New Zealand's Treasury Looks For Substantial Tax Reforms

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

24 November 2009

New Zealand’s Treasury has released a report prepared for the Minister of Finance regarding the country’s target of closing the income gap with other countries, in particular with Australia, by 2025.

The key message of the report is that, without a consistent package of major economic reforms, including tax reforms to encourage savings, investment and work effort, that target was unlikely to be attainable.

The New Zealand economy, the report stated, “faces serious and longstanding challenges. The accumulated imbalances and indebtedness are severe. Those imbalances, the product of excessive public and private consumption spending, show few signs of correcting sustainably”.

“The per capita GDP growth rate needs to be more than doubled, and maintained at that higher rate for 15 or 20 years,” it added.

“Substantial multi-faceted structural reform is essential if this growth acceleration is to occur. The first, and probably the single most important element, should be a thoroughgoing reform of the tax system.”

The report went on to observe that: “Tax reform should be focused on removing the significant biases in favour of consumption, and on providing a tax environment much more conducive to achieving the sort of levels of innovation, participation, savings and investment that New Zealand needs.”

The Treasury noted that such a strategy would also enable substantial reductions in income tax rates.

“There is a variety of income tax reduction options (e.g. harmonisation at a single maximum rate, or focusing more heavily on reducing capital income tax to promote savings and investment), each of which could be expected to have significant long-term growth benefits,” the report continued.

“The less ambitious the increases in other rates (goods and services tax, land tax, capital gains tax), the more hard choices would be required around where to concentrate income tax reductions.”

“Issues here include choices and judgements around the significance of the risk of losses of highly-skilled labour if taxes on labour income were not reduced against the benefits in terms of encouraging investment (and savings) if income tax cuts were focused more heavily on capital income. Analysis is underway on which option we would recommend. The Tax Working Group is also looking at these issues,” the report concluded.

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