Australian tax system inspires NZ Labour

The NZ Labour Party has been languishing in the polls ever since it lost government in 2008, and deservedly so – the party has been a policy-free zone. This changed yesterday when the party released a detailed 28-page tax policy.

The policy, which closely resembles some aspects of the Australian tax system, is made up of three major components: increasing the progressivity of income tax, a capital gains tax (CGT), and removing GST on fruit and veg.

The income tax plan is to introduce a tax-free threshold of $5,000, and raise the top rate of income tax from 33 cents at $70,000 to 39 cents at $150,000 per year (affecting 2% of taxpayers). Concurrently, NZ’s ‘clean’ GST regime will be corrupted and complicated by exempting fruit and veg.

Bolder is the proposal to introduce a capital gains tax of 15% on all gains accrued past an appointed ‘valuation day.’ However, the family home is exempt.

Two oft-used arguments in support of a CGT are that it will reduce ‘overinvestment’ in housing and that ‘the Aussies do it.’

This is true, Australia does do it, but it is highly complex and expensive to enforce. Last year’s Henry Tax Review actually recommended introducing a savings income discount for capital gains.

A CGT will be particularly counterproductive in New Zealand, where ‘savings’ are supposed to be the key strategic economic challenge. After all, CGT is essentially a second tax on savings and so acts as a disincentive to save. Given that housing is the number one investment vehicle (and personal savings scheme) in New Zealand, this is no small deal. On the other hand, increasing the top marginal tax rate is a disincentive for more work, which has a negative effect on income and savings.

It would undermine a competitive advantage New Zealand enjoys – the absence of a CGT – and also misunderstand the drivers of housing prices (which the lack of CGT has supposedly driven up). House prices are a function of both demand and supply. One thing is for certain – a CGT will help reduce the investment on the supply side, driving up prices.

Overall NZ Labour’s tax policy is weak and a flawed solution to a misdiagnosed problem.

Luke Malpass is a Research Fellow at The Centre for Independent Studies.