Do the hard work, John

Prime Minister John Key. Photo / Mark Mitchell.

I worry that John Key's enthusiasm for the Funds Hub idea is based on the attractiveness of appearing to 'do something' to boost the economy without having to take any political pain. This all seems like a 'no-brainer' until you look a little closer.

Firstly, it involves further 'tweaking' a tax system that is already riddled with loopholes, exceptions and special treatments. This looks like another loophole that tax lawyers paid for by multi-nationals will jump through, charging hundreds of dollars an hour as they go. The problem is our system needs fundamental reform, not more tweaks.

This 'tax free funds hub' idea further entrenches a tax system driven by tweaks creating loopholes for tax lawyers designing clever schemes. It also drives the IRD to spend years and millions of dollars trying to use the court system to close them down.

We have seen years of court action around Trinity, the bank structured finance cases and now the 'Penny and Hooper' (Optional Convertible Note) OCN case grinding through the courts as the IRD tries to achieve through legal system what politicians are failing to do through the parliament.

Why doesn't John Key take on the much more economically sustainable (but politically difficult) task of broadening, flattening and simplifying our tax system? The system was broken by Labour when it introduced the 39 cent top income tax rate, opening up a big gap between the 33 per cent corporate and family trust rates. John Key should fix it properly and extend the tax net to property.

Instead he is latching onto another clever 'scheme/dream' that achieves nothing, but employing more tax lawyers and accountants. See more detail on that here.

Questions need to be asked, in particular, around the potential conflicts of interest for Craig Stobo, if he is appointed as a sort of 'Pension Fund Hub Tsar'. He runs a pension funds administration service.

I'm also sceptical about the idea that financial services are a sustainable source for growth. The huge problems in Ireland and the UK are partly because their banks and other financial institutions were way too clever for their own good and took on too much debt.

Back office services for funds management are a different beast, but I'd much rather grow the productive sector and small businesses than focus on the money changers.

It also creates new distortions. Why should foreign fund managers receive tax breaks when other foreign companies don't. Do we widen it to other 'special' foreign companies? How about pharmaceuticals? That's what Ireland did. Or maybe investment banking? Or maybe we should try to set up some tax-free zone for foreign companies? Down that path Caymans Islands' madness lies.

It's all very nice to want to be the Geneva of the South Pacific, but what happens when the other tax gathering authorities such as America's Inland Revenue Service (IRS) or the Australian Tax Office come calling to ask some tough questions. Switzerland's notoriously secretive banks are currently under concerted attack from the IRS and others over this very issue.

John Key should stop looking for magic bullets and just do the hard work. He could do it. All he has to do is blame Labour for the economic, taxation and spending distortions now evident and convince New Zealanders they are better off in the long run with a cleaner, simpler, broader and flatter tax system.

He needs to think beyond the next election. He has the support of the public and some real political gifts. Why doesn't he use them instead of looking for short cuts?

Bernard Hickey