Budget takes us closer to the National Party's founding philosophy back in 1936
Taxation is an unavoidable aspect of modern life but the mix evolves over time.
This week's Budget was a landmark as far as the mix is concerned because the reduction in income, company and investment taxes - and the hike in GST - has been designed to encourage savings and restrain spending.
Low-income workers will not benefit directly from the tax changes but the Key Government expects Thursday's Budget to stimulate economic growth and job creation in the medium to longer term.
The Budget was a traditional National Government document, as the party was founded in 1936 on the basis of low taxes and personal freedom. But it hasn't always stuck to its principles, as the marginal tax rate has reached almost 70 per cent while the party has been in power.
Finance Minister Bill English's second Budget takes us closer to the original National Party philosophy but we are still a long, long way from the country's low income tax and relatively high expenditure tax structure of a century ago.
Customs duties, mainly on alcohol and tobacco, were our first form of taxes in the mid-1880s.
Individuals who neither drank nor smoked paid little or no tax because there was no income tax.
Estate or death duties, the country's second most important tax in the 19th century, were not introduced until 1866.
In 1880 the Government's tax take comprised 83 per cent in custom duties, 12 per cent in stamp and death duties, 2 per cent in land and property tax and 3 per cent in gold duties, which falls under the "other" category in the accompanying table.
These figures are sourced from Paul Goldsmith's book We Won, You Lost. Eat That! A political history of tax in New Zealand since 1840.
The long-running tension between taxes on property and income began to escalate at the end of the 19th century. Customs duties on alcohol came under pressure in the 1880s because of reduced consumption due to the temperance movement.
Landowners also began to lobby against property taxes.
Property taxes were reduced and the country's first income tax was introduced in the March 1883 year.
The top marginal income tax rate was only 5 per cent until 1909 but it rose steadily over the next 75 years and this is reflected in the increased contribution of income tax to the Government's total tax take.
The top marginal income tax rate had reached 67.5 per cent until it was reduced to 50 per cent in the 1970 Budget by Finance Minister Robert Muldoon.
The company tax rate was 50 per cent at the time and taxes on dividends were an additional 50 per cent. Thus shareholders received only 25c of every dollar of net earnings of a company.
After the decisions announced in this week's Budget are implemented, shareholders should receive 72c of every dollar earned by domestic companies.
The tension between property investors and the Government escalated again in the early 1970s with Finance Minister Bill Rowling introducing the "Property Speculation Tax" in the 1973 Budget.
Under this initiative any profit on houses sold within six months of purchase attracted a 90 per cent tax rate and a 60 per cent rate if held for less than two years.
Minimal revenue was collected from this draconian tax.
Prime Minister Muldoon raised the top marginal tax rate to 66 per cent in 1982 but rates have fallen dramatically since then. The following tax changes, including those announced this week, have been implemented since the mid-1980s:
* The top marginal income tax rate has fallen from 66 per cent to the 33 per cent rate beginning this October 1.
* A 10 per cent GST tax was introduced on October 1, 1986 and this will reach 15 per cent from October 1.
* The company tax rate has declined from 48 per cent in the mid-1980s to 28 per cent from next April.
* The imputation credit tax regime, which abolished the double taxation on company dividends, was introduced in 1989.
* Land taxes were abolished from May 1991.
* Estate or death duties were removed at the end of 1992.
* The capital gains tax on unit trusts, the country's only major capital gains tax, was abolished with the introduction of the PIE (Portfolio Investment Entity) regime in October 2007.
Tax changes in the 2010 Budget have continued the trend of recent years, namely the broadening of the tax base with more emphasis on an expenditure tax (GST) and less on income tax. Thus the total income tax take has risen from zero in 1880 to 60 per cent of the Government's total tax take in 1980 to a forecast 46 per cent in the June 2013 year.
New Zealand now has a far more favourable tax system than it did 25 years ago and compared with most other countries. Our system is particularly advantageous to individuals with accumulated capital.
We have no capital gains tax, there are fully imputed dividends, the maximum tax on any income received within a PIE will decline to 28 per cent next year and we have no estate or death duties.
No other Western country, with the possible exception of tax-free havens, has a more favourable environment for investors yet very little of our capital is invested in domestic productive enterprises.
This week's Budget tries to address this dilemma in several ways, including the removal of depreciation on buildings that have an expected life of 50 years or more.
This is an attempt to divert investment away from residential property, where all it does is push up the price of existing houses, but this strategy is fraught with difficulties for a number of reasons:
* Most New Zealanders are heavily exposed to residential property and the Government doesn't want to divert investment away from this sector to the extent that it causes a major slump in the housing market.
* The Government doesn't want to abolish the LAQC (loss attributing qualifying companies) regime even though it is being overused by property investors because this scheme is also extremely attractive for investment in the productive sector.
The switch in emphasis from income tax to GST, and the reduction in investment and company tax rates, is an attempt to encourage investment in the productive sector in the short, as well as the long term.
In the short term there will be a limited supply of international credit because of the lingering international financial crisis. As a result our banks will continue to have problems borrowing abroad.
Thus the availability of domestic credit and equity will play an important role in the economic recovery. If New Zealand doesn't generate more credit and equity through higher domestic savings then our economic recovery will be slower than in other countries.
One of the Government's major long-term goals is to bridge the economic gap between us and Australia.
This week's Budget is an important step in that direction but if the tax cuts are spent, rather than saved, and if the savings are channelled into existing residential property, instead of the productive sector, then English's second Budget will not have its desired outcomes.
* Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management.
