The Treasury has renewed its call for reform of the tax system, including the issue of capital gains from property investment.

It wants the system to have a broader base and lower rates, Treasury Secretary John Whitehead told an Institute of Directors function yesterday. "And at the risk of being chased down by an angry crowd with pitchforks and flaming torches, yes this should include consideration of moving the boundaries to tax more capital gains - for example on investment property - and shifting more of the tax base towards consumption," he said.

Without changes to the tax system, there was a real risk that the Government's revenue base would be unsustainable in the medium term, given growing international competition for capital and skilled labour, and an ageing population.

"A key priority has to be reducing effective marginal tax rates and increasing the rewards for effort. There is a growing view that the high mobility of our skills base means high personal income taxes are especially harmful for New Zealand's growth and productivity," he said.

At the same time New Zealand's company tax rates are at the upper end of the scale by the standards of the OECD and other open, small economies. "The pressure on us will be even stronger if the review of Australia's tax system currently under way leads to further company tax cuts across the Tasman."

Another major component of a tax reform strategy should be shifting investment incentives, by taxing returns to capital in a more even-handed way.

"I know there is a lot of passionate debate on this matter, but capital gains or property taxes would be beneficial for encouraging investment in productive activity.

"A more complete capital income tax base reduces the impact of tax distortions on investment decisions, thereby improving the allocation of capital in the economy." And greater reliance on GST - aligned with reduced income and corporate tax rates - should help strengthen incentives for savings, he said.

Such a shift would be challenging. "But now, when hopefully we are at the bottom of the business cycle, is the most propitious time to make these changes."

The Government has set up a tax working group headed by Professor Bob Buckle to act as a forum to debate such issues.