Fran O'Sullivan: Group therapy needed on tax

Finance Minister Bill English has a mighty important Budget in front of him that has the potential to finally deliver a business environment that encourages Kiwi enterprise and investment.

It will not be the budget that English delivers on May 28.

That is basically geared to knocking the Government's books into shape and thus keeping the ratings agencies off our backs. It will sprinkle some additional assistance to business and give an additional boost for infrastructure. But it will not be a transformational Budget.

By this time next year English will be readying himself to deliver a Budget that could be a "game changer" by introducing a much needed reform of the tax system so NZ business can leverage the economic recovery period.

The first signal that the Finance Minister means business was last week's announcement of a new tax working group to assist the Government "in considering the key tax policy challenges facing New Zealand".

English and his sidekick Revenue Minister Peter Dunne have brought together some of New Zealand's best brains in the taxation space to identify issues that need to be considered when reviewing medium-term tax policy.

The group - headed by Victoria University's Bob Buckle - includes investment banker Rob Cameron who is currently chairing the capital markets taskforce, economist Arthur Grimes who is also chair of the Reserve Bank board, Ernst Young's Rob McLeod who chaired the 2001 taxation review, PricewatershouseCooper's John Shewan and Geof Nightingale, Victoria University's John Prebble and David White, economist Gareth Morgan, KPMG's Paul Dunne, Deloitte's Mike Shaw and Chapman Tripp's Casey Plunket.

English has couched the need for a strategic review of the tax system in light of the challenges posed by the current economic and fiscal environment and the Government's medium term goal of a 30 per cent top personal tax rate.

Among the topics that will be considered are the fiscal framework and the structure of personal income tax, corporate tax, GST and tax integrity.

It's worth noting that Treasury recommended in its briefing to incoming ministers that the tax base needed to be shifted from bases that are internationally mobile and lower growth (capital and labour) to tax bases that are less mobile and less damaging to productivity growth (consumption and land) over time. Tax rates on different forms of investment should be equalised to improve savings and investment; average corporate tax rates should not get out of whack with other countries so to encourage businesses to invest and relocate here.

But last year, English effectively pooh-poohed the Treasury recommendations making clear his focus was on delivering the personal tax cuts National promised at the 2008 election which he believed would also act as an economic stimulus.

What a difference six months makes.

Prime Minister John Key has now added his weight to English's firm signal that the income tax cuts programme will now be deferred.

It now seems spectacularly obvious that unless the Government can find extra revenue from bumping up GST and/or moving towards a more comprehensive capital gains tax regime, it will be difficult to move towards English's goal of a top 30 per cent personal rate in the medium term unless the economy goes into a remarkable growth surge.

Their formal press statement says the two ministers are looking forward to considering the "interesting ideas" that will spring forward from the working group.

But their press statement also signals the group has not been empowered to come up with specific policy recommendations.

What a waste of brain space.

The least this working group should do is argue for clear terms of reference which empower them to come up with the guts of what NZ's future tax system should be.

Across the ditch, Australian Treasury Secretary Ken Henry has been charged with doing exactly that. Henry is assisted by just four other people on his review panel.

He has already said the review may lead to dramatic and far-reaching changes that may span 20-30 years.

Henry's terms of reference are apposite. Among the more pertinent comments:

The basic recognition that tax system design can impact on the growth rate and allocation of resources in the economy.

Raising revenue should be done so as to do least harm to economic efficiency, provide equity (horizontal, vertical and inter-generational) and minimise compliance for taxpayers and the community.

The review will examine and make recommendations to create a tax structure that will position Australia to deal with the demographic, social, economic and environmental challenges of the 21st century and enhance Australia's economic and social outcomes.

All the Rudd Government's exclusion clauses are already on the table so it should be reasonably straightforward to come up with a New Zealand tax system that positions this country competitively against its bigger neighbour.

But it's not clear whether English and Dunne want a truly independent working group review - or simply a bunch of ideas that will flow into what the pair reckon they can get across the line politically.

Let's hope the pair are made of the right stuff to persuade their colleagues - and New Zealand at large - that fundamental change is now essential if this country is to stop haemorrhaging talent and business control overseas.

Issuing clear terms of reference and calling for recommendations from the working group would be a step in the right direction.