English dampens hopes of big tax cut

Finance Minister Bill English's cautious approach ruled out any 'big bang' package of economic reforms. Photo / Mark Mitchell

Finance Minister Bill English has poured cold water on hopes of a cut in the top income tax rate to 30 per cent.

He told a business lunch at Auckland's Viaduct Harbour that his priority was to "align" the top personal tax rate, now 38 per cent, with the 33 per cent tax on family trusts and estates.

But he said it would not be easy to achieve a "30-30-30" alignment of the top personal and trust rates with the 30 per cent company tax rate, as recommended last month by the Government's tax working group.

His cautious approach, also ruling out any "big bang" package of economic reforms, left many in his audience disappointed.

Anna Hamilton-Manns, founding director of the Angel Association of early-stage new business investors, told him he had not given her a good reason to stay in New Zealand.

Ms Hamilton-Manns, 33, worked in Qatar, Kuwait, Britain, Italy and South Africa for five years as a teacher and then as an event manager. She came home in 2006 and runs her own business staging events in the finance sector, but told Mr English she was thinking of leaving again.

"I don't see opportunities in New Zealand apart from having babies," she told him.

Mr English replied that the Government could only make policy choices - such as the proposed switch from income tax to higher GST - that would help "to tilt the playing field in favour of savings and exports and against debt-funded consumption".

It wanted to cut personal taxes to give people "incentives to work hard, to improve their skills, to save, to invest and to get ahead here in New Zealand".

"Alignment of the company rate, the top personal rate and the trustee rate is, in theory, the best arrangement. This, therefore, remains the Government's medium-term goal.

"However, the Government is considering whether that is affordable and whether it fits with other equity considerations.

"Our early advice is that aligning the trust and top personal tax rates is the most important issue, because they are both final taxes and it would have the most impact on increasing the integrity of the tax system."

Company tax was only an "interim tax" for New Zealand residents, who could claim a deduction from their personal taxes for the full company tax paid on their dividends. He intended to keep that system.

"Complete alignment may not be necessary to eliminate many of the integrity problems with the current system," he said.

As well, remaining competitive with other countries could be more important than "theoretically pure alignment".

In particular, New Zealand's tax rate had to stay close to Australia's. The current rate was 30 per cent in both countries, but if Australia cut its rate New Zealand would have to follow suit.

It would not be possible to cut the top personal tax rate below 30 per cent.