Australia has a housing bubble and a capital-gains tax. New Zealand has a housing bubble and no capital-gains tax.
No connection there, you would have thought.
Numb-nut morons Certified geniuses however suggest that the New Zealand government should embrace a tax on capital gains, in order to avoid the housing bubble we already have.
The logic of the argument escapes me, just as the art of logic has clearly escaped long ago from these self-proclaimed genii proclaiming it.
Writing in The Australian this morning, Henry Ergas observes
there is an iron law of Australian public policy, it is that you can’t keep a bad idea down. And never was that clearer than in the [latest] discussion of capital gains tax.
Bad ideas being enshrined in public policy debate are evidently not confined to Australia. If only. Happily, however, neither are good arguments against them, and Ergas’s is a beauty. For not only did Australia’s capital-gains tax do precisely zero to avert their housing bubble,
those high rates of capital-gains tax are anything but costless. To begin with, the capital-gains tax can tax investment income that has been taxed several times, compounding the tax rate on savings. And as the tax rate on savings is already high, the additional economic harm is material.
It is true that Treasury’s “Re: Think” paper on tax reform suggests otherwise. Because taxes don’t have much impact on the level of savings, it argues, taxes on savings, such as the capital-gains tax, may do little damage to efficiency, assuming they are imposed uniformly.
However, Treasury’s argument is confused. After all, saving is merely a way of using income today to “buy” consumption tomorrow; and just as the economic harm a tax on oranges causes does not depend on how it affects spending on oranges but on whether it materially reduces the number of oranges consumed, so the economic harm from taxes on savings depends not on what happens to the level of savings but to the impact on how much future consumption savers buy.
Sad to say that despite his other good works here, Mr Ergas labours under the modern misconception that consumption is more important than production—ignoring the obvious-enough fact that the latter makes the former possible—production itself being the most important economy-wide consequence of saving. And take note that the impact on saving (and thence production) of a capital-gains tax is “typically large”:
For example, at an unchanged level of savings, a tax that cuts the average inflation-adjusted annual rate of return by just 5 percentage points reduces the value of savings in 30 years by over 75 per cent.
Cut production by that much over that time period, and everybody is poorer for it.
But the distortions due to the capital-gains tax are even greater than those caused by other taxes on savings. In effect, as gains are only taxed when they are realised, the higher the capital-gains tax, the greater the incentive to postpone realisation. By thus locking in investors, high rates of capital-gains tax make asset markets less efficient while inducing investors to carry more risk (in the form of unrealised gains) than they otherwise would.
At the same time, because the capital-gains tax can be avoided by postponing realisation, rate increases may yield little revenue for the harm they cause.
Not that I favour government revenue-gathering, but since both the US Treasury and Congress’s bipartisan tax committee agree that revenue gained is hardly worth the harm, you’d think that our local
numb-nut morons Certified Geniuses for CGT would realise that neither their goal of raising revenue nor pricking bubbles is something their tax can do. Thank goodness then that
the New Zealand tax review … found capital gains taxes “make the tax system complex and costly”; it concluded that a capital-gains tax would not lead to a “fairer or more efficient tax system, lower avoidance or raise substantial revenue.”
New Zealand therefore benefits from not having a CGT, as do numerous other countries.
Do you hear that Bernard Hickey, Gareth Morgan, Russel Norman, Uncle Tom Cobley and all? The evidence shows New Zealand therefore benefits from not having a CGT, as do numerous other countries.
So either those folk are certified morons immune to evidence, or they have another goal. Which is probably just soaking the rich
You choose who is which.
[Hat tip Catallaxy Files]