Nicola Willis played an economic Uno reverse card and said a capital gains tax would discourage business investment. We went in search of an economist, financial type, or person who’s once used money, who would back her take.

Nicola Willis appeared on RNZ’s Morning Report last Thursday, beset on all sides by affliction. Wokesters like the chief executive of ANZ, the IMF, and Newstalk ZB’s Kerre Woodham were piling on, urging the government to introduce a capital gains tax. She was there to teach those notorious pinkos a lesson and reintroduce some economic sense into the discussion. Things got off to a rough start. A mere 44 words into her explanation of New Zealand’s full economic context, presenter Corin Dann interrupted, asking her to return to the 35-word question at hand. “You had the benefit of a long question, and I’m going to give you a proper answer,” she said. 

But Dann continued to insist she explain why we don’t need a capital gains tax when the US, Australia, and nearly every other country in the OECD has one. That was when Willis decided to deploy a bold conversational gambit and play the economic equivalent of an Uno reverse card. 

“When you look at our economy, one of the challenges we have is that our firms don’t actually have that much capital invested in them. That has affected our productivity. So when you look at all of those factors, do we really want to say to small businesses, to KiwiSavers, to people wanting to invest, actually, if you invest more capital, you’ll face more tax,” she said.

This is essentially the opposite of what economists, accountants, commentators, and people who once saw a $20 note tend to claim, which is that a capital gains tax would redirect investment away from unproductive housing assets toward business. Dann said as much. “Are you saying that a capital gains tax would somehow discourage investment in business?” he asked. “Because I think you’ll find most economists and tax experts will argue the opposite; that there has been a bias to housing at the expense of money going into the productive sector.” 

Willis was undeterred. “What I am saying is that it would detract from that, because if you own a mechanics business or an interior decorating business, when you go to sell it, you will be slapped with a capital gains tax. That’s pretty off-putting.”

Maybe the finance minister had access to a different source of economic advice than that generally provided to journalists like Dann. Who was telling her a capital gains tax would reduce business investment? Finding that person or persons sounded like a challenge for The Spinoff.

First it was time to rule out some long shots.

“An absence of a CGT on investment properties puts them at a tax advantage. That means we overinvest in residential property – pushing up rents and house prices along the way. This also strangles investment in other, more productive areas of the economy,” said Council of Trade Unions economist Craig Renney, who spent much of the last election cycle getting repeatedly berated by National candidates for his admittedly correct calculations on their policy costings. 

Tax researcher and capital gains tax advocate Max Rashbrooke also pleaded not guilty to secretly providing anti-CGT advice to the finance minister. He argued our current system incentivised small-scale property investment, which generated little taxable day-to-day income, but did generally spew out a massive untaxed capital gain at point of sale. “It’s plausible a CGT would help shift investment away from residential property,” he said. “The strength of that effect isn’t certain. But what is certain is that there’s no support, as far as I know, for the proposition a CGT harms investment. Admittedly, I’m not an economist. But nor is Nicola Willis.”

As mentioned, it wasn’t Kerre Woodham.

Tax expert Terry Baucher wasn’t convinced by Willis’s argument either. He said prime minister Chris Luxon’s decision to invest in seven houses, including an Onehunga unit recently sold for an untaxed $300,000 capital gain, was an indication of what our current system incentivises.

“By her logic we should have one of the most heavily invested-in business sectors because of the opportunity to grow a business and realise a tax-free capital gain. But we don’t, although America, Australia and the UK, which do have a CGT, have plenty of business investment and are more productive.”

Independent economist Cameron Bagrie supported a CGT, offset by a cut to the company tax rate. “The scrum in NZ is too far screwed towards housing investment, and a CGT on housing is one way of balancing the ledger,” he said.

Infometrics chief executive and media regular Brad Olsen said businesses had nothing to fear from a properly implemented capital gains tax. Like Bagrie, he said a hypothetical tax switcheroo offsetting a CGT with a cut to the company tax rate could encourage investment.

“I can understand the concerns from the minister, but I don’t share them,” he said. “From a fundamental point of view, it’s hard to understand why some people are fine with income tax, where you pay a proportion of the pay you get from using your time, but are against your asset paying a proportion of the gain – not the total value, just the additional gain – in tax.”

Economist Sam Warburton wasn’t sympathetic either.

“I do not endorse Nicola Willis’s views,” he said.

But then he proceeded to do the thing I hate most, and introduce context and nuance to the discussion. “Basically there may be a bit less capital investment overall because capital gains are taxed (so a bit of what Willis was saying), but likely better allocation of capital across the economy and productivity overall because we’d remove the tax distortion that sees capital flowing to sectors where capital gains are more possible (ie the point Corin Dann was making).”

The sectors we currently over-invest in can be seen on this graph from the Tax Working Group.

The Spinoff also contacted economists from New Zealand’s largest banks. Strangely, none of them wanted to weigh in on a highly politicised topic that might require them to be at odds with the finance minister.

“I have no comments on this topic at this time,” said ANZ’s Sharon Zollner.

“I was a bit sick this morning so don’t have much time really to delve into the whole CGT debate,” said ASB’s Nick Tuffley.

Other banks either did not reply, or insisted on anonymity.

Eric Crampton, an economist for right-leaning thinktank The New Zealand Initiative, provided a comprehensive response that could be seen as broadly sympathetic to Willis if held in a certain light at exactly 3pm on the summer equinox. He said the country could see a decline in foreign capital investment if it implemented a CGT without other changes to its tax structure. He preferred to discourage unproductive housing investment by loosening zoning laws to such an extent that property would simply stop generating large capital gains. “If zoned land is no longer scarce and isn’t expected to just keep becoming more scarce, that abolishes the capital gain at point of origin.”

Sense Partners economist Shamubeel Eaqub provided a brief and to-the-point assessment when furnished with a transcript of Willis’s take on a CGT discouraging business investment.

“No. It makes no sense,” he said.