Muldoonist ad hocery is back
Published in Insights, The New Zealand Initiative’s newsletter, 26 March 2021
It is hard to know where to begin, there is so much wrong with the Government’s housing package presented on Tuesday.
I leave it to my colleague David Law to explain why the measures introduced will hurt housing affordability and supply. Instead, I will focus on the political and broader economic implications.
For a start, it is not conducive to creating trust in politics when the two most senior ministers – the Prime Minister and the Minister of Finance – do not do what they promised.
The Prime Minister’s rejection of a capital gains tax was unequivocal. In a Beehive press statement on 17 April 2019, she said: “I am ruling out a capital gains tax under my leadership in the future.”
As Newshubs’s Tova O’Brien wrote: “Jacinda Ardern effectively introduced a capital gains tax, breaking one of the biggest promises of her political career – one that she staked her job on.”
The Minister of Finance’s broken promise weighs heavier still. Only half a year ago, he categorically ruled out extending the bright-line test. He now says that statement was “too definitive”. The Herald’s Audrey Young wryly commented that the Minister’s explanation sounded “little like he meant he was being “too honest”.”
What is worse, the Government’s measures are a serious assault on the tax system’s integrity.
To introduce a capital gains through the backdoor is bad enough. To let it operate at taxpayers’ marginal income tax rates (up to 39 percent from next week) is reckless. Almost no other developed country does that. Capital gains taxes typically operate at a much lower rate.
Also, it is one of the principles of taxation that income ought to be taxed, not revenue. Therefore, the deduction of interest for property investors is not a loophole, as the Government claims. It is precisely how the tax system should operate.
The new tax measures create an uneven playing field for investments in housing on the one hand and everything else on the other. It also aggravates the tax advantages of owner-occupied houses – as if that had not already been a problem without the new policy.
The icing on the cake is that the Government’s new measures border on retrospectivity. Property purchase agreements suddenly have their financial calculations invalidated. Existing investors, who had made long-term plans, now find themselves in radically different territory.
The tax system is a core element of the apparatus of government. Tax changes need to be principled and due processes for changes must be followed for the system to have integrity, legitimacy and engender confidence.
That is why, in its first term, the Government asked the Tax Working Group to assess tax reform options. Everyone affected could have their say, and the public could form a view.
With this week’s announcements, one wonders why the Government even bothered with the Tax Working Group. Why not announce plans on a Tuesday, rush them through Parliament under urgency on Wednesday, and have a new capital gains tax in operation on Saturday?
With no public consultation, a truncated Parliamentary process – and, as it turns out, without much consideration of Treasury and Inland Revenue’s advice. This is not how OECD countries are usually run.
Finally, if the Government can violate such elementary principles of good policymaking and taxation so wilfully yet again, what will it do next? Did it not learn from the fallout from its 2018 ban on offshore oil and gas exploration?
For anyone contemplating doing business in New Zealand, the words ‘political risk’ must now come to mind. This kind of policymaking damages New Zealand’s reputation as a place to do business. Just look at what happened to the Kiwi dollar’s exchange rate this week.
As far as policymaking is concerned, it does not get worse than the Government’s housing package. Its political arrogance is compounded by the economic damage it creates.
In normal circumstances, one would like to send the Government back to the drawing board. The only problem is the Government has just thrown out the drawing board.
Law changes we thought too foolish to be contemplated on Monday will be in force tomorrow.
The worst of Muldoonism is back in New Zealand politics. It is a morass of ad hoc interventions and spiralling public debt. We know how that ended last time.