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Capital gains tax: a move to the left for Labour?

Posted: 26 July, 2011 by Admin in Economics, Labour Party NZ, National Party NZ

by Colin Clarke

The emergence into the public domain of Labours proposed Capital Gains Tax (CGT) has, at least in the eyes of the media, split the parties along perceived class lines ahead of the forthcoming election. National and ACT have, of course, have cast it as an attempt to go back to the bad old days, coupled with dire predictions about what will happen to the economy if Labour won the election and the tax was implemented.

Those who are on the left are saying the same as National, that it is a progressive move that shows that Labour, at last, are moving in the right dierection. Chris Trotter (http://bowalleyroad.blogspot.com/2011/07/price-wepay-for-civilisation.html) states: Labours tax policy is as much a moral declaration as it is an economic statement. It speaks to our notions of fairness and equal treatment every bit as directly as it addresses the investors love affair with real estate.

He goes on to say, Thats why Labours embrace of a Capital Gains Tax is so important. It signals that a line in the sand has been drawn by the Labour caucus.

Another left-wing blogger, Chris Ford (http://www.voxy.co.nz/politics/labours-capital-idea-capital-gainstax/1273/94343), writes that, from a left-wing perspective, Labour has finally done the right (left) thing. During the fourth and fifth Labour Governments, a CGT was ruled out on the grounds that it would impact upon business confidence, amongst other things. Thankfully, in 2011, the party has had a change of heart. Such a tax is necessary not only to generate the revenue that will be needed to pay for Labours promises but also make some dent in the yawning income inequality gap this country faces.

So there you have it. Labour is fighting the election on a left-wing platform based on taxing the rich. Except, not everyone who has come out in support of the policy can be categorised as part of the left by a long stretch. The move has been applauded by the IMF and the OECD, with the latter having recommended this move for a long time. Furthermore, it should also be noted that the political commentator Matthew Hooton, not noted for his leftwing views on economic matters, also endorses the idea of a CGT, as does well known capitalist Gareth Morgan. It is also worth pointing out that the only two other OECD countries without a CGT are Turkey and Switzterland.

So what is going on? Why are such politically diverse organisations and people endorsing the CGT policy?

The starting point to discover what is going on is a cursory look at the state of the New Zealand economy. Almost 30 years after the start of Labours fourth government and the implementation of Rogernomics, the economy is in a mess. Despite the hype about the benefits of opening up the economy to market forces, only the rich have prospered. John Key touts New Zealand around the world as the perfect place to invest in because of the low wage rates, the low level of regulation in the workplace and the ability of workers to work long hours.

In spite this of all this, the economy hasnt grown nor changed in any meaningful way. The countrys only significant exports are still of agricultural produce, timber and its by-products, as well as small amounts of specialised machinery. This causes a problem as the earnings from these sectors fail to cover the costs of the large amounts of goods that have to be imported into New Zealand to sustain the economy. Tourism, as the only other major industry that brings in foreign money, can never hope to make up the difference.

One of the major problems for the New Zealand economy has been, especially since the 1984 reforms, the lack of capital investment into the productive sector. Even with the tax rate for high earners being pushed lower and lower, little of this money was invested into the productive sphere, directly as new capital or more indirectly into Research and Development. Other countries, such as the USA or the UK for example, have been able to partly resolve this problem of lack of investment by the sheer size of their economies and the use of old fashioned economic imperialism (See Tony Norfields article The Economics of British Imperialism: http://economicsofimperialism.blogspot.com/2011/05/economics-of-british-imperialism.html). This is obviously not an option for New Zealand nor is it a long term solution for the countries mentioned.

This problem of lack of investment has been recognised many times in the past in New Zealand but the political will has been absent from introducing a CGT or anything similar. As far back the early 1990s when Don Brash was governor of the reserve Bank of New Zealand, the arch neo-liberal argued for a CGT on investment properties In a speech delivered on 3 June 2009, now departed New Zealand Treasury Secretary, John Whitehead called for a capital gains tax to be included in reforms to New Zealands taxation system. His successor, Gabriel Makhlouf says: Our view is that our current system has a slight bias in favour of, in particular, property holdings and we see, and certainly my predecessor (John Whitehead) is on record as saying, a capital taxation is a way of rebalancing that (http://www.stuff.co.nz/business/money/5282369/Capital-gains-tax-goodtool-Treasury-head).

Whilst the prevalent problems in the New Zealand economy have been evident for a long time, it is now becoming clearer to all but the most doctrinaire politicians, that the free market is not delivering what is needed for the economy as a whole. This idea that the market works great if its just left alone has taken a serious battering over the past 20 years, and even more so since the financial sector meltdown. This has led to renewed focus from bourgeois economists and commentators on the productive sector. This is why the argument about CGT has reappeared on the agenda now.

Another problem New Zealand faces is that capital flows where profit is greatest, not where its most needed to smoothly operate a capitalist economy. So, after removing most of the obstacles to growth trade union power, a very big state-owned sector, commodifying much of the remaining state sector including, to some extent, public services, driving down wages and conditions and making workers work longer, harder, faster neo-liberalism still couldnt inject sufficient oomph into the economy to bring about a dynamic new round of accumulation. Capitalism is so senile now, it simply cant survive for long without state direction and aid. This was one of the characteristics that Lenin noted of the imperialist epoch. Its one of the signs that the market cant operate according to its own laws any more and requires planning.

If the above is true, then another question to be asked is why doesnt National bring in a CGT. According to some recent articles in the press, Bill English at least, thinks it is necessary. However, the difficulty for John Key is that he has built a political constituency based on farmers, small business owners and some sections of the middle class. It is not in their interests to have a Capital Gains Tax as this section of capitalism are the ones most likely to have bought investment properties. Phil Goff, on the other hand, without a clear cut constituency in the same sense, is more able to represent the interests of capital-in-general.

However, despite the benefits to the capitalist class as a whole of CGT, the truth of the matter is that Labour are unlikely to win the election and, even if they did, it would be a decade or more before the changes filtered down into the economy. Even then, their version of CGT is so timid, it wont have a massive effect on the areas of the economy that need more investment