Phil Rennie: Less tax better for business

Underwhelming as it may seem, the Government's Business Tax Review re-opens a huge philosophical debate over "hands-off" or "hands-on" approaches to business development.

Interventionists argue that money for tax cuts is tight, and should be targeted to specific areas to get results, such as export and capital investment incentives.

Alternatively, the attraction of broad tax cuts is clear and simple. Less tax means more money in the hand for companies to invest as they see fit, be it employing more staff, investing in training, research and development, or new machinery.

The proposed cut in the corporate tax rate of 3 per cent to 30 per cent is small but shouldn't be sniffed at. Remember, this is a conservative Labour Government that has spent the past six years telling us tax cuts are unaffordable, and that they don't promote productivity or growth. To even consider tax cuts as an option is a significant shift in policy rhetoric.

The danger for business is that if the paucity of the proposed cut is over-emphasised, Dr Cullen may have an excuse to return to his old ways and proclaim that a 3 per cent cut isn't worth the hassle. It might also unintentionally strengthen the argument for an incentives-based tax cut.

The interventionist approach is based around the patronising idea that New Zealand business people need government direction in ordering their affairs. This view assumes business people are too stupid to run their businesses, and that they pay out too much in dividends, don't save or invest or export enough, and "fritter away" any tax cuts they are given.

These arguments tend to be made by people not involved in business, such as politicians, unionists, and academics. Undoubtedly some businesses will support the idea of incentive tax breaks, but usually only those which benefit directly.

This "hands-on" approach has been creeping back into favour among policy-makers since Labour's election in 1999, although it remains to be seen whether or not business people actually want Dr Cullen's hands on them. The response from Business NZ, the Business Roundtable and various Chambers of Commerce has been underwhelming.

Basic economic theory indicates that the makeup of taxation is as important as the level of taxation. Distortionary taxes, with various loopholes and exceptions, act as a handbrake on economic growth.

Complicated tax laws encourage businesses to spend time trying to minimise their tax returns and fit their activities into bureaucratic categories, rather than just getting on with business and being productive.

There are also enormous practical difficulties in implementing incentive-based tax schemes.

The Government's discussion paper is deliberately vague on how they would work and exactly what business activities would fit under each category. Tax lawyers and accountants must be licking their lips at the prospect.

Brahma Sharma from KPMG describes the economy like a car engine. Trying to tune a select few spark plugs of an engine doesn't make a car run better - it just creates damaging imbalances.

To race the engine you need all spark plugs firing. This is why tax experts around the world support broad-based, low-rate taxes - because they let markets run smoothly and wealth-creators get on with the job.

The call from business is clear. They want more time to do business, and less time and resources spent on tax, regulations and red tape (such as the Resource Management Act, OSH and ACC).

This mantra has been repeated to the point of being almost boring. If the Government is serious about boosting growth it needs to start listening and acting on this problem.

The best thing a government can do for growth is to create a healthy environment where it is easy to do business and flourish. This is not a new or radical idea, but one that obviously needs repeating.

* Phil Rennie is a policy analyst with the Centre for Independent Studies.