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Business Tax Review Not Coherent Or Bold

Business Tax Review Not Coherent Or Bold

“It is pleasing that the government wants to align tax policy with economic growth, but the proposals in its discussion document are piecemeal and fall short of its commitment to a ‘bold’ review”, Rob McLeod, chairman of the New Zealand Business Roundtable, said today.

“The idea of a reduction in company tax without cuts in other income tax rates, and proposals for a range of tax concessions, are a partial and incomplete tax strategy. A reduction in the company tax rate is desirable, particularly in the context of cross-border investment, but should not be made in isolation from other income tax rate reductions.”

Mr McLeod said that over the past 20 years, governments had generally pursued a broad-base, low-rate tax strategy with few tax concessions and a close alignment between personal, trust, company and other income tax rates.

This had made the tax system simpler and more efficient by reducing tax distortions and lowering administration and compliance costs, and the proposals risked unravelling that strategy.

As the OECD had advised the government, a return to tax concessions would signal that “the ‘no exception’ policy of the past 15 years is being loosened, thus encouraging lobbying for more significant relaxation measures in the future. As a result, the quite unique existing consensus that tax exemptions are unwarranted could be undermined.”

Mr McLeod said that the move to increase the top personal tax rate to 39 cents was a mistake, and the current proposal to lower company rates and not personal rates would place major pressure on that boundary.

He added that the document was not a comprehensive review of business taxation as it focused on companies whereas many small businesses, farms and partnerships are not incorporated and are more affected by personal and other tax rates. There is no good reason for biasing the tax system against such businesses. The company tax imputation system would also deny the benefit of a reduced company tax rate to New Zealand shareholders, particularly investors in private companies.

Given greater restraint in government spending growth, the Business Roundtable also believed there was scope for a much bolder package.

“The government has said it wants to listen to business opinion”, Mr McLeod said. “Earlier this year the Business Roundtable, Federated Farmers and the New Zealand Chambers of Commerce, with support from the New Zealand Institute of Chartered Accountants, argued that the basic strategy of the review should be to lower and flatten the income tax scale, in line with the key recommendation of the 2001 Tax Review. We suggested a cut in the top personal tax rates to 28 percent and a cut in company tax to 25 percent, together with a responsible funding package.

“Such a strategy would also be in line with United Future’s stated commitment to a low and comparatively flat tax structure.

“Business reaction to the proposals has generally been one of disappointment and I am sure submissions on the discussion paper will urge the government to preserve the integrity of the current tax structure and adopt a bolder and more coherent strategy”, Mr McLeod concluded.

26 July 2006


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