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7 April 2006 Business to Government: Please
Lower and Flatten Taxes This week
Federated Farmers, the New Zealand Business Roundtable and the New
Zealand Chambers of Commerce told the government what they would
like to see come out of the review of business taxation. The other
main national business organisation, Business NZ, broadly supported
the proposed package, while putting more emphasis on reductions
in the company tax rate. This represents
a very broad-based expression of business community opinion on an
important issue. The review
arises out of Labour's post-election agreements with United Future
and New Zealand First. The government has said it will release a
discussion paper on options around mid-year. The main
criteria adopted by the consortium of business organisations in
developing a proposal were to reform business taxation in a way
that would benefit investment, employment, productivity, competitiveness
and economic growth in New Zealand; make New Zealand's tax structure
internationally attractive, particularly in relation to Australia;
and be fiscally responsible. The package focuses on a lower and flatter tax structure funded from the existing provision for additional growth in operating spending or revenue reductions; modest savings in base spending; a lower operating balance; and the revenue benefits of the impetus to the economy of a lower tax structure. The joint proposal is based on the view
that a central outcome of the review should be a reduction in the
rate of company tax (and related rates of tax) and a narrower gap
between the top personal and company tax rates. A company tax rate of 25 percent is proposed.
The present top and upper middle personal tax rates would be reduced
to 28 percent. The changes could be introduced in two steps at the
start of the 2007/08 and 2009/10 tax years. It is important to recognise that the rates
of tax on companies and other entities cannot be considered in isolation
from personal tax rates, since individuals are the ultimate owners
of business entities. Personal and company tax are interrelated
through the imputation system. Many businesses, such as sole traders
and partnerships, including many farming operations, would not benefit
from a business tax review that focused on company taxation alone.
The coalition agreements envisage a tax
system that provides better incentives for productivity gains and
improved competitiveness with Australia. The reporting in Australia
of 'income' generated in New Zealand points to a company tax rate
that is no higher, and preferably lower, than Australia's rate of
company tax, currently 30 percent. Australia is expected to reduce
personal income tax, and could well lower its company rate over
the next few years. It is interesting to reflect on what the
package does not contain. The business sector is not calling for
tax concessions or other favours. In calling for high personal tax
rates to be cut along with the company rate it is also mindful of
the burden of personal taxation on workers and families. Reductions in high effective marginal tax
rates, such as the top personal rate of tax, and in taxes on capital
income, do most to improve incentives and boost economic growth.
Growth generates widespread benefits to all income groups. Lower
personal rates of tax would also help to address the high effective
marginal tax rates associated with the phase-out of family and other
income-related assistance. The idea has been mooted of introducing
a payroll tax to fund a reduction in company tax. This would be
strongly opposed by business. The economic effect of a payroll tax
would be similar to an increase in GST and involve much higher compliance
and administration costs. Over time, the tax would largely be borne
by workers through a reduction in post-tax wages and lower employment.
Australian state payroll taxes reflect the need for an independent
state tax base and do not provide a good model for central government.
A move in the direction of Australia's company tax rate does not
necessitate the adoption of other features of Australia's tax system.
Lower income tax rates could be announced
in the 2006 budget and implemented with the first step effective
from the 2007/08 tax year (ie from 1 October 2006 for companies
with 'early' balance dates). There is no need for lengthy investigations
and extensive legislation. There was wide support at the last election
for tax reductions. The government has said it plans 'bold'
moves on business tax. The proposal is consistent with that commitment.
However, if the government is not prepared to go that far, a reduction
in the top personal tax rate to 33 percent and the company rate
to 28 percent is recommended as an immediate step. The proposal is also commended to other
political parties, including the National Party which did not address
the issue of the top personal rate of tax and the company tax rate
in its election policy last year. Roger Kerr is the executive director of the New Zealand Business Roundtable. |