The Spinoff: Here’s what’s at stake in the Labour tax debate

Read the original article in the Spinoff

An essentially arcane subject for ordinary folk, tax has taken on a symbolic – indeed, almost existential – dimension in the modern Labour Party. To some members, the 2023 “captain’s call” in which party leader Chris Hipkins ditched a wealth tax proposal has become an emblem of betrayal. Restoration of a radical tax policy is thus essential. 

For others, talking about tax is a vote-loser, distracting the party’s attention away from the more meat-and-potatoes concerns of the median punter. Yet others would like to see tax reform, but of a more modest nature. 

What, then, are the different taxes being debated – and why do they arouse such passion? As with the Bird of the Year competition, there are a staggering array of options, each with its own doughty champion. Almost all the public chatter, though, concerns two main contenders: a capital gains tax (CGT) and a wealth tax.

The mainstream option: a CGT

New Zealand is virtually the only developed country that does not systematically tax capital gains – that is, the income people make selling assets like investment properties and shares. No one has ever satisfactorily explained why we remain a holdout, although it may be related to the fact that two of our most sacred pastimes – buying investment properties and farming – can generate relatively little income day-to-day, and rely heavily on massive untaxed capital gains at the moment of sale.

Powerful vested interests, in short, have traditionally opposed a CGT. And Labour has reason to be wary of this debate. It campaigned on a CGT in 2011 and 2014, and although that wasn’t the reason it lost both elections, successive party leaders – Phil Goff and David Cunliffe – got tripped up when asked about it in debates. It also formed the backdrop to the party’s recent psychodrama in which Jacinda Ardern put a CGT to a tax working group in 2017, lost the argument through being unable to defend her own policy for two years, and then ruled it out during her political lifetime.

Now, though, Hipkins’ post-election policy reset has put it back on the table, alongside a wealth tax. Of the two, it is the more mainstream option, as can be seen by yesterday’s endorsement from the head of ANZ, Antonia Watson, and the backing of groups like the chartered accountants’ peak body. 

A CGT is easy to explain: people pay tax on the income they make selling assets, just like others pay tax on their salaries and wages. It cannot be especially hard to administer, given that virtually every other developed country does so. Politicians do have to choose how high to set the tax – it can be levied at a flat rate, at varying rates but lower than conventional income taxes, or exactly the same rate as those income taxes – but this is not a stumbling block per se.

Estimates vary, but probably 70% of a CGT would be paid by the richest 20%. Perhaps its most obvious drawback, though, is that it isn’t retrospective. If, for argument’s sake, a CGT was introduced in 2027 and someone sold an investment property in 2030, they would pay tax only on the increase in value in those last three years. 

That, in turn, means a CGT would generate “only” hundreds of millions of dollars in its first year, and not reach its full revenue potential – estimated at around $6bn – for a decade. Labour would have to withstand the brutal hand-to hand combat required to pass major tax reform – but without much immediate pay-off. To get around this, it would need to find some way of “bringing forward” the revenue, effectively borrowing against the promise of a future income stream.

The radical option: a wealth tax

Whereas a CGT targets the profits people make from selling an asset, a wealth tax is levied on the assets they still own. Over a certain threshold – say, $5m for an individual – any wealth they hold is subject to a low-rate annual levy – say, 1%. In this example, someone with assets (after debts) of $7m would pay a levy of 1% every year on the $2m they hold over the threshold; their tax bill would be $20,000.

Before Hipkins tossed them out, proposals for such a tax had been worked up by officials in 2022-23 under the supervision of revenue minister and general tax enthusiast David Parker. His inspiration was, and remains, the celebrated French economist Thomas Piketty, whose central insight is that accumulated wealth typically grows at 4-5% a year (through interest, dividends, rents and so on), rapidly outpacing the 1-2% rate at which wealth grows for workers. The only way to restrain this galloping inequality, Piketty argues, is to tax upper-end wealth directly.

In the 1990s, a dozen European countries had wealth taxes, though most had been so riddled with exemptions – for farms, family businesses and so on – that they earned little revenue and were easily abolished. That said, countries like Switzerland and Spain still have them, as do various Latin American states. Closer to home, the Greens have advocated a wealth tax since 2020. (Before that, they were CGT fans.)

Wealth taxes get their revenues from the wealthiest 1%. Under a CGT, by contrast, that 1% can afford not to sell their assets, and can then pass them on tax-free to their children. (To avoid that problem, a CGT would have to be buttressed, further down the line, with an inheritance tax.) 

A wealth tax would generate its estimated $4bn instantly – one major advantage compared to a CGT. It does, though, involve greater complexity. Every major asset has to be valued annually, which for family businesses can be especially challenging. Critics argue it would also cause the wealthy to flee overseas; although the Treasury has estimated that just 3% of New Zealand’s wealth would be lost, this would remain a politically potent line of attack.

The tax also potentially creates problems for people with large assets but no immediate cash-flow from which to pay the levy: think farmers hit by Cyclone Gabrielle, or the owners of highly valued startup companies. There are technical fixes for these issues, but they are not always easy to explain, or popular.

Nor, necessarily, is the tax itself, which lacks the simple “income is income” justification of the CGT. Parker sometimes describes the wealth tax as a “capital income tax”, as it effectively assumes that – following Piketty – the rich are generating income worth 4-5% of their wealth every year, and the 1% annual levy is, in essence, a 20-25% tax on that income. Whether the public would find that compelling – or even comprehensible – is another question.

And as it stands, a wealth tax sounds like the more confrontational, more radical option. If businesspeople as a whole remain ambivalent about a CGT, they positively hate a wealth tax. (This is a good or bad thing, depending on one’s point of view.) Comms-wise, advocates point to positive polling and the fact that 99% of people wouldn’t pay it. Critics say the polling numbers collapse once the public understands what the tax actually involves.

A subplot: switch or no switch?

One potential selling point of the wealth tax is that its $4bn revenue could be used to slash income tax rates for ordinary New Zealanders. This would, though, leave Labour without extra revenue for a thousand other things, notably health and education. That could be generated via other levies, but whether the party wants to enter 2026 with a panoply of tax options is debatable.

One final option: do nothing

Wending its way through the party’s labyrinthine internal process, the debate over tax will continue at least into next year. The party could, of course, dodge the issue by campaigning in 2026 on no new taxes. But this would run into serious political problems. Internally, many party members are furious about the tax climb-downs of recent years, and a do-nothing stance may no longer be tenable. Externally, the party would face the same problem as with the tax switch: no extra revenue for public services. Labour would, in essence, have to campaign on spending the same amount of money as National but doing it better – something that, given the now-entrenched perception of its incompetence in office, is likely to be a hard sell.

One final caution: the cake, not the recipe

Although for some activists, a tax is an end in itself, that is not how the general public sees it. According to pollsters, ordinary people worry about – and want more funds for – health and education. They do not often think about tax in the abstract, or necessarily even connect it with public services. Talking too much about tax, rather than the services it funds, runs the risk of trying to sell people a recipe for a cake rather than the cake itself.