Higher GST, lower income tax cheapest ways to lift savings, says group

A lower top tax rate and higher consumption tax are the easiest and cheapest ways to boost the country's poor savings record, according to the Savings Working Group.

Increasing the goods and services tax to 20 per cent and cutting the top personal tax rate to 29.2 per cent would be fiscally neutral and have a positive impact on both private and national savings rates, according to background papers prepared by the Inland Revenue Department for the government-appointed group tasked with finding ways to lift New Zealand's savings across the board.

IRD's major concern with the option was that it would impact on the distribution of taxation.

"Revenue neutral changes that incorporated a reduction in the tax rate applied to income from savings would lead to increases in private savings and parallel increases in national savings," the Inland Revenue said in a paper entitled 'Sensitivity of Household Savings to Taxation'.

Still, "the model does not incorporate a number of key determinants of the level of savings and would not be relevant for lower income individuals (who do not save much) and the very wealthy."

That would be an extension to Finance Minister Bill English's rejigging of the tax system in this year's budget that lifted GST 2.5 percentage points to 15 per cent and cut personal tax rates in a bid to stoke investment and savings, something that's happened faster than Treasury and Reserve Bank officials anticipated.

Other options explored include an expenditure tax for retirement savings that was likely to have a small positive impact on private savings, but a small and ambiguous impact on the national level.

It would have an impact on KiwiSaver and other superannuation funds that could cost $800 million a year, rising to $1.9 billion by 2024.

Extending the lower portfolio investment entity (PIE) tax rates to other forms of investment would have a similar impact on savings as the expenditure tax, though would only cost about $300 million a year.

A split tax system with different rates for capital and labour income would have a modestly positive impact on private and retirement savings, though the overall impact would likely be small and ambiguous, and would cost more than $3 billion a year.

Partially excluding interest income, which was suggested in Australia's Henry review, would have a similar impact on the savings rates, and cost an annual $1 billion.

Linking the tax base to inflation would also have a small and ambiguous impact on overall savings, and a modest lift in private savings, at a cost of about $1 billion, the papers said.

Last month, chairman Kerry McDonald told a media briefing compulsory savings wasn't a silver bullet to fix New Zealand's dismal savings record, with Australia's experience mixed on whether 18 years of enforced saving has lifted the national rate.