By BRIAN FALLOW
WELLINGTON - Financial services generate more income tax than any other sector of the economy, says Inland Revenue in briefing papers to the Government.
Although manufacturing contributes more to gross domestic product (20 per cent against 16 per cent) and generates a similar share (19 per cent) of PAYE revenues, the financial services sector provides 39 per cent of business income tax.
This compares with 11 per cent from manufacturing, the next biggest contributor.
"This suggests that New Zealand's business income-tax base is very sensitive to the health of our banking sector and the income derived by superannuation funds, life insurance companies and unit trusts," the IRD says.
The observation could be seen as a veiled warning about the potential fiscal costs of any changes to the taxation of savings that might be mooted as part of the Government's promised review of the tax system.
The IRD says that to avoid distortions in investment decisions, the tax system should treat consistently forms of income from capital, whether superannuation, life insurance, bank deposits, shares or housing.
It acknowledges that the tax system favours investment in housing and that there are anomalies over capital gains from shares.
"Taxing capital gains in a more systematic and comprehensive manner than the current system would provide some benefits, including possibly increased revenue.
"The main advantage would be, however, to improve the neutrality, fairness and efficiency of the current system."
But the IRD notes the difficulties of taxing capital gains.
Should the gains be taxed on an annual basis as they accrue, which could involve considerable compliance costs in measuring those gains, or only when the assets are sold?
It says the increased international mobility of capital has increased the sensitivity of investment decisions to tax considerations, and notes a tendency in the US and Australia to reduce tax rates on some forms of income from capital.
It does not seem to approve.
"Providing exemptions or lower tax rates for certain forms of income causes inequities and inefficiencies. Individuals who can choose the form in which they derive their income will be able to take advantage of any preferential treatment of income from capital."
On Australia's plans to cut its corporate tax rate from 36 to 30 per cent, the IRD says that a large part of the resulting revenue loss will be funded by replacing accelerated depreciation with effective life depreciation.
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