” to drive R&D and blue-skies thinking. Even Steven Joyce’s old National Science Challenges are being allowed to lapse with no evident replacement.

While the government didn’t inherit a strong economy, its cuts seem to be making things worse: GDP fell 0.5% in the year to June, driven by a construction slowdown, among other things. Yet in this year’s Budget, infrastructure spending is projected to fall sharply across the coming years.

None of this helps turn around our under-investment calamity. Which is where a capital gains tax (CGT) – once more under consideration by the Labour Party – might come in.

The case for it is strong: earnings from selling assets – that is, capital gains – should be taxed just like earnings from salaries and wages. Income is income.

According to OECD data released this week, the absence of a CGT allows many high earners here to pay just half the tax they would at Australian, American or British rates. A New Zealander on $330,000, earning half their income as capital gains, pays a 14% tax rate overall; their equivalents in those three countries pay 28%.

We’re letting our high earners get away very lightly. By contrast a CGT would, a decade after its introduction, bring in around $5.9bn, according to the best estimates.

The tax’s defect, though, is that it applies only to gains made after it is brought in, so it takes a while to gather speed. In the first years, it would bring in ‘just’ hundreds of millions of dollars, and couldn’t solve every immediate social problem. Extra funds for health, welfare and education would have to be found elsewhere.

CGT revenue could, though, be earmarked for a slow-building investment in our shared prosperity: increased R&D credits for firms, for instance, or a Kids Kiwisaver scheme that creates an asset base for poorer children. A sensible-looking move with the additional merit of actually being sensible, such investment is exactly the sort of thing that – underpinned by a proper long-term plan – could put our economy on the right path.