Enthusiasm for the drip-fed tax cuts announced in the Budget does not seem to have been universal.
However, all New Zealanders should commend Finance Minister Michael Cullen's recent initiative to put the elimination of transtasman double taxation back on the agenda.
Mutual recognition of corporate tax paid is much more likely to produce a genuine, long-term benefit to the New Zealand economy than tinkering with personal income tax brackets.
Unfortunately, in this respect Dr Cullen and New Zealand are at the mercy of Australian enthusiasm, or lack thereof. The cautious response from the Australian representatives at last Friday's Australia New Zealand Leadership Forum is a reminder that over nearly 20 years, the idea of removing this barrier to transtasman investment has failed to gain any traction on the other side of the ditch. Given the track record of rejection, a better strategy than asking Australia to dance might be to look for a bigger party.
To understand the options, we need to understand the real issue, which is the tax penalty imposed on New Zealand companies which expand their operations into the 99 per cent of the world's economy that lies beyond our shores.
While the Government pays lip service to the importance of growing our domestic companies into worldbeaters, our current imputation system of corporate taxation sends the opposite message.
The problem is the difference between the way foreign tax is treated under the imputation system, and the way New Zealand tax is treated.
When a New Zealand company earns New Zealand income, pays New Zealand tax, and distributes the after-tax amount as a dividend to a New Zealand shareholder, the shareholder is subject to tax again on the dividend received.
However, under the imputation system we adopted in 1988, the company can pass on to the shareholder a credit for the New Zealand tax the company has paid.
The ultimate effect is that the company's earnings, once distributed, are subject to tax only at the shareholder's marginal tax rate.
If the company earns income from operations overseas, it will generally pay foreign tax in respect of those operations. The New Zealand tax treatment of this foreign-source income has varied considerably over the past 25 years.
For a period, the income was subject to double taxation, with the company being required to pay full New Zealand tax on the foreign earnings after a deduction for the foreign tax paid.
Under the more internationally standard policy setting about to be implemented, the income will be exempt from New Zealand tax altogether, provided it is from an active foreign business.
While this exemption is a very positive step, it does not address the tax consequences when the company distributes this income to its New Zealand shareholders. The payment of foreign tax does not provide a tax credit which the company can pass on to the shareholder. The result is double taxation of the same income - foreign tax to the company and New Zealand tax to the shareholders.
For a company considering its value to New Zealand shareholders, this double taxation acts as a powerful brake on any offshore expansion. The company will not undertake such expansion unless it will maintain sufficient New Zealand tax payable to fully impute its dividends, or unless the after-foreign-tax return from the investment is greater than the before-tax returns available in the domestic market.
In the latter case, this means the foreign expansion will only be undertaken if it is riskier than the domestic opportunities, which increases the likelihood of foreign losses.
Alternatively, the company can migrate from New Zealand, and seek to raise capital from investors who do not value imputation credits.
Individual investors face a similar dilemma. The lack of imputation credits from foreign companies tends to restrict their choice of equity investments. While most investors will put some of their share portfolio offshore, there is a powerful tax disincentive to doing so. This is detrimental to the quality of our portfolio investment.
Mutual recognition would address this issue in terms of investment into Australia. By allowing New Zealand residents a tax credit for Australian tax paid, it would remove the disincentive to New Zealand companies and individuals seeking to expand their businesses or their investment portfolio into Australia. It would also make our businesses more attractive to Australians.
However, it is a solution which is limited to Australia - our largest single investment partner, but a very small fraction of the world economy. Given the uncertainty about whether Australia is even interested, New Zealand should be considering solutions which can be achieved unilaterally, and which embrace the 95 per cent of the world economy beyond CER.
One solution is to abandon imputation for a different corporate tax system. Surprising though it may be to us in New Zealand, of the many countries which had imputation systems at the beginning of the 21st century, the only two of any significance which retain it in 2008 are us and Australia.
Abandoning imputation need not mean a return to classical double taxation, as we had before 1988. Various systems have been developed to remove the disincentive to foreign investment while retaining, at least approximately, the benefits of imputation. These systems often involve a lower corporate tax rate combined with a lower rate of tax on dividends.
A second possibility is to allow companies to attach imputation credits only to dividends paid on shares held by New Zealand residents - often referred to as "credit streaming". This would allow New Zealand companies seeking to make foreign investments to do so by raising equity capital on foreign markets, while preserving their ability to pay imputation credits to New Zealand shareholders, and preserving their connection with New Zealand.
It would also encourage Australian (and other foreign) companies with New Zealand operations and tax payable to issue shares to New Zealanders. Credit streaming would allow them to give meaningful imputation credits to New Zealand shareholders. Such companies would then have a continued reason to retain their New Zealand-based operations and to pay New Zealand tax.
Some of the benefits of this approach are that it keeps the imputation system intact, involves giving a credit only for New Zealand corporate tax paid, and can be implemented unilaterally.
The Government has in the past rejected imputation credit streaming as a policy, on the basis that it does not reflect the reality that a company's dividends are made up of income from all the geographic sources available to it.
However, streaming can be achieved through appropriate corporate structuring such as the twin-listed company structures adopted by groups such as Shell/Royal Dutch Shell, and in a New Zealand context by the Westpac NZ Class shares formerly on issue.
Relaxing the policy against streaming would allow corporate groups to achieve the same results without incurring the costs of restructuring. Concerns about avoidance could be addressed by making streaming available only in relation to NZX-listed shares.
While this issue is less susceptible to an easy headline than a change to the tax brackets and lower bottom rates, it is one which both the Government and the private sector should be vitally concerned with. The imputation review which the Government is currently embarked on is an obvious and appropriate vehicle for developing a policy which will resolve these issues without needing to plead for some love from Australia.
* Casey Plunket is convener of the Law Society's tax committee, and a partner at Chapman Tripp.