Govt wary of plan for big change to tax

Finance Minister Bill English warned that a theoretically perfect system might not be politically sustainable. Photo / Mark Mitchell

A proposed overhaul of the tax system - reducing income tax and company rates by introducing new taxes on land and rental properties and increasing GST to 15 per cent - brought a cautious response from the Government yesterday.

Finance Minister Bill English warned that a theoretically perfect system might not be politically sustainable.

The tax working group's report says the present tax system is increasingly uncompetitive in a world where capital and labour are mobile.

It gives unfair opportunities for the wealthy to dodge tax and distorts investment, particularly in favour of property, the report says.

The group wants lower income tax rates, especially at the top end, a lower company tax rate, and for rates to be aligned, if possible.

But its report leaves it open for the Government to decide how far it wants to go.

The group has given a range of options for funding personal and company income tax cuts through increases elsewhere in the system.

It would prefer a land tax to a capital gains tax, and the option of taxing an assumed return on investment properties gained only minority support.

Mr English would not comment on any of the options.

Asked if he accepted the group's conclusion that the system was broken and tinkering with it would not be enough, he said: "We accept the general conclusion that there are significant problems in the system."

But in dealing with those problems what was theoretically perfect might not be politically sustainable, he said.

"Changes that will stick are changes where the public can see it will lead to better incomes for them, more secure jobs and a faster-growing economy, even if in the short term there are aspects of it they don't like."

The working group says the cost of aligning top personal income tax rate, trust rate and company rate at 30 per cent would be about $1.6 billion.

One option to offset that cost would be to raise GST from 12.5 to 15 per cent. But it would be difficult and expensive to compensate those on lower incomes for such an increase.

A capital gains tax in theory could pay for big cuts elsewhere even with the family home excluded from it.

"But most of the group have significant concerns about the practical challenges involved," its chairman, Professor Bob Buckle, said.

A 0.5 per cent land tax could bring in up to $2.3 billion, but the group says it could give a one-off hit to property values and could be unfair on the retired, Maori authorities and farmers.

That could lead to pressure for exemptions, which raised concerns about the sustainability of such a tax.

Mr English said the threshold for getting a system that worked was high.

"It needs to help strengthen the economy, help hard-working Kiwis get ahead and it needs to fair, " he said.

Some of the information given about "who pays what" was startling.

"For instance, a survey of 100 of New Zealand's wealthiest people found only half of them paid the top tax rate."

The working group criticised the interaction of Working for Families with the tax system, saying it caused high effective marginal tax rates for those on middle incomes as the benefit abated, and some people on higher incomes could rort the system.

"We are not as concerned about Working for Families in general as the working group is," Mr English said.

"We are concerned about people rorting it but that is a matter of tidying up the ways they can manipulate their taxable income."

BALANCING THE BOOKS

What the tax group recommended

New taxes on property

* A land tax of 0.5 per cent
* Tax returns on residential rental property
* Remove tax depreciation on buildings if they do not depreciate in value
* Increase GST from 12.5 per cent to 15 per cent

* The top personal tax rate of 38 per cent should be reduced