Flatter income tax scale wins favour with panel

By BRIAN FALLOW economics editor

The McLeod tax review proposes a flattening of the personal income tax scale.

It favours a two-rate scale, instead of the present one which has four steps at 15, 21, 33 and 39 per cent.

It suggests four alternatives, each with $29,500 as the threshold between lower and higher tax brackets - 17 and 34 per cent, 18 and 33 per cent, 19 and 32 per cent, or 20 and 31 per cent.

Any of those combinations would bring in about as much revenue as the present four-rate scale does.

"Substantial progressivity is not possible given the way income is distributed in New Zealand," review chairman Rob McLeod said.

"We don't have the numbers at the high end of the income distribution to achieve major redistribution by taxing the top end."

Only 200,000 taxpayers earn more than $60,000 compared with 1.65 million on less than $30,000.

It takes $8 in tax from each person in the high group to provide $1 for each person in the low group.

The review also gives short shrift to the idea of not taxing income below $9500.

"That would give people on $20,000 a gain of $17 a week but the other tax rates would have to increase to 26 per cent, 30 per cent and 49 per cent to fund that tax threshold."

Mr McLeod said that in the past New Zealanders had indicated that they saw a mild degree of progressivity in the tax scale as fair.

"High marginal tax rates are economically costly so we advise against them in general," he said.

It was also better that the company tax rate should be the same as the top personal rate.

"But we are not saying that if the Government were to move on [lowering] tax rates it should start with the company rate."

The review recommends scrapping existing forms of indirect tax apart from GST, notably taxes on alcohol, tobacco, gambling and petrol. Last year those four brought in $2.8 billion in revenue.

It would replace them by raising GST across the board.

Many New Zealanders of modest means pay as much or more through taxes on alcohol, tobacco and gaming as they pay in GST on all their other spending, the review said. The most deprived New Zealanders are more than twice as likely to smoke, for example, as the least deprived.

Mr McLeod said the case that GST is regressive had not been made out.