Editorial: Time to align top tax rates - it's only fair

The Government expects to be borrowing $240 million a week for the next four years. Photo / Supplied

Opinion

The economy ebbs and flows in public consciousness.

After a flurry of discussion that followed a succession of commissioned reports on tax, capital markets and the income gap with Australia, the subject has waned somewhat.

But the Government has yet to act on those reports, having promised to do so in this year's Budget due to be delivered late next month.

It is important that the momentum of the public discussion is not lost in the meantime. It has prepared the electorate for some important economic changes, especially to the balance of taxation from income and spending and to the tax treatment of property.

The Government has given some indications in advance of the Budget. It wants to raise the rate of GST to 15 per cent. It has ruled out a comprehensive capital gains tax, though it might find a way to bring investment property sales into the net.

It will probably remove property depreciation deductions and maybe other rental offsets against unrelated income.

It will lower the top rate of income tax from 38 per cent to perhaps 33 per cent, which would leave it still significantly higher than the company rate of 30 per cent.

Aligning those rates should be a primary aim of tax reform. The top income and company rates should be the same for reasons of social equity and economic efficiency.

It is neither fair nor useful to the economy that taxpayers on the same incomes should pay different rates because one puts some costs through a company and the other does not.

The rates were aligned for a long time after the 1980s reforms when incentives for tax avoidance were taken out of the system.

The incentives were restored by Helen Clark's Government as a byproduct of its determination to "tax the rich".

It introduced a new top income rate of 39 per cent in its first year of office, 2000, and tax-avoidance opportunities returned.

Chief among them are the use of trust funds and personal investment entities that carry a lower tax rate, 33 per cent.

These and other vehicles are the reason that an Inland Revenue survey of people earning above the income threshold for the top tax rate has found that only half are actually paying the top rate.

That survey has been cited several times by Finance Minister Bill English. It is a powerful argument for removing differential tax rates, though he sounds content to cut the top income rate only to the level of the trust and portfolio investment entity (PIE) rates.

He might not have sufficient revenue from a higher GST to take the income rate down to 30 per cent, especially since the Government has undertaken to provide relief at all levels, but this is not the argument he offers.

Rather he argues that company tax is not a "final" tax for shareholders who count it towards their income tax.

He is also haunted by the advice from the Tax Working Group in January that company rates are coming down in competing economies and New Zealand's rate may have to come down below 30 per cent eventually.

International comparisons are only one important tax consideration.

Internal efficiency and the Budget balance are just as important. Deficits and rising public debt will be a legacy of the 2008 recession for years yet.

The Government expects to be borrowing $240 million a week for the next four years. Tax cuts must be balanced by spending cuts if the red ink is not to get worse.

The economy would gain as much strength from a balanced Budget as it would from competitive company tax rates.

Whatever decision the Government makes on the alignment of income and company rates it should be guided by the implications for its revenue. But if it can afford to align those rates it should do so.

Alignment is tidy, simple and fairer for everybody.