Where would a watered-down, politically palatable version of the Tax Working Group’s recommendations leave us? Jenée Tibshraeny struggles to find the modelling

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TWG Chair Michael Cullen

By Jenée Tibshraeny

As you come to read your millionth “hot take on tax” piece, I have some bad news. My “hot take” is less than riveting.

I am not going to tell you the Tax Working Group’s (TWG) final report will collapse the New Zealand stock exchange, cause rents to double, or ruin the “kiwi way of life”.

In fact, what I’m going to tell you, you already know – it’s complicated and political.

But here’s the interesting bit – it’s so complicated that I don’t believe the Government currently has the information it needs to make an informed decision on the Group’s recommendations.

And it’s so political, that I fear it won’t bother getting this information.

Let me explain.

All 11 members of the TWG agree more of the gains from selling rental property should be taxed than is currently the case under the bright-line test (introduced by National, but extended from two to five years by the Coalition Government).

However only eight support broadening this approach to include all land and buildings, business assets, intangible property and shares.

The Group concluded: “The Government doesn’t necessarily need to make a straight call over whether or not to adopt the Group’s preferred model for taxing more capital gains. It could choose to apply it to only some types of assets or stagger the inclusion of different assets over time.”

Where’s the modelling?

It’s almost like the Government threw the political hot potato that is tax reform at the Group, hoping it would diffuse some of the heat by making the tough calls on what do.

But instead, the Group has thrown the potato – still hot – back to the Government, leaving it to make the final decision with a smorgasbord of options in front of it.

The problem is, it hasn’t given the Government a bunch of models to accompany these options. It hasn’t said, ‘If you go with Option X, we expect the consequences to be Y.’

It’s provided really good graphs like the one below that show how the cost of applying a capital gains tax to all assets (other than the family home) would fall on different households.

However it hasn’t provided similar graphs showing how the costs would be spread if a capital gains tax was only applied to investment property, for example.

The TWG’s analysis in general (around the fiscal impact and so on) assumes the gains from investment property, shares, land, business assets and intellectual property would be taxed.

Given the Government’s response to the report has been that it won’t “throw the baby out with the bathwater,” or roll with all the TWG’s recommendations, one can safely assume it’ll implement a watered-down version of what the TWG has suggested.

I’m sure we can all agree that only taxing gains from property investment, or “extending the bright-line test,” would be the most politically palatable way forward.

While the Group has recommended cherry picking the assets to come under the tax, the Government could also go against the this advice and implement a lower tax rate than the marginal one for individuals proposed.

The question is, does it know what the consequences of either of these options would be?

PM unclear on use of external consultants 

Some of the papers prepared by the TWG Secretariat for consideration by the TWG include distributional analysis, however none of the reports include the data I believe the Government needs that shows how different households would be impacted if a capital gains tax was applied to only certain assets.

I asked the IRD if this sort of modelling was tucked away somewhere else. It said no.

It also said the TWG Secretariat didn’t have the resource to do this sort of modelling for media, despite the public interest.

Surely the Government will employ external consultants to do this work if the TWG and IRD aren’t?

Prime Minister Jacinda Ardern didn’t seem to think so, but wasn’t entirely sure, when I asked her on Monday afternoon. She said: “Sometimes in these areas they are complex. I have no information that suggests to me that we’ll be doing that.

“Again, I wouldn’t necessarily have that layer of detail, but my view would be that predominantly we will probably more than likely be receiving that directly from IRD.

“But again, I won’t necessarily know the way in which IRD make their operational policy advice.”

As for Revenue Minister Stuart Nash; I’m yet to hear back from him.

More consensus-building than Excel spreadsheet studying?

There is a possibility that what started as a simple search to find out what the effects of excluding certain assets from a capital gains tax would be, has led me down a rabbit hole and seen me lose perspective of the bigger picture.

But if I feel I don’t have enough information to write a well-informed “hot take” on the TWG report, I don’t know how the Government has enough information to make a well-informed decision on something a tad more important… the tax system.

No doubt it has rallied the troops at the IRD to do the modelling it deems necessary.

But given that in the more than three weeks it has had the TWG report it hasn’t asked for the information I would’ve thought was key, and given it only has about two months until it needs to tell the public where to from here, I’m dubious about the information it’s working with.

It makes me think Labour, the Greens and NZ First are putting more effort into trying to come to some sort of consensus, than they are studying the evidence to make the best policy.

Ardern, at a press conference on Monday, put more emphasis on dispelling myths around how harmful a capital gains tax would be, than marketing it as a good idea.

She was at pains not to pin her colours to the capital gains tax mast, highlighting how her job was to build consensus among the coalition partners.

Sure, this consensus building is a part of MMP, but it is becoming an increasingly problematic hurdle for this government.

While politics adds to the complexity of changing the tax system, let’s hope it doesn’t overshadow the complexity that needs to be grappled with.

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