Tax breaks low on minister's agenda

A lower tax structure is the focus of the Treasurer-designate rather than picking winners, BRIAN FALLOW reports.

WELLINGTON - Finance minister Bill English is sceptical about the case for tax breaks to encourage people to save or firms to do more research and development.

Tax neutrality (not using the tax system to pick winners) and base maintenance (eschewing tax breaks and plugging loopholes, as the price of lower tax rates overall) remain articles of faith for the Treasurer-designate.

"We would argue, and we will strenuously this year, that the best thing we can do is look to a lower tax structure overall," Mr English told the Business Herald..

"Lower tax rates on every hour worked and every dollar invested are probably in an economic sense just as plausible as bigger reductions for particular types of savings."

Should the reference to "every hour worked" be taken as indicating a preference for another cut to the lower tax rate rather than the top rate?

"I wouldn't want to comment on that," Mr English said.
"Say you were going to have $1 billion of tax reductions, would you have that as a tax incentive for savings or a change in the rate structure or an increase in family tax credits?"

The Government favoured changes in the rate structure and family tax credits over incentives which amounted to spending a whole lot of money on people who were already saving, Mr English said. "There's just no particular evidence that tax breaks increase the quantum of saving, though they certainly change the pattern. You spend all that money [in tax forgone] for what is likely to be a relatively small effect at the margin."

A work programme underway for the past four or five months involving the Treasury and the Investment Savings and Insurance Association was looking at tax as well as issues about how savings are measured and public education.

One thing emphatically not under consideration is a capital gains tax on residential investment property.
The favourable treatment of residential property compared with financial assets is often cited as a major distortion in the tax system.

Nor is the work programme addressing the fundamental "taxed-taxed-exempt" regime (taxing earnings and investment income, but allowing tax-free withdrawals from investment vehicles) which was set in place by Sir Roger Douglas.

On R&D, Labour has looked at the comparatively low level of private sector spending and concluded that a more liberal tax treatment is required.

But Mr English argues that one reason there is so little private sector R&D is that the Government has done so much of it.

"We basically do New Zealand's R&D. We pay for it and we provide it and that has been the case for a long time. There is only the odd significant exception to that."

The Government wanted to have more brains involved in planning how its $600 million R&D budget is spent. The Foresight project was part of that effort, he said, as were moves to build links between business, the CRIs and universities.