Govt 'carefully considering' radical tax report

Photo / Martin Sykes

Finance Minister Bill English says he will be "carefully considering" advice to raise GST and cut personal income tax rates as he puts together his Budget.

English and Revenue Minister Peter Dunne have this afternoon issued a press statement, saying they will "carefully consider" advice from the tax working group, which says major tax reforms are needed.

"For ordinary New Zealanders, we're particularly keen to ensure that our tax system rewards effort, encourages savings and helps families to get ahead," said English.

Any changes would have to meet tests of equity and fairness, alongside delivering benefits for households and the economy, he said. "And given that we face another six years of Budget deficits, they need to be broadly fiscally neutral."

The group's report - one of several reviews to have reported back to the Government in recent months - will be considered in coming months as part of Budget decision making, said English.

Peter Dunne said the group had produced a comprehensive report and, in the process, it had helped generate constructive public debate.

"I note the Working Group's concerns regarding the misalignment of tax rates which encourages the use of trusts and companies, with a tax rate of 33 per cent and 30 per cent respectively, to shelter income that would otherwise be taxed at the higher personal tax rate of 38 per cent," he said.

The group says "significant changes" are needed to make New Zealand's tax system fairer and more effective.

Raising GST to 15 per cent and cutting personal income taxes are key recommendations in the report.

Prime Minister John Key yesterday indicated the Government was open to reform which traded personal income tax cuts for some form of tax on investment property.

Key also said he could not rule out an increase to GST.

The opposition Labour Party says it will "give careful consideration to the report" but urged caution about any policy changes that would disadvantage hard-working New Zealanders.

"It is critical that the Government makes decisions that are fair to all New Zealanders. Hard-working Kiwis have come through the recession and face increased living costs," said Labour Finance spokesman David Cunliffe in a press statement.

"Any policy changes need to be fair for all, and should strengthen the productive economy, including by promoting innovation, removing unfair tax loopholes and moving toward tax neutrality between asset classes.

"Any policy changes must be fair to all New Zealanders and not skewed to the privileged few. In seeking to achieve improved coherence and sustainability, the Government must not sacrifice equity. We need a positive future for all New Zealanders, not just those in the top tax rate."

David Cunliffe said Kiwis had come through the recession largely because of the legacy of Labour's prudent fiscal policies that dramatically reduced Crown debt, and the last Labour budget which provided stimulus to counteract the international downturn.

"With growth resuming, those New Zealanders who are still struggling to pay their weekly household bills now have high expectations that the Government will deliver on a future that provides hope across the board." he said.

Business NZ Chief Executive Phil O'Reilly said many of the recommendations would find support among the business sector, though some would be approached with caution.

"Business will be firmly supportive of the recommendation to get our company tax rate competitive with rates in other countries, an important factor for economic growth," he said.

"There will also be support for alignment of company, top personal and trust tax rates and for lower personal rates."

O'Reilly said he shared the group's concerns over the "distortions" that could be caused by the introduction of a captial gains tax. He also agreed that a new approach was needed to the taxation of rental properties.

However, he said the recommendation for a land tax could become "an anti-competitive cost on New Zealand's many land-based enterprises".

O'Reilly supported the group's call for a review of welfare policy, and relevant tax treatment for low income families in place of the "poorly-targeted Working for Families system".

"We know from feedback from our members that Working for Families can act as a disincentive for workers to improve their income from employment," O'Reilly said.

CTU secretary Peter Conway said cutting the top personal tax rate should not be a priority.

He said broadening the tax base did not mean there should automatically be reductions in the top personal tax rate.

"The CTU supports forms of capital gains tax except on private homes, and believes that action must be taken to address the current situation where $220 billion of investment property gets a tax credit of around $500 million," he said.

"We could also support a land tax depending on an effective exemption for modest value holdings.However, we are completely opposed to raising GST and we note that company tax rates have already been reduced in the last few years."

Conway said the Tax Working Group had taken an "inclusive approach" in its report, and he hoped the Government would take a "similarly inclusive" approach to tax reform.

The main recommendations of the working group are:

• Align the top personal, company and trust tax tax rates.

• Make the company tax rate competitive with other countries' rates, particularly Australia's.

• A widespread reduction of personal tax rates and increasing GST to 15 per cent.

• Most members of the group also supported a "low rate land tax".