Tax reform is likely to be one of the biggest issues in this year’s General Election. If the debate so far is anything to go by, it will focus on how much cash-back parties are offering and the day-one impacts of any changes. pity. What we really need is:
• Multi-party agreement on long-term tax reform path, having as goal tax policy that will help attract talent, business and revenue. It does not all need to be delivered on day one and, in fact, is more credible if co-determined by economic conditions.
• personal tax system that is about growing wealth and incomes. There are other ways of addressing social equity, like extending Working for Families to cover individuals and improving the performance of low decile schools.
• The top personal and corporate tax rates aligned, to attract people and investment and reduce incentives for tax minimisation.
• wider tax base. Some of the options already being discussed include raising GST and introducing new tax on land. In return, personal and corporate top tax rates will all peak at $0.20.
The alternatives are short-term options like cutting tax rates to $0.28 or $0.30, paid for by fiscal drag as people earn more and drift into higher tax brackets (bearing in mind everyone now on the average wage of $46,000 will enter the top $0.39 tax bracket in just 10 years), or combining slightly lower rates with changes to the levels at which higher taxes apply. Pushing out income tax limits before new marginal tax rate cuts in does not address our international tax competitiveness, especially with Australia.
On the other hand, if we were to seriously examine widening the tax base and ending up, over an agreed period of time, with some of the lowest corporate and personal tax rates in the world, how would we fare?
At the Business Budget Summit held late last year, senior executives, with Revenue Minister Peter Dunne present, argued that widening the tax base would lower income tax rates, encourage investment, savings and exports, and discourage consumption.
Options on finding revenue included:
• Increasing GST from 12.5 percent to 20 percent to finance single-rate tax of $0.20
for all individuals and businesses, at the same time adjusting allowances and benefits to compensate for price rises for lower wage earners, families and beneficiaries. This proposal would maintain government spending at 31 percent of GDP (now about $55 billion year). It would still run small surpluses and meet the country’s social needs.
• tax of one percent on the unimproved value of all land, and rise in GST to 15 percent, to fund cutting personal taxes to $0.20. (Finance Minister Michael Cullen was quick to ask the leading economist suggesting this how the government would finance the loss of revenue while it waited for those who couldn’t afford the extra tax to die so it could reclaim it from their estates.)
Personal tax rates are business issue because they directly impact on the ability to attract and retain skilled people. Countries that have achieved long-term success, like Australia and Ireland, have clearly signalled their long-term tax regimes.
A sense of direction on tax policy is important for business. Over time equating the top
corporate and personal tax rates and flattening the tax scale is important if we are to remain internationally competitive.
In the longer term the government should not rule out widening the tax base by increasing GST, taxing environmental externalities or investigating the potential of land tax.
We have done very little on personal tax in the past 20 years. GST rates were last changed in 1989, after cancellation of the $0.25 flat tax in 1986. Then in 1999 top personal tax rates went up from $0.30 to $0.39 on income over $60,000. Since then the number paying the $0.39 top rate has gone up from five percent (in 2000) to 14 percent this year.
What are the chances of significant long-term reform?
According to ShapeNZ research, New Zealanders believe the government now has enough money to ensure Kiwis get “fair go”; 76 percent believe the government should lower personal taxes and 72 percent believe it is affordable.
Of the 62 percent of voters that will be swayed by tax policy, 13 percent say personal tax cut will be the single biggest factor influencing their party vote, while the other 49 percent say personal tax cut policy which also balances the need for continued social spending will decide their party vote.
Party vote analysis of those favouring single-rate tax reform shows some interesting MMP alliances are possible. For example, Green voters strongly back the single-rate tax system option, along with National, ACT and Maori Party voters. If National has first option to try forming government after the election, tax could become policy with which to pitch for Green support. That may come as surprise to some, but perhaps not to those searching for path to lasting long-term lower taxes – combined with the ability to make sure we still take care of each other and preserve our quality of life. M
Peter Neilson is chief executive of the New Zealand Business Council for Sustainable Development.
www.nzbcsd.org.nz www.shapenz.org.nz
