Cullen: Why I won't cut taxes

By BRIAN FALLOW, economics editor

Finance Minister Michael Cullen has laid down the gauntlet to businesses clamouring for a tax cut: would they prefer the payroll or capital gains taxes companies face in other countries?

Cullen yesterday made it clear neither a company tax cut nor lower personal income tax rates will feature in tomorrow's Budget.

In an interview with the Herald yesterday he explained why.

"It is really [just] an assertion that a company tax rate cut would lift the rate of economic growth. No one has actually demonstrated it.

"We in New Zealand ran the biggest economic experiment in the world in 1988 when we cut the corporate tax rate from 48c to 33c. But the next four years were the most dismal we had had in economic growth for a very long time.

"It didn't suddenly lift the economy."

Second, with dividend imputation, the only real gainers would be foreign owners, Cullen said, because New Zealand investors would end up having the lower company tax clawed back on their personal tax rate.

"New Zealand companies tend to pay out all their profits by way of dividend, or a very large proportion of it.

"So there is no evidence that lowering the corporate tax rate will lead to more investment in the company.

"It will merely feed demand, and there are other ways of doing that. That is not sustainable growth."

If the headline corporate tax rate really was the big issue then lowering it from 33c to 30c would make little difference. It would just be twiddling around the edges, he said.

"They really mean that they want a big cut in the corporate tax rate.

"But given that New Zealand corporates don't pay all the other taxes which in other countries they would, they have got to say what other bits of other countries' tax systems they would be prepared to adopt to make up the lost revenue," Cullen said.

"But then they are forced to admit that the mix of taxation in New Zealand is economically more efficient than it is in Australia, say.

"Would New Zealand corporates want to swap their current arrangements for payroll taxes or capital gains tax or stamp duty?

"They are quite right to say no to that, because those tax designs are overall inferior to New Zealand's."

Cullen also rejected the argument that much of tomorrow's Budget package would be funded by fiscal drag - where higher nominal incomes push people into higher tax brackets.

"Compared with the progressive tax rate regimes of the 1970s and early 1980s there is much less inbuilt fiscal drag than there used to be."

Inflation rates were much lower and there was GST to provide a partial offset; the more of a person's income was left for them to spend, the more GST they paid.

"Addressing the tax thresholds is not something that is adamantly ruled out. It is just very expensive. For small gains for most people, it costs an awful lot of money.

"I don't accept the argument there is some huge growth dividend from it. Have people stopped working harder because of the 39c rate? No.

"We have run these experiments in New Zealand over the past few years and what you come out with is that tax rates of 66c are stupid because you get all kinds of distortionary behaviour.

"But at levels under 40 per cent, I don't think there is much evidence around the world that marginal shifts around there have much impact at all."