A missed opportunity on productivity

Dr Patrick Carvalho
Insights Newsletter
1 March, 2019

The jury is out for the released Tax Working Group’s “Future of Tax” Report, with the government promising to deliver its verdict in April.

Unfortunately, a careful reading of the 200-page document already shows a missed opportunity to address New Zealand’s biggest elephant in the room: slow productivity growth.

Worse, the document’s main recommendation of taxing capital gains will do little – if not work against – to fix our low capital stock levels that drive the productivity problem.

To be fair, the TWG report has a few praiseworthy parts. The report, for instance, argues against the introduction of progressive company taxes and changes to our dividend imputation system. Similarly, the document makes the right case for a functioning emission trading scheme and the efficient use of road pricing.

The most notable laudable aspect of the report, however, is the conspicuous minority dissent on its core recommendation regarding the introduction of a comprehensive capital gains tax.

For the three dissenting (and brave) members, “the revenue benefits, perceptions of fairness and possible integrity benefits [of a broad approach to the taxation of capital gains] would be outweighed by adverse efficiency impacts, increased compliance and administration costs and fiscal risk.”

Indeed it would: much pain and little gain, as we have argued here before.

Part of the report’s shortcomings is due to its original design. From the beginning, it was clear that the commissioned work was a calculated move to bring the capital gains tax to the forefront of the tax debate. And so it did.

CGT is the sole protagonist in the two-volume report, with the second volume entirely devoted to detailing its implementation.

All the other topics – from environmental taxes to counter-tax-avoidance measures to the taxation of business – are forgetful sideliners. Well-nigh afterthoughts, scarce on details and too often dismissed with “further work is necessary” comments.

So here comes the ugly side of the report: a blind spot on tax arrangements to enhance our slow-paced productivity growth. Particularly with respect to our timid efforts to fix the housing constraints.

The New Zealand Initiative, for example, has long favoured a revenue sharing mechanism between central and local governments to create the right incentives for increasing the housing supply.

The report, however, banks on the belief the (self-inflicted) housing shortage will not go away, and unashamedly proposes CGT on ever-increasing property prices to fill the Crown coffers instead.

That is, governments not only perpetuate the constrained housing supply crisis, but now might just profit on it as well.

Alas, a missed opportunity indeed.

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