John Roughan: Taxing question of top rate put to bed

The Budget prepared by John Key (left) and Bill English stimulates the economy in a way that looks tight-fisted. Photo / Mark Mitchell

Strange how the inevitable can be a relief when it happens. The top rate of income tax had to come down from the vindictive level Helen Clark and Michael Cullen set as soon as there was the chance.

They were taking vengeance not so much on "the rich" as on the previous Labour Government for its cardinal sin in their eyes: abandoning progressive taxation.

It is exactly 10 years since the restoration but their top tax rate always felt temporary. It was swimming against the economic current and, I suspect, most people's idea of reasonable taxation.

What is the most that anybody should have to contribute to the cost of public services? A third of your income seems reasonable to me. It is quite a lot, but when you tote up the benefits: universal education, emergency health insurance, a police force, a pension, the cost seems fair.

It has been known for months that this week's Budget would bring the top rate down to 33 per cent but it was satisfying nevertheless to hear it. The subject is tidy now, settled, feels as permanent as anything can be in politics.

It is hard to say the same for the company rate, surprisingly lowered to 28 per cent. It was a decision plainly made late in the day when Australia contemplated that rate.

Now we are hearing plenty of hairy-chested commentary about beating Australia to the punch but corporate tax competition is short-sighted. It is not a competition we are going to win.

Companies that may decide to set up in this country for a tax rate are probably not going to stay.

International comparisons are the sole justification offered, unfortunately, for the whole new deal announced this week.

Tax is being transferred from incomes and profits to spending and property because, it is said, skilled people and smart firms are mobile. But that is not the main reason to rebalance the burden. The levels and sources of taxation reflect a general consensus about the services we want and the contributions we think reasonable.

When governments make decisions that accord with the consensus the decisions stick. Clark and Cullen faced a constant call for tax cuts, particularly since they were collecting a surplus.

Eventually they threw the corporate sector a concession, reducing the company rate from 33 to 30 per cent. That widened the gap with their top personal rate, increasing the incentive for resourceful people to avoid the top rate.

One of the best things Roger Douglas had done was to align a lower top rate with the company rate, removing most of the incentive for tax avoidance at a stroke.

Clark and Cullen seemed to care less about avoidance. When the property market took off on their watch they did nothing about concessions property investors could claim by becoming a company qualifying for losses to be assessed at shareholders' personal tax rates.

The Budget for the coming year proposes to do something about that, and take one or two other bites at property investment.

Family trusts will have no tax advantage over the new top rate and depreciation allowances will go.

The 28 per cent rate for unit trusts, superannuation funds and bank deposits in 'portfolio investment entities' could attract more savings in those forms and leave less for direct investment in property.

But John Key has not done nearly enough to deter property investment, as he needs to do if his original aim of a "step change" in the economy is to be based on more than state projects.

Commercial property owners are complaining about the end of depreciation allowances but many residential investors say they don't claim them since they have to be repaid when the sale of the property shows it has gained value.

Capital gains can be taxed and the Budget promises to beef up Inland Revenue's ability to do so, but Budgets have said that before.

Key is nothing if not lucky, though. Residential property investment might have been hit too hard by Budget predictions to recover on the discovery that bark was worse than bite.

He and English have produced another economic stimulant that manages to look tight-fisted. They have paid for almost all the income tax cuts with a GST increase that pundits strangely thought politically too difficult when it was first proposed.

They have redirected some of Labour's daycare subsidies to people that most need them, restored universities' right to raise fees and put health boards on tight rations. And they are going to stop income tax avoiders getting welfare into the bargain.

They will probably never be more daring than they were on Thursday.

This Budget has cast the die for the rest of their time. The economy needs much more than income tax cuts but at least those look durable now.