That’s it, writes Bernard Hickey. It will now be almost impossible for a wealth or capital gains tax to be implemented within the next decade or two.

This is an edited version of a post first published on Bernard Hickey’s newsletter, The Kākā.

The future of Aotearoa’s political economy will now remain frozen in its stagnant, unequal, unjust, unproductive and unhealthy state for the foreseeable future. That’s what our leaders, and ultimately the only voters that matter, have decided. Those hoping to change that frozen landscape should now look after themselves and their families, and/or hope and work for an electoral miracle that gives parties who want such taxes dominant positions in any post-election negotiation.

The prospects of a combined Green/Te Pāti Māori/TOP vote growing from around 15% now to above National-Act on 50% are infinitesimal within the next 94 days. It would require all Labour voters to switch, and quite a few New Zealand First and other flotsam and jetsam. As much as some might want that, it’s simply not realistic to believe it will.

Any renters without family resources or strong prospects of marrying into wealth need to know they now have no normal pathway to home ownership for their families for another generation. Realistically, they should look to migrate to Australia, which has a capital gains tax that helps fuel higher capital investment, higher productivity, higher wages and a much better prospect of saving a house deposit after the rent (albeit high and rising) is paid.

Stockholm syndrome powered by tax-free gains on land

PM Chris Hipkins’ decision announced yesterday to rule out a capital gains tax or wealth tax in his political lifetime has effectively shut down the discussion again. It signifies another complete victory for those median voters who own homes in the suburbs, and who can’t see any other financially viable or stable future for themselves or their families without leveraged and tax-free capital. Their main focus now will be on leveraging up even more tax-free equity to afford to help their own children with deposits to “get on the ladder”.

The announcement yesterday of the freeze on the full wealth tax debate probably added another 10-20% overnight to land values, thanks to the removal of any uncertainty about a threat to the existing model of our “churn and burn” economy of a housing market with bits tacked. The division between landowners and renters is now brutal and stark. All that those on the renting side who choose to stay in Aotearoa can hope for is to marry into wealth or win Lotto.

Savers and entrepreneurs still thinking their simplest and least-risky way to financial security and wealth is to invest in their own and others’ businesses and their own income and skills should revisit that assumption again. Clearly, the easiest, simplest and least risky way to higher wealth is to:

• do whatever it takes as fast as possible to buy more residential land;
• to leverage it up as much as possible from a bank with proof of income from rent and one or two solid waged jobs (rather than uncertain and variable business income); and,
• then sit back and wait for massively leveraged and tax-free gains to arrive, possibly with the help of using any political influence to block new consents or infrastructure funding that would add more land that more houses could be built on.

Investing in businesses, managed funds and bank accounts that pay interest or dividends that are taxed and cannot be leveraged is a mug’s game. Unlike the rest of the world, where capital gains beyond the family home are taxed and where managed funds are often lightly or not taxed before retirement to encourage investing in real businesses, New Zealand will remain uniquely exceptional: a place where leveraged investment in residential land is tax preferred and politically untouchable.

Captured by a real estate industrial and political complex

Anyone who wondered how this situation could be politically sustainable for very long needs to be just as pragmatic and clear-eyed as Chris Hipkins.

He weighed up the numbers and decided challenging homeowners was not politically realistic. He realised he and the country is now so captured by the $1 trillion in tax-free capital gains made over the last 30 years and now held by median voters that it can never be changed. He gave up on changing the status quo, just as his predecessors, Labour prime ministers Jacinda Ardern and Helen Clark, did.

National/Act will never agree to a wealth tax to redistribute income or increase public and business investment. Unless parties in favour of such taxes get more than 50% of the vote, that will not change in our lifetimes. Why? Because more than 70% of voters are residential land owners and they won’t or can’t see beyond the immediate and obvious financial and emotional interests of their families.

They believe the status quo works for them and can be sustained. All they need is plenty of renters in work and not nearly enough new homes built. That’s why both Labour and National favour very high population growth through migration of temporary workers and not nearly enough investment in the infrastructure needed for enough homes for all the population. That:

• keeps rents growing to sustain the leverage in the land values;
• keeps land values rising because of a lack of new homes to slow rent growth or stop values rising;
• pushes budgets back into surpluses and lowers public debt through high GST and income tax receipts from the temporary workers, but without capital investments; which,
• keeps mortgage rates lower than would otherwise be the case to support land owners with high leverage; and,
• allows room in budgets for tax cuts for middle-income earners, who can then use that extra disposable income to apply for more leverage from the bank.

Here’s what Chris Hipkins said yesterday:

“I’m confirming today that under a government I lead there will be no wealth or capital gains tax after the election. End of story.”

He’s right. That’s it. The story is over.

