Classical Government Imprudence and Overreach

Unable to Leave Well Enough Alone

Well, well, well.  The birds are truly coming home to roost.  A divisive debate has begun to roil the Chattering Classes in New Zealand.  The intent to introduce a capital gains tax is causing a few formerly extinct volcanoes to fire up again.

The responsibility for a plan to introduce a tax upon capital lies firmly at the feet of our inept Prime Minister, Jacinda Ardern.  The Labour Party socialists had learnt their lesson--we thought.  They had several times attempted to introduce this "envy tax" and been thumped.  Then Ardern, campaigning to win the last general election, out of the blue, with zero consultation, decided to campaign for a capital gains tax once again.

Thus began the turmoil and troubles which have led us to where we are today.  Mike Hosking details some of the milestones:

Jacinda Ardern personally overrode her party and ran this policy last election to be enacted by now. But she got dragged kicking and screaming into a cupboard and was subdued to the point where she acquiesced, and promised nothing before 2020, then flick it off to a working group.

The working group was specifically tasked with finding a way to make a CGT work, they couldn't. They told the Government they couldn't, they were then told to go away and try harder. All the while the Government stalled, pretending they hadn't made up their mind.

They're still stalling, pretending they haven't made up their mind and in that is the naivety, they're taking their issue, and making a complete and utter hash of it. The Prime Minister, at her post-Cabinet press conference, lectured the media on how to cover this subject, and offered up an olive branch to small businesses and farmers that they'll be at the top of her mind.

She does this because Newstalk ZB political editor Barry Soper said the Beehive's ninth floor is in shock at the reaction to the tax. More naivety.  If they really thought a new all-encompassing, sweepingly aggressive tax was going to be welcomed, they didn't learn enough about the real world as they spent all those years at university, union meetings, and running NGOs. [NZ Herald]

When the socialists were last in power in this country before the current mob they set about designing and introducing a tax upon capital gains.  They sent a bevy of Treasury officials to research versions of capital gains taxes in the OECD.  The consensus advice ran something like this: "yes, capital gains taxes are great.  Every country should tax capital.  But whatever you do, don't have the kind of capital gains tax we have.  It's useless."  The idea was quietly dropped by the NZ government.

So, capital gains taxes are great in theory, useless in practice.  They are a bridge too far.  Apart from the perverse outcome of pandering to envy capital gains taxes have two additional fundamental weaknesses.  Firstly, they are horrendously complex, and usually come with a thousand and one carve outs and exemptions, qualifications and concessions.  This leads to the second mortal weakness: the amount of money raised for government coffers is usually less than the costs to the government and the economy in general from administering it.

As Hosking puts it:

Do remember the more they cut out of this, the more people they exempt, the less sensible a CGT is.  If you're taking farms and businesses out, you open the Pandora's Box of the fast burgeoning industry that is tax avoidance. Not to mention the fact the more you exempt, the less you actually raise. And the less you raise, the more questions are asked about the cost of compliance and chasing the returns. . . .

This Government looks yet again like they're fighting to convince anyone that what they're doing is good for the country, makes sense, and it's all part of a clear professional well thought through policy plan.  And if they're on the ropes now, how bad is it going to get when they actually tell us it's on and provide some specifics?

What is that old definition of insanity?  One who makes the same mistakes over, and over, and over, and . . . That's right.  The classic definition of insanity is doing the same thing over and over again and expecting a different result.