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Understanding New Zealand’s Uncertainty Toward Taxing Wealth

Kiwis are fretting about inequality, poverty and high prices of housing. However, a capital gains tax is far from the key to winning the general elections.

Like many small states, New Zealand enjoys thinking of itself as somehow set apart from other nations. It has long reveled in the tag of being the “social laboratory” of the world, and was ahead of the curve when it came to both setting up a welfare state in the 1930s and cutting it back in the 1980s. It is also exceptional in its attitude to wealth — specifically its attitude to taxing it. Unlike virtually every other developed country, New Zealand does not tax wealth in any of its forms. It does not tax wealth itself, or the capital gains made from inheritance, gifts or selling assets.

This could, in theory, change. As the Sustainable Governance Indicators (SGI) 2017 New Zealand Report points out, there is “a growing consensus” among political parties outside of the government and economists that this anomaly “needs to be tackled.”

Housing among the most expensive in the world

The absence of a capital gains tax raises equity issues, as someone who makes $50,000 selling a house pays no tax, while someone on a salary of $50,000 pays tax from the very first dollar. This absence also creates strong incentives to invest in housing, diverts capital away from startup businesses and other productive uses, and has helped fuel one of the most overpriced housing markets in the world. The average house in Auckland costs around 10 times the average disposable income, putting it on a par with the much larger Sydney and Vancouver among cities with overheated housing. Unsurprisingly, weak housing affordability and homelessness — the middle- and lower-class manifestations of a housing crisis — are on top of the minds of voters, just behind inequality and poverty.

However, as New Zealand goes to the polls on September 23, it remains unclear whether a capital gains tax is a vote-winner. While the philosophical and economic case for a capital gains tax is a strong one, politics is famously irrational. The governing National Party, which with coalition partners has been in power since 2008, is adamantly opposed to a capital gains tax. The opposition Labour Party previously supported one, but is currently promising to put various ideas for wealth taxes to a working group that would be formed after the election. In doing so, it is perhaps picking up on voter ambivalence about the idea. A recent poll found 35% supported a capital gains tax, but 26% opposed it and 32% said they were “neutral.”

New Zealand’s economy: Farms and small businesses

This appears to reflect the views of a large number of voters who can see both positive and negative aspects: increasing equity on the one hand, but — in the minds of many — putting curbs on the traditional ways to make money in New Zealand. This is a quirk that can be difficult for outsiders to appreciate. New Zealand remains a small country — the population is just 4.7 million — at a great distance from most trading markets. Its self-reliant, pragmatic culture is geared to making the most of today rather than dealing with big issues in the long run.

These traits combine to create an economy that is unusually reliant on both small businesses — many of them not trading internationally — and farming, which often operates on a business model of very low returns during an owner’s working life but a large capital gain when they sell up. In addition, a poorly regulated stock market and financial industry, combined with low financial literacy, has pushed many New Zealanders into investing in housing rather than businesses.

The result is that many people rely on capital gains for their livelihoods — if not their day-to-day incomes then their hopes for a secure retirement and long-term financial success. Therefore, they see a capital gains tax as a potential threat. For this reason, the National Party has been hammering away for the past few weeks at Labour’s plans for a tax working group, raising a series of concerns about what could be within its ambit: taxes on the family home, on land, on inheritance and so on. While the polls are volatile, it seems at least possible that this approach is paying off.

Highly-indebted private households

Failure to implement a capital gains tax would, admittedly, be out of kilter with New Zealand’s general approach to social and economic reform. As the SGI 2017 New Zealand Report argues, the country is in “reasonable shape” to tackle future challenges, having substantially reformed its economic and governmental systems in recent decades.

But the country still has weaknesses, which are closely allied to its strengths. Tight management of public finances — government debt is amongst the lowest in the Organisation for Economic Co-operation and Development — seems to have come at the expense of lax private finances, where indebtedness is at worrying levels. This is, in turn, connected to the high price of housing and the failure of multiple fronts to rein in that market, which is overvalued by as much as 40%, according to the International Monetary Fund. The potential for the housing bubble to burst is one of the biggest threats to an otherwise strong economy.

Though a capital gains tax would not solve all those problems, it would go some way toward alleviating them — but the politics of self-interest suggest it may be a while in coming.

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

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