Tax on payrolls possible, says Cullen

Michael Cullen

Finance Minister Michael Cullen is refusing to rule out a new payroll tax which could accompany any corporate tax rate cuts.

The suggestion of a new tax was raised yesterday by National finance spokesman John Key, who said he understood Treasury and Inland Revenue Department officials were studying a payroll tax in combination with a cut to the corporate tax rate.

He questioned Dr Cullen in Parliament on whether the business tax review was looking at this.

Dr Cullen gave little away in his reply, saying only that a range of options was being considered.

Mr Key said the Treasury in 2004 had calculated that if the company tax rate was to be cut to 20 per cent with no loss of revenue to the Crown, a payroll tax of 5.4 per cent would have to be introduced.

He released a Treasury document that said Dr Cullen had requested information on the rates of company tax and payroll tax arising from:

* Identifying tax contributions to current superannuation spending - approximately $6 billion, or approximately $8 billion including super fund contributions.
* Allocating half the amount to a dedicated part of the current income tax.
* Allocating the other half to a new payroll tax; and
* Reducing the company tax by the amount of the payroll tax.

The Treasury said the 20 per cent company tax rate and 5.4 per cent payroll tax rate arising from this covered super spending only.

If contributions to the super fund were included in the calculation, the company tax rate would be about 15 per cent and the payroll tax would change to be about 7.2 per cent, the Treasury said in its advice to Dr Cullen.

The minister told Parliament yesterday that the figures would be subject to "a great deal of recalculation".

But in both cases, the company tax and the payroll tax rates would be "significantly lower than the corresponding Australian rates".

In Australia, payroll tax is levied on employers based on wages paid or payable to their employees, including superannuation contributions.

For instance, in the Australian state of New South Wales, the rate of payroll tax is 6 per cent, with the first $A600,000 in payroll ($NZ671,140) exempt.

Mr Key also questioned Dr Cullen yesterday on whether the objective of the business tax review was to be revenue neutral.

If not, how large did Dr Cullen envisage the impact on the Crown accounts, Mr Key asked.

"Those matters will be settled as part of the review," Dr Cullen said.

Mr Key said the payroll tax Dr Cullen was working on was his own idea that others would have difficulty accepting.

Dr Cullen's spokesman said the minister was not commenting further on what he had said in Parliament.

Revenue Minister Peter Dunne noted in the House that the National Party's 2004 economic policy position paper said it was not persuaded that reducing company tax would have a materially beneficial effect on growth.

- NZPA