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Insights 5: 22 February 2019
Eric Crampton shares on The Spinoff his views on the Tax Working Group's recommendations
 
Patrick Carvalho argues in his policy note that the proposed CGT rate is one of the most penal in the world
 
We recommend a rethink of local government through the lens of localism in our submission to the NZ Productivity Commission

No time is money
Dr Oliver Hartwich | Executive Director | oliver.hartwich@nzinitiative.org.nz
As if to squeeze the most out of the short parliamentary term, the Government has been busy with a flurry of initiatives. Such a hurry can be costly.

Of all the Government’s decisions, the oil and gas exploration ban was the most surprising. With no prior consultation, it announced the decision in April 2018 to show resolve on climate change.

Almost a year later, an NZIER study reveals the staggering costs of this ad hoc decision. By the calculation of our colleagues, New Zealand will lose $28 billion and thousands of jobs.

One might quarrel about the NZIER study. Yes, it was commissioned by the oil and gas industry. However, NZIER is a reputable research institute not known for always delivering the results its clients want to hear.

One might also question whether the numbers NZIER used were accurate. After all, it had taken them straight from the Ministry of Business, Innovation and Employment – which Energy Minister Megan Woods said “do not adequately model our policy.”

But maybe that is the real problem. Which numbers can we trust without proper consultation?

Had the Government introduced the oil and gas ban after extensive and open consultation, there might have been more clarity. Instead, we are now in the bizarre situation in which the Government dismisses economic research because it is based on Government modelling.

The lack of proper analysis is not restricted to the oil and gas ban. It has become a sad theme that major policy overhauls are introduced with no or minimal consultation. The reform of New Zealand’s vocational education sector will take years, so the initial consultation period of six weeks can only be the beginning.

In fairness to the Government, New Zealand’s electoral cycles hardly leave them any other choice. Since the transition into office consumed the Government's first year, the second year must be, in the Prime Minister’s words, “the year of delivery”. That is because the 2020 election will dominate next year.

Under such time pressures, it becomes understandable why the Government does not have enough time to think and consult before taking action. But if that is the case, would we not be better served by four- or even five-year terms as in most other advanced economies?

New Zealanders like the ability to kick out bad governments after only three years. But our short terms reduce the quality of any government no matter who happens to be in office.

Much pain and little gain of a broad CGT
Dr Patrick Carvalho | Research Fellow | patrick.carvalho@nzinitiative.org.nz
The Tax Working Group released this week its much-anticipated “Future of Tax” report, which recommends introducing a broad-based taxation of capital gains at full income rates.

As proposed, the 33% headline rate would be one of the highest among industrialised economies.

And given New Zealand’s recognisably low income tax thresholds by international standards, a new CGT would disproportionally hit middle-income earners already struggling to invest for retirement.

The new tax would also tarnish the simplicity and competitiveness of our internationally-praised tax system.

Ironically, despite all these drawbacks, CGT would still raise miniscule revenue.

According to the Tax Working Group’s own numbers, the new tax would raise a mere 1% of GDP after ten years of introduction. And that is based on optimistic forecast assumptions, such as taxing capital gains for all types of land and domestic shares, consistent annual asset appreciation across the board, and no behavioural changes among taxpayers.

So the question is why bother at all?

For its supporters, a full CGT regime might seem a perfect and sensible tax change. It would allegedly increase fairness, progressivity, and integrity of the tax system – and probably resonate with “tax the rich!” feelings that some might secretly (or overtly) carry.

Yet all previous government-mandated reviews – from the 1987 Consultative Committee to the 1998 Committee of Experts to the 2001 McLeod Tax Review to the 2009 Victoria University of Wellington Tax Working Group – have either refrained from recommending extensive capital gains taxes all together or expressed serious concerns regarding their practical challenges.

Even the current Tax Working Group recognises “the administrative complexity of a broad-based capital gains tax, in particular, should not be underestimated.”

At closer inspection, fully taxing capital gains would likely have undesirable effects on productivity, investment and growth, and impose significant compliance costs.

Attempts to implement a comprehensive CGT regime, therefore, would quickly emerge as an intricate can of worms at the expense of economic efficiency. Surely a windfall for lawyers and accountants.

The bottom line is that much capital income is already taxed in New Zealand, including the capital gains on the sale of any residential property (family home excluded) within five years of purchase.

Extending the CGT asset list should always be under the scrutiny of strict cost-benefit analyses. A cautious incremental approach would be wiser – and in line with international best practices.

The government must consider the full costs and complexities of a new capital gains tax regime before acting on the report recommendations.

After all, a broad CGT would inflict much pain for little gain in return.

You can read our policy note on the Tax Working Group’s proposed rate of capital gains tax here.

Pot calling the kettle black?
Roger Partridge | Chairman | roger.partridge@nzinitiative.org.nz
Canadian psychologist Dr Jordan Peterson has a lot to answer for. At least he does according to Auckland Peace Action spokesman Iris Krzyzosiak. According to Krzyzosia, Peterson “threatens everything of value in our society.” Levelled against a professor at a mainstream university, that is quite some claim.

Yet you would not have guessed this from the crowds attending his lectures around New Zealand this week. Those lining-up looked distinctly respectable. Men and women, young and old, with a diverse ethnic mix. I even picked out the odd hipster.

Granted those attending looked mostly male. But then Peterson’s messages are aimed at young men. His proselytising encourages them to do things like get their own houses in order before criticising others, take responsibility for their actions, pursue meaning, and tell the truth.

Peterson is prone to preaching. But his strictures do not sound that subversive. Unless of course society wants males who whose lives are a mess, who do not take responsibility for their actions and who are nihilistic liars.

But perhaps there is value in some of these messages for Krzyzosiak’s colleagues.

Last year the Wellington branch of the Peace Action group thought it would be a good idea to plant a fake bomb in Wellington’s Roxy Theatre.  Police were called and removed a beeping black box chained to one of the cinema’s seats.

The group’s plan was to disrupt the screening of Ben-Gurion, Epilogue, a documentary on the former Israeli Prime Minister, David Ben-Gurion. At the time the cinema was packed with elderly Jewish people.

When interviewed last week, Krzyzosiak could not see the irony in a group responsible for terrorising elderly cinema-goers claiming a Canadian psychology professor is subversive.

Perhaps they would benefit from reading Dr Peterson’s book?
 
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