The Government has raised expectations of a corporate tax cut and is set to come under renewed pressure to deliver personal tax cuts as a result.
A cut in the corporate tax rate to 30c from 33c is one of several options outlined in the much-awaited business tax review released yesterday by Finance Minister Michael Cullen and Revenue Minister Peter Dunne.
The cut - which would cost $540 million a year - is flagged as a move that would improve New Zealand's productivity and growth and bring the country's corporate rate into line with Australia's.
But as the Government opens the door to a corporate cut, its move is triggering further speculation about personal tax cuts.
The business tax document reveals that briefing papers written for Mr Dunne during the review discussed lowering the top personal tax rate to 36c from 39c, in combination with a 3c corporate tax cut and an increase in the trustee rate to 36c.
Dr Cullen, who has strongly argued against personal tax cuts of the magnitude that National promised at the last election, would not say yesterday what might happen to personal tax levels.
But he acknowledged that there were "obviously potential implications" for personal tax if the business regime changed.
Those implications arise from concern that a wider gap between the corporate rate and other tax rates will provide incentives for tax sheltering, or avoidance.
Dr Cullen appeared to indicate that personal tax changes, if they occurred, would not be limited to the top 39c bracket.
"A Labour-led Government is not likely to want to change only the top rate and not have some impact upon thresholds or whatever, further down the system," Dr Cullen said.
"And [then] the costs will start multiplying fairly rapidly."
Dr Cullen reiterated that any "significant" changes to the overall taxation regime would likely numb the Government's ability to deliver higher spending in a wide range of areas.
Labour's narrow victory in last year's election came after a campaign in which it struggled to offset National's promises of big personal tax cuts.
Since then, media coverage of the tax cut argument has attracted strong criticism from Dr Cullen, but yesterday he appeared relaxed while discussing the issue.
National's finance spokesman, John Key, was not convinced last night that Labour would deliver a cut to either personal or corporate tax rates.
"Why should anyone believe that they'll deliver anything?" Mr Key said.
He noted that Dr Cullen announced last year a shift in personal tax thresholds which would have given many people just 67c a week more in take-home pay, but that policy was in some doubt.
"If things are so tight that that may be jeopardised, why should we believe any of this is going to happen?"
He argued that the business tax review was designed to try to make Labour look "business-friendly and head National off at the pass".
The Government will not yet say how much money it is prepared to put into whatever changes it makes to the business tax regime.
The cost of all the options contained in yesterday's discussion paper is around $2 billion a year, but the Government has made it clear it won't be doing all of them.
Public submissions on the discussion paper will be accepted until early September, and Mr Dunne and Dr Cullen will start talking about decisions in February.
At that point, Mr Dunne said, talks about any personal tax changes - including a decision on last year's threshold shifts - will also be held.
Decisions on business and personal tax will be announced in next year's Budget.By Paula Oliver Email Paula