Albert
Einstein apparently once said "insanity is doing the same thing over
and over again and expecting different results."
Earlier
this week it was reported that the Labour Party's Policy Council is
recommending the Party include introducing a capital gains tax in its policy
for the next election. If that recommendation subsequently becomes part of
Labour's policy, it will confirm the accuracy of Einstein's alleged comment.
Labour
has flirted with the idea of a capital gains tax since the late 1980s when a
tax advisory committee recommended to the then fourth Labour Government that such
a tax be introduced. The government rejected the idea then fearing the public
backlash, and Labour resisted internal pressure to promote capital gains tax
for the next twenty years.
Finally,
in 2011 and even more explicitly in 2014, Labour went to the electorate
proposing the introduction of such a tax. It was resoundingly defeated at both
elections. But Labour did not accept the electorate’s rejection of its tax
ideas.
By
2017, the capital gains tax was back on Labour’s agenda, although this time the
party stopped short of specifically proposing it. Rather, it suggested
establishing an independent tax working group to examine all aspects of the tax
system, including capital gains tax. When that working group, chaired by former
Labour Finance Minister Sir Michael Cullen, duly recommended the introduction
of a capital gains tax, the die seemed cast. Even more so when Cullen
prophetically observed that it was “now or never” for a capital gains tax,
because political pressure was likely to make the idea even more difficult in
the future.
However,
when the crunch came, Prime Minister Ardern – a self-confessed long-time
capital gains tax supporter – baulked at going beyond her talk, and abandoned
the idea, saying it lacked popular support. In 2019 she pledged never to
introduce a capital gains tax so long as she was Prime Minister.
In
2023, new Prime Minister Hipkins overruled a plan from his Finance and Revenue
Ministers for a tax-switch, reducing personal taxes but introducing a capital
gains and possibly a wealth tax to compensate for the revenue loss. In words
akin to Ardern’s, he said those ideas would be off the agenda while he was
Prime Minister.
One
would have thought that after more than a decade of first promoting then
backing away from the idea of a capital gains tax Labour should have by then have
learnt its lesson. But no; no sooner was the Party back in Opposition at the
end of 2023, than party activists were again raising the spectre of a capital
gains tax, claiming – in complete denial and contravention of recent history –
that Labour’s failure to introduce a capital gains when in government
contributed strongly to its defeat in 2023.
To
placate some of these death-wish activists more concerned with political purity
than winning elections, last year’s party conference referred the question of a
capital gains or a wealth tax to the party’s Policy Council for consideration.
Reports
that the Policy Council now wants a capital gains tax could place Hipkins in a
near impossible situation. He is smart enough to know that the chances of being
able to persuade the public now that a capital gains is a political winner when
he and three of the party’s leaders before him either could not or would not do
so over the last decade are close to zero. Moreover, he also knows his own
credibility would be shattered if he now opted for a capital gains tax having
so vigorously ruled it out in government barely two years ago.
But
overruling the Policy Council and potentially the party’s ruling New Zealand
Council a little further down the track is unlikely to be a feasible option
either. Many in the party resented Hipkins’ “Captain’s Call” rejecting the
capital gains/wealth tax option in 2023 and are unlikely to tolerate his being
consistent and doing so again this time around. A second “Captain’s Call” might
be a step too far.
However,
the last thing Labour can afford right now is a distracting and divisive debate
on this issue. Against the odds, it has a strong chance of becoming the
government again next year, given the present government’s performance and the
wallowing state of the economy. It already has enough ammunition to mount a
strong campaign in 2026 and does not need to let itself be sidetracked by
issues that have historically worked against it. So how Hipkins manages the
ongoing internal party debate from here and maintains his personal credibility
will be intriguing to watch.
Meanwhile,
all this is mana to National, at a time when it needs it. No doubt it will be already
preparing a fear campaign about the impact of capital gains taxes on things
like the family farm, the holiday house and boat, and other assets New
Zealanders enjoy or aspire to. Again, history suggests such a campaign will
produce the same results as previous attempts to introduce a capital gains tax.
Therefore,
rather than allow itself to get bogged down in another rerun of a long-standing
political argument it has consistently failed to win, Labour should heed the
rueful observation of Sir Michael Cullen after the Ardern government abandoned
his tax working group’s capital gains tax plan. He said:” "The
problem we have is New Zealanders seem not to want an inheritance tax, or a
wealth tax, or a land tax or a capital gains tax but they still want to
complain about growing inequality of wealth. Clearly that is a political
position that has to be recognised, but it is not a satisfactory one.”
Labour
therefore ought to be taking the opportunity to promote constructive reforms
about tax enforcement, collection and compliance to boost fairness and equity, rather
than continuing to flog the capital gains tax dead horse.
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