A capital gains tax is only an answer to a narrow question

Opinion: There is a renewed interest in a capital gains tax. The Labour party is having one of its occasional flirtations with the concept. A bank CEO even offered a very tempered murmur of approval. A billionaire admitted to a flash of interest subject to tighter government spending controls. A couple of accountants have realised that their fee prospects favour possible change rather than certain stability. Various commentators on the left started to see their fantasies coming to life.
I think I must be getting old. I expressed a social media view that “I would not get too excited” and found one of our driest economic commentators on my side.
I am not opposed to a capital gains tax. I’m also not opposed to much more progressive income tax rates for higher incomes. I’m not opposed to wealth tax, land tax, company tax, trust tax, inheritance tax – take your pick of any or all.
But we know as soon as any tax that looks to weaken wealth and power is discussed it immediately gets hamstrung by objections and exceptions. A case in point with capital gains is excluding a primary residence, which continues to favour such investment over others with potentially negative community prosperity implications.
The point is that, even just on the tax side alone, it all depends on what level the tax is set at and what the overall mix of taxes is. What is taxed and how much and what is not taxed. A simple example: a capital gains in a package to reduce higher levels of income tax would not appeal to many on the left.
A moment’s thought will tell you that arguing for or against one type of tax in the abstract gets you nowhere. All types of tax have trade-offs, inefficiencies, costs. They vary and their impact varies. What matters to each taxpayer, to different classes of taxpayer, and to the overall government revenue, to equity and to community prosperity, is the total mix, not any one of them. It’s pretty obvious, but much debate ignores it.
But equally obviously tax is only one side. Let’s say we could establish a mix and level of taxes that we could agree was consistent with equity and community prosperity. (We can’t, but just for argument’s sake.) What really matters to both equity and community prosperity is the mix and level of spending as much as the sources of the funding. A fair tax system supporting an aggressive defence industry or subsidising polluting industries does not achieve much.
Equity and community prosperity is not simply about distributive allocation or about collection and spending of government revenue as if it were simply an accounting exercise. What causes inequities and lack of community prosperity and environmental damage is much more complex and holistic than that. It is very dangerous if we see these issues deteriorate into such an arithmetic. If we assume that economic and social structures and the distribution of power within them are fixed and then focus on allocative policies alone there are no right answers. Just unsatisfactory compromises and unnecessary transaction costs.
One reaction to increasing, and often gross, wealth disparities in Europe is to limit personal wealth (see, for example, Limitarianism: The Case Against Extreme Wealth by Ingrid Robeyns) and reinforce that with tax and other means. If you think a simple capital gains tax is controversial, think about that! At least limitarianism has a clear goal.
Here one can already sense us being drawn into a technocratic discussion on various taxes, all of which are capable of manipulation to various ends. The real concerns are equity and community prosperity and these are not technocratic matters.
The economist Thomas Piketty gets called on a lot in these matters, rightly so given some important insights into inequality and taxation. In Nature, Culture, and Inequality he concludes: “the history of inequality is not a long tranquil process … Questions about the economy, about finance, government debt, and wealth distribution are too important to be left in the hands of a small group of economists and experts … they often look through the wrong end of the telescope to find narrow solutions.” He calls for wider public debate on the full issues and for a “movement whose aim is to democratise society as a whole and better apportion power”.
To my mind that is much more constructive than a narrow debate on what kind of capital gains tax is most acceptable to those most likely to be making capital gains. We know where that ends. Going nowhere.
At the last election the Greens proposed a specific wealth tax and Te Pāti Māori an even more radical one. They were identifying the core problems of equity and poverty and not simply an adjustment to a more “balanced tax system”, as one advocate for a capital gains tax has described it. What Piketty calls “looking through the wrong end of the telescope”.
The debate should not really be about tax alone, let alone one type of tax.