Don’t believe me? I argue the case lower down.

Well that escalated. So what actually happened yesterday?

It’s worth looking at how the announcement was made, and why yesterday, to understand both how close Labour came to grabbing the third rail of a wealth tax, and how far away it is now.

While travelling in Europe, Chris Hipkins issued a statement as Labour leader that ruled out a capital gains tax or wealth tax in his political lifetime, saying this was the “end of story”.

He did that on the same day treasury released its budget 2023 advice documents showing the government considered a wealth tax “switch”, whereby net wealth over $5m was taxed at 1.5% a year, excluding the family home. Treasury now routinely puts out its budget advice a couple of months after the budget for geeks like me to pore over for the occasional nuance of “what might have been” in a proposal rejected in the months before the presentation of the budget.

But this wealth tax switch was the biggest “what might have been” in living memory.

Treasury said it would have applied to 25,000 individuals (0.5% of the population) with $5bn in assets and raised $3.8bn/year by 2025, in order to allow the first $10k of income earned by all to be tax free: effectively a $1,000 a year tax cut for the 95%.

Hipkins had to say something about the plans and to shut down a fresh debate about a capital gains or wealth tax before it got out of hand. Simply ruling them out was the simplest approach, and to reinforce that by saying his stance would apply “under a government I lead”.

Hipkins said he decided not to go ahead with the tax switch because Labour did not have a mandate for a wealth tax and he wanted to keep things simple at an uncertain time. Here’s Hipkins again, with my bolding, and my comments on the bolded sections, below each quote.

“With many Kiwi households struggling, now is simply not the time for a big shake-up of our tax system.”

(He’s right about many households struggling, but it applies mostly to renters and the 99.5% who would have benefited from the tax switch.)

(“Now” is a relative term. He’s effectively saying not for another generation, given if he wins the election that is three more years of no such tax, followed most likely by a National-Act government for another six to nine years.)

“New Zealanders I talk to want certainty and continuity right now, and that’s what I’m delivering with this policy.”

(Which ones? A Newshub-Reid Research poll in May showed a majority in support of a wealth tax.)

“When I became prime minister I said the government I lead will focus on the basics. Experimenting with a wealth tax doesn’t fit that approach, which is why I’m ruling it out. My position on CGT is a continuation of the position the government has held since 2018.”

(The risks of that experiment would be borne by the 0.5% of the population who are the most resourced to deal with the potential fallout.)

(Technically, Jacinda Ardern did not rule out the CGT until 2019, but he’s sort of right because the CGT died in the week before the 2017 election when Ardern promised it would not be implemented in the first term, and would only happen after a Tax Working Group study, which meant never.)

“While work was already under way on a potential wealth tax and CGT as part of a tax switch in the budget, I ultimately made the call not to proceed with it. We simply didn’t have a mandate to implement those tax changes.”

(That’s worth challenging. As Grant Robertson pointed out yesterday, the wealth part of the tax switch would not have applied until after the election, which would have made the wealth tax part of the election contest to provide a mandate.)

“Instead we have moved to address inequity in our tax system by increasing the top trust tax rate to match the 39% top income tax rate. This will help prevent trusts being used as a tax shelter and ensures the ultra wealthy pay their fair share. It also aligns with the increase to the top tax rate we implemented at the start of the term.”

So what’s the point of Labour again?

Finance minister Grant Robertson, who was the instigator of the treasury studies and no doubt informed Hipkins throughout the policy advice process in February and March, said in a standup news conference in parliament he would have preferred the wealth tax switch, but he was not gutted and was a team player.

“(The tax switch was) an idea that clearly I think has some merit, but I also am a team player and I’m also somebody who’s very conscious of the economic conditions that we are in.”

He said he thought it was still worth supporting Labour because he loved social justice and fairness.

“There are a lot of things that the Labour Party stands for. One of them is fairness, we’ve made some tax changes in that direction, we considered others and decided not to go ahead with them.”

Labour capitulated on a bank windfall profit tax too

Treasury documents also show the government looked at imposing a retrospective windfall profit tax on $1bn of bank profits in 2020 and 2021 to raise up to $700m, but decided against it because treasury worried about “significant unintended consequences”.

Here’s Hipkins again justifying the non-action (bolding and comments mine):

“Some people might call it boring, but the times call for restraint and simple and smart policies which grow our economy, help drive inflation down and provide targeted help to those families who need it the most.”

(Some people are calling it something else.)

“Details of our tax policy will be released soon, but New Zealanders can be assured the government I lead is listening and will be focused on making life a little easier without implementing big uncertain changes.”

(We should get the final policy position from Labour within a week.)

(But to whom is he listening to? The 99.5%? Or the 0.5%?)

So what was the point of the Greens again?