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Fair tax for savers proposals would broadly pay for itself

2 August 2014

Fair tax for savers proposals would broadly pay for itself and boost household incomes by $400 million

Expert advice received to date on a package of Fair Tax for Savers Campaign proposals could increase Government tax revenue overall – and deliver a $400 million income boost to savers.

The package could pay for itself rather than cost Government more, says the Fair Tax for Savers Campaign Convenor, Peter Neilson, CEO of the Financial Services Council (FSC).

The Fair Tax For Savers Campaign launched on Wednesday with a new web site through which people wanting to reduce the world’s harshest tax regime on long term savings, can directly e-mail and petition MPs, party leaders and finance spokespeople. Postcards are being inserted in newspapers and the campaign is being bolstered by online advertising. The fair tax proposals would see the average wage earner saving in KiwiSaver receive more than $100,000 extra in retirement.

Someone in the 33% tax bracket with a $100,000 term deposit rolled over during their 25 year retirement would receive more than $19,000 extra income over that period.

The Fair Tax for Savers Campaign has raised questions of whether the proposed changes can be funded by the Government, says Peter Neilson.

“We think the changes are likely to pay for themselves.”

The Fair Tax for Savers campaign has asked all political parties to consider removing the over-taxation of longer term savings by:

• Making the effective tax rate paid on KiwiSaver funds the same as the marginal tax rates KiwiSavers would pay on their other income, and
• Taxing term deposits only on the real interest rate (actual interest less the rate of inflation) rather than the nominal interest (the actual interest you receive) as the compensation for inflation is not really economic income.

The Financial Services Council asked Robin Oliver, the former Deputy Commissioner for Policy at Inland Revenue, to prepare a report on the likely fiscal and economic impact of the Campaign proposal to index interest income from term deposits and also index the deduction of interest expense by businesses and other investors. In his report released today, Robin Oliver concluded that changes to how term deposits are taxed and interest costs were deducted along the lines suggested by the Campaign, would be expected to:

• Increase government tax revenue by about $500 million per annum.
• Increase household after-tax incomes by $400m focussed on the retired and those saving for retirement.
• Provide greater incentives for retirement savings and a greater opportunity for New Zealanders to save for a comfortable retirement.
• Discourage highly speculative investments such as investments in rental property, and
• Provide an increased incentive to have term, as opposed to on call, deposits reducing the vulnerability of our financial sector.

Mr Neilson says the $400 million boost to household after-tax incomes was significant, a major reward for saving, and result in more productive investment and growth for New Zealand.

The FSC says there are a number of reasons why Robin Oliver’s conclusions differ from the broad estimates officials provided to the Savings Working Group back in 2010:

• The Campaign proposal for interest indexation are restricted to term deposits usually understood as being lending for 90 days or more) so about one third of interest income would not be indexed with a consequent loss of revenue.

• The over-taxation of interest income in KiwiSaver funds would be fixed by the cut in KiwiSaver fund tax rates so does not need to be compensated for twice.

• Home owners with mortgages are unable to deduct their mortgage interest costs so no Government revenue loss has to be funded for this interest cost.

• Non-residents already are taxed at a concessional 15% tax rate under treaty agreements and they would not need to have indexation extended to them as they have a concessional rate already.

• It is also likely that foreign owned corporates would switch their debt funding in New Zealand to have more equity funding in their New Zealand business and more debt sourced from their home country where the interest expense would be fully deductible. This would transfer the revenue cost of the tax subsidy from New Zealand taxpayers to the taxpayers in their home country.

Robin Oliver estimates the overall impact of these term deposit changes would be to increase the New Zealand Government’s tax revenue by about $500m.

The KiwiSaver fund tax cuts proposed are estimated by FSC to cost less than $200m if applied this year so the Fair Tax for Savers package would increase Government tax revenue overall.

Mr Neilson says at the launch of the Fair Tax for Savers Campaign, he made a mistake when quoting $626 million as the annual cost of removing the over-taxation of KiwiSaver funds.

“In fact that was not the annual cost it was a discounted present value of the likely costs over 4 years. I apologise for that error.

“Over time the cost of the KiwiSaver fund tax rate cuts would rise as the number of KiwiSavers increased and the value of KiwiSaver funds grew based on growing contributions and the reinvestment of fund earnings. Eventually the annual cost of the KiwiSaver fund tax rate reductions would cost more than the indexation of interest income and deductions.

“These numbