NZ Tax Changes Recommended

by Mary Swire, Tax-News.com, Hong Kong

12 May 2010

A report by the Maxim Institute (MI), an independent research and public policy think tank, makes a series of recommendations about how to improve New Zealand's tax system, despite concluding that there is little appetite among New Zealanders for major change.

According to the results of a poll commissioned by the institute, the vast majority of New Zealanders are opposed to cuts in public spending on Working for Families, KiwiSaver and New Zealand superannuation, while also being opposed to a land tax and even to an increase in goods and services tax (GST), even if personal income taxes are reduced at the same time.

"The popularity of government spending on these programmes reflects a common principle, that once spending is introduced it is very hard to remove,” the MI researcher, Steve Thomas said. “In 2004, government operating spending was at 30% of gross domestic product. It is now at 36%. We should think very carefully about whether these programmes are of good quality and worth their cost."

"Costly, poor quality government spending is a drag on the economy and is unsustainable in the future," he continued. "Forecasts show that in the next five or so years, the government will be spending more than it collects in revenue. Any predicted spending drops do not counter predicted revenue drops."

"People's concern about the prospect of cutting some of the money being spent on these services is understandable. But we have to be realistic about the shape of spending and growth in New Zealand," he concluded.

The MI reports that New Zealand relies heavily on personal and corporate income taxes - what it calls “the least growth-friendly taxes”. Also, it says that “tax bases are mobile, and they are voting with their feet. For example, Inland Revenue has reported that about 24% of highly-skilled New Zealanders live overseas. There is also a risk of international tax competition, in which our tax system is compared unfavourably to that of other countries.”

Thomas argues for a move to increase GST from 12.5% to 15%. "There is obviously significant concern about a GST increase and that concern deserves to be acknowledged," he said. "But a GST change is likely to encourage more investment and saving and stimulate capital formation.”

His opinion was that: “A rebalanced tax system offers real benefits for all of us, in the shape of economic growth and better living standards. The government needs to make a commitment to improving the tax system, even if it costs them some popularity for a time. They must also clearly explain the case for the changes, to the electorate."

The MI’s report therefore recommends the introduction of a two-step system for reduced personal income taxes. To make New Zealand’s personal income taxes flatter and simpler over the medium-term, it says that the top marginal personal income tax rate should be around 27%, with a low income tax rate retained for taxpayers who earn up to a threshold set according to a relative measure of low income. It does not recommend that a tax-free threshold should be introduced.

It also suggests that the 30% corporate tax rate should be reduced and aligned with the personal income and trustee rates at 27% over the medium-term, and that the corporate tax rate should be further reduced if the top marginal personal income tax rate is also reduced over the medium-term.

With regard to savings and investments, the MI’s other tax recommendations are that the trust tax rate should also be lowered from 33% to align with the personal income and corporate tax rates over the medium-term, while the KiwiSaver tax incentives for employers and employees should be removed. However, it does not support the introduction of a land tax, capital gains tax or capital income tax.

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