Why the NZ Labour Party is crazy for suggesting the introduction of a Capital Gains Tax

Moving away from the Dirty politics debacle and Kim Dot Com saga, the biggest issues in this years New Zealand General Election are Kiwisaver and the Government's Kiwisaver scheme.

If Labour was to win the general election being held on the 20th of September they would introduce a capital gains tax.  The Capital Gains Tax would be introduced in an effort to stop property speculation which Labour leader David Cunliffe believes is the main reason people are unable to purchase homes.  Under Labour's policy proposal, only the family home would be excluded from the tax.  That means all investments including shares, term deposits, managed funds and property investments would be taxed if they made a capital gain.

New Zealand is one of the only countries in the OECD without a CGT and those on the left think the proposal has merit but this blog will attempt to explain why it is a terrible idea.

A Capital Gains Tax is generally introduced by countries in an effort to stem growth in particular areas - in this case the NZ housing market however as mentioned it would have undesirable consequences because New Zealanders are already terrible savers.  Nobody is going to invest in something if it's going to cost them money to do so and people will be less likely to take control of their financial futures.  

That is a major problem which would see the Government need to pick up the slack.  We're already seeing that with Kiwisaver which was originally introduced by former Labour Finance Minister Michael Cullen under Helen Clark.  Kiwisaver's original aim was to ensure that New Zealanders had enough money to fund their retirement however that isn't at all what's happened.  Kiwisaver is now, for want of a better phrase, a home deposit savings scheme.  Instead of being just for retirement, after being enrolled for five years people can withdraw the money invested and use it to purchase a home.  In addition to this, the Government will top up the money.  The problem with this is people in New Zealand are notoriously bad savers and providing what are essentially handouts as both a Labour and National want to do, will make the situation worse.  

A CGT will too.  People are already not saving or planning for their futures and given that terrible track record of saving the last thing people need are more barriers to planning for your financial future.  The problem is a capital gains tax will extend to all types of investments and if people aren't investing in their future they'll be so much more reliant on the state in retirement.  It isn't just people's retirements that will suffer.  What if they lose their job or for whatever other reason they are unable to work?  Why should the taxpayer foot the bill?  Why should those who DO plan for tomorrow be penalised?  And why should those who don't save continue to get a free ride with Kiwisaver and other government policies that just reinforce the handout mentality?

These are just some of the reasons why a CGT is a bad idea.  If anything, to promote planning for tomorrow, the government needs to cut taxes and increase the age at which you can get super so people are forced to take responsibility for their own lives.