Fran O'Sullivan: Expect swift action on tax

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The smart money is betting the Labour-led Government will gazump National by introducing the first round of personal tax cuts on September 1 - or earlier - rather than waiting till after the 2008 election.

By signalling now that the Government will cut personal taxes in Finance Minister Michael Cullen's next Budget, Prime Minister Helen Clark has openly cleared the way for the Treasury and Inland Revenue to get down to business.

Not just working out the size of the cuts that could be made without affecting the sustainability of Budget surpluses (the Treasury has been doing the figures on this option for years, contrary to the spin at last weekend's Labour Party conference), but also examining timing options and what machinery changes Inland Revenue would have to put in place to deal with various changes to tax rates and/or income thresholds.

There are three advantages for Labour in moving swiftly.

* It can take advantage of its incumbency by deploying the bureaucracy to work on the first steps of a tax-cutting programme that will obviously have electoral implications. This puts National on the back foot, as Clark and Cullen will be able to point to the changes they have already made before the election campaign starts.

The Clark/Cullen duo will also be able to cite Treasury advice that the Government's tax cuts do not jeopardise the Finance Minister's four conditions: they will not result in cuts to services, be funded from increased Government borrowing, will not push up inflation, and will not introduce greater inequalities.

This puts Labour in the position to attack National's more generous tax-cutting programme as imprudent and cite Government advice it has received from the Treasury to underscore this point in election debates.

* Labour gets the Treasury to do all the hard policy yards for free by exploiting its incumbency as the Government. If the Government opts for a programme of rolling tax cuts - as it was urged to do at last week's Business Budget Summit - Labour can later claim any Treasury work to underpin a programme that straddles the election date is purely Government business. This will disadvantage National, which does not have access to the Treasury's boffins to do the hard work for it. Cullen - if feeling mischievous - could also get Parliament's finance and expenditure committee to ask the Treasury to run its ruler over the fiscal and economic implications of any alternative tax cut programmes put up by competitors for the 2008 election (this would clearly be done via political semaphore).

* Labour gets to take political advantage of a Government-funded advertising campaign during mid-2008 to explain the upcoming tax rates/threshold changes. This rather cute stratagem would also enable Labour to neatly sidestep the advertising limits on election funding as any television or print campaigns by Inland Revenue would clearly be "Government-related", freeing more cash for political brand differentiation. National's tax-cutting policies would be caught outright by the limits.

Cullen used his opening address to last week's summit to challenge business to do its part to get greater public discussion on how to take inequality seriously in a debate on tax.

Most chief executives - even the "sustainability aware" group that belongs to the NZ Business Council for Sustainable Development which hosted the summit - want a much harder-nosed approach.

The consensus was that the personal tax system should be about growing wealth and income. Social equity should be addressed through other mechanisms such as extending Working for Families to cover individuals.

The Finance Minister didn't stick around for the afternoon session on tax (neither did two-thirds of the 80 chief executives) but there was a clear feeling that CEOs wanted to see the long-term direction of cuts - not just another Budget Day surprise.

The CEOs appeared to be much more ambitious than Cullen on the tax-cutting front. They want New Zealand to start levelling the score (even a bit) with Australia to arrest this country's declining tax competitiveness.

Council chairman Nick Main stressed that equating the top corporate and personal tax rates and flattening the tax scale is important if New Zealand is "to remain internationally competitive".

A Deloitte position paper on this score put forward credible options to reduce the top personal rate to 30c from 39c to match the corporate rate (which goes to 30c next April), or, reduce the top tax to 28c and corporate rate to 28c.

These options resonated with business people. But they are likely to be disappointed, given Cullen's indication that the personal tax cuts won't amount to much as they will have to be spread thinly over many people to ensure equity.

Radical solutions - like a plan put forward by Motu's senior research fellow Arthur Grimes to introduce land taxes and bump up GST to fund a substantial flattening of the top personal rate to 20c-plus were too adventurous for this Government to stomach.

Ironically, Revenue Minister Peter Dunne did signal that it was time New Zealand reassessed its position on taxes. He pointed out that the country was a world leader when it slashed the top personal rate from 66c and introduced GST in 1986. But since then it has lost its leadership position (it raised the top personal rate to 39c after the 1999 election).

Dunne's advocacy during the Budget formation process and the 2008 election campaign will be a major factor in the size of any cuts.

An Australian pointed out that the tax-cutting programmes that have been signalled in Australia are subject to economic performance. But Australia looks at the "final destination" of the cuts - what the ultimate rate will be after several years - not the here and now.

Chief executives were also concerned that if the tax cuts are paltry it will lead to more of the talented and skilled feeling disenfranchised. A long-term tax reform programme should not just be geared to attracting overseas talent but retaining New Zealand's existing base.

In philosophical terms, those at the summit agreed with the Treasury's contention that tax cuts have a dynamic effect - they spur economic growth, which produces more incomes and hence more tax. This runs counter to Clark's line at the weekend that tax cuts can now take place because Treasury has conceded Budget surpluses are "structural".

But the CEOs will be tempted to put that to one side for now. Their challenge is to push Cullen to lift the level of Government ambition - not settle for a welfare agency approach.

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