Please Lower and Flatten Taxes
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.
The Institute of Chartered Accountants of New Zealand, which also lent its general support, preferred personal and company tax rates to come down together and be aligned at a common level.
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.