Having been a business leader in various industries and now a teacher of business in the education sector, with the recent public disclosure of Capital Gains Tax being advocated by a working group of tax specialists to central government; I think it’s about time that I spelt-out a fundamental principle of human psychology in the hope that at least the more astute decision-makers out there think deeply about the likely impact/ consequences of what has been proposed.

Human beings strive each and every day to fulfill a wide range of needs – propelled by the pursuit of wanting to maintain a state of homeostasis (i.e. balance). These needs range from the need to eat/ drink right the way through to higher order needs such the need to belong and the need to realise our potential (i.e. the zenith of what we’re capable of achieving/ being).

Everything we do in life requires will, time, energy and application (effort and assignment of talent/ skill). When we create “rules” that serve to curtail/ standardise/ restrict/ prohibit certain behaviours/ actions taking place such rules necessitate EXTRA will, time, energy and effort being applied to achieve the same or similar outcomes as those that could have been achieved in the absence of such rules. 

But when we create rules (particularly those created by others which we have no input into and have no control over) which serve to diminish the outcomes that we strive to achieve, this is when the psychology of even strong-minded people starts to modify considerably, and become questioning of the “worth” (value) of the pursuit (objectives) that they had conceived.That is, the question of “do I have the will and is it worth me devoting the necessary time, energy and effort to performing the activities required to achieve the outcomes that I set as goals for myself/ my organisation ?” starts to show itself.

I believe that New Zealand is at a tipping point right now – a position that it has steadily been heading towards for the past 50 years as increasing amounts of legislation and regulation have come into effect in an attempt to control peoples’ behaviours and lives generally. Result ? New Zealand has become a country which is “legislative dependent” to achieve virtually anything, and independent free (innovative) thinking has been successfully quashed under layer upon layer of rules. Rules which mostly serve to “disable” rather than “enable” (i.e. encourage/ incentivise).

The Capital Gains Tax (CGT) recommendation in front of central government – should it take effect – will:

a) Add yet another layer of compliance cost to businesses without invoking any positive return in exchange for this cost. i.e. nil Return On Investment to the business itself.

b) Despite perhaps not being realised (payable) until a business is sold, it still represents a significant cost burden to particularly small businesses; and dare I speculate but it is foreseeable that central government would want to stay abreast of the “current market value” of business assets for government revenue forecasting purposes – so it would be a fair predication that central government would require business valuations being performed at intervals during the life of the given business (i.e. not a one-off single cost exercise).

c) Cause many small business owners in particular to start thinking “is what I’m doing really worth the time, energy and effort necessary for me to maintain a viable business” (never mind having a “growth” mindset), only then to have the financial value reflective of my years of hard graft reduced by central government taking a percentage of my capital gains ?”. And it is this mindset that could well see the level of productivity/ GDP level and survival rate of New Zealand businesses plummet.

Alternatively, those businesses which consider the road too hard to travel in New Zealand have plenty of choices for relocation – particularly those that are in the IT sector. Should these relocations take place, this too will serve to reduce GDP achievements that New Zealand is able to claim on its books.

Central Government should be very concerned about the above foreseeable outcomes, and therefore make the right prudent governance decision to reject the proposal in front of it for a Capital Gains Tax to come into effect.

So the key psychology learnings to take away from this article are:

i. The achievements of any individual or organisation improve when the right conditions for improvement are activated. That is, when there are more rules in place which “enable” versus “disable”.

ii. When there are so many rules in place that govern behaviour, people feel “controlled”. When people feel “controlled” people tend to stop thinking for themselves and/ or stop thinking in a creative/ innovative vein. When innovation dwindles, so too do comparative advantages – rendering an organisation vulnerable to competitive warfare (market share erosion).

iii. When the nature of rules in place are perceived as being too onerous relative to the end outcomes that are likely to be achieved, people tend to question the value of pursuing the activities that are required to achieve those outcomes – and in the least resist applying themselves/ resources at the maximum level possible. Result ? The outcomes achieved are either of a lower quality and/ or lower quantity than what otherwise would be possible had the rules not been so onerous.

A good analogy to use to understand this third and most serious consequence is where a Strategic Plan is created to guide the direction of a company. If the author (e.g. CEO/ GM/ Board of Directors/ MD) of the given plan includes objectives which are deemed by the stakeholders who are responsible for implementing the plan to be either too many and/ or too difficult and/ or unrealstic then the psychological response of these stakeholders will be one of “futility”. When a person feels that a pursuit is futile, they tend to give-up on that pursuit, or in the least not apply the best of themselves to that pursuit.

As I have said many times before in the various articles that I have published to date, rule makers must think long, hard and deeply about rules that are under consideration before the legislative/ regulatory quill is dipped into the ink pot; and in my view rule makers right now should be concentrating their time, energy and efforts on ensuring that there are more rules in place that “enable” (empower/ support/ encourage/ incentivise) versus “disable” (restrict/ curtail/ prohibit). It is clear to understand what the consequences are for the New Zealand business community if this advice is deflected/ ignored.