Whaleoil transcription: Mike Hosking and Sir Michael Cullen on a capital gains tax

Mike Hosking.

Newstalk ZB

Starts at 7:53

Mike

It looks like a capital gains tax is coming our way.  The tax working group has reached a consensus, the government have to tick it off, but the group, you have to remember, was set up to achieve such a task.  The chair, Sir Michael Cullen, is back with us.  Good morning to you.

Sir Michael

Good morning Mike.

Mike

In your view, what is the value of a capital gains tax?

Sir Michael

I think there are three areas.

First there’s the long-term sustainability of a tax system as in general terms capital income tends to grow faster than labour income and we’ve seen that shift already over the last 20 years. And we will see more of it as the… as the structure of the population changes so aah… more people in the older age groups with higher capital income, so if we don’t do this then basically those… more of the tax will have to come from labour income in the future.

And secondly, what’s called horizontal equity. Two people with the same income, different sources, (unintelligible) equity, capital income is concentrated amongst the higher, obviously higher wealth, higher income groups aah… and we have a very, very flat tax system apart from that in NZ when you take all factors into account, because GST is a bit regressive, income tax is a bit progressive, umm… you end up with a pretty flat system owing to national standards.

Mike

I know this is a government decision obviously, but what… a capital gains on what?

Sir Michael

Aaah… basically on land, business assets aah… aah… non-owner occupied housing, those are the… the major categories aah… that we’re doing.  So we haven’t done what the Australians did, say everything is in and then start making exceptions and, given Australian politics, everything starts becoming an exception one after the other. We’ve said, no, here’s the fine list of what’s in and then we’ll work out what kinds of variations there are within that.

Mike

Okay.

Sir Michael

There’s things like, you know, if something is subject to capital gains tax there’s something called rollover relief, so it’s not applied at that point, but maybe at the next transaction umm… maybe never, in fact, depending on how things work out.

Mike

And obviously the size of the tax is critical but broadly, what’s the size of the haul? What does it bring in?

Sir Michael

Aaah well, estimates are still pretty kind of elastic because there’s still fine tuning and some of those fine tunings make quite a difference.  But looking over the first five years at roughly aah… ten billion, which sounds a lot, but then you gotta remember roughly over those years aah… total government income was round about $400 billion. And, of course it increases because we are starting off with a system that doesn’t look back, starts from a day, initial income is low and it builds up and that actually makes better than the profile of the need for capital income taxation looking out over the next 25-30 years. And probably about 35-40 years if we get the full… the full effect of it.

Mike

Right. So, given it is supposed to fiscally neutral what tax gets cut?

Sir Michael

Aaah.. well we’ve put up some… some indicative packages to the government. Umm… two of the packages are more weighted to reductions of personal tax, the other two have quite a substantial element of reductions in business taxation, not so much the corporate tax rate umm… but things like reintroduction of depreciation of building costs which the previous National government abolished in 2010-2011. But there is an infinite variety of the ways of which that mix… and of course you’ve still got to go through the process in terms of government.  Does the government accept these recommendations? Will all three parties be online? Going through a… a tremendous process of further consultation umm… and long select committee consideration. So, it’s a long, long way to go before there’s actually any kind of capital gains tax.

Mike

Indeed, but having said that and you being on both sides of the fence here, what’s the… the real politic.  Do you go into an election going, hi guys, here’s a capital gains tax and expect to get votes?

Sir Michael

Aah… well I think you have to go into the election with aah… the full programme clear so people understand it, so you got minimum sort of areas of people making mischief and we’ve had a bit of that already from one or two commentators, you know someone sort of saying we’d have to require everyone to go out at the same day to get a valuation. Which clearly would completely bury the NZ valuation industry. In a word, we couldn’t possibly cope with that. In fact, what would happen, there’s a variety of means of arriving on a valuation at a certain day when after five years after that day in order to actually work out what that valuation should be.

Mike

All right, appreciate your time as always. Sir Michael Cullen who’s the former finance minister of course and the head of the tax working group.

Finally, Cullen gets the opportunity to heavily tax rich pricks, umm… I don’t know that’s true. It’s fiscally neutral. You must understand his role is not political, his role is to merely recommend. What the government does with it is up to the government and it is fiscally neutral. So if he’s hauling in $10 billion from a capital gains, somebody, hopefully us, through personal tax, gets cuts.  And Grant Robertson’s been on this programme before indicating that might well be the way he’s thinking.


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