Thomas Pippos: Few revelations as the real tax debate is still to come

Budget '06 was destined to be the runt of the 2006 tax litter. A now slightly-less controversial tax bill on Wednesday and the the Business Tax Review, to be released later this year, are making sure of that.

In some respects, that's positive: the last thing we need is the Budget being the primary communication tool for tax policy. But even runts have secrets. Working for Families gobbled a further $1.84 billion over the next four years and forms part of the "families, young and old" initiatives badged as targeted tax relief where it's needed most.

Contrast this with Budget '05, an election year Budget, which aggregated all number of tax policy initiatives and badged them as a business package. Most were remedial in nature, were good tax policy and were foreshadowed for a number of years.

The lack of tax detail in Budget '06 is, therefore, not surprising. The ultimate tax debate is set for the Business Tax Review.

That's when the Government will set out its tax agenda. But that agenda will not be clear in the short term. What is expected is a discussion document with a range of possible initiatives for consideration and debate. Initiatives targeted to apply in 2008, possibly an election year, will shortly be before us.

But let's put the Business Tax Review into context. In addition to the extension of the Working for Families package, we have just witnessed a material broadening of the tax base. The new rules regarding the taxation of offshore share investments, foreshadowed in Budget '05, saw their legislative incarnation on Wednesday.

Great, they seek to ensure that tax does not impact whether one invests in shares directly or through a fund. But not so great, they result in differing assets being taxed differently and the overwhelming tax bias to invest in Australian shares as compared with other foreign shares.

They replace one form of tax distortion for another. The inevitable pressure will be to deal with that problem and widen them to other forms of investment. Even without such widening, they result in a considerable expansion of the tax base and the cementing of an asset tax within our tax rules. The missing ingredient so far is a corresponding lowering of the rate - the big issue.

Ultimately, taxes are about choices. The choice made by the Government has been to generally hold or increase taxes, most notably the introduction of the 39 per cent rate in their first term. This rate now hits at around 1.4 times the average wage. That, in itself, is equivalent to a further tax increase as the Government's tax take increases as more average New Zealanders are exposed to the higher marginal tax rates.

More concerning is that only 12 per cent of the population over 15 earn over $60,000, yet the nation relies on them to pay 51 per cent of the total income tax paid by individuals.

This needs to be addressed. Indexation needs to be viewed as the norm, not a giveaway. But that's not enough. There also needs to be a clear view as to at what point in time rates will move and how.

Ideally, the Business Tax Review should set the scene regarding New Zealand's tax policy direction. Hopefully, there will be a recognition that things aren't always fair to all and that, in the wake of Australia's tax cuts, New Zealand needs to fiercely compete for capital and talent.

* Thomas Pippos is managing tax partner at Deloitte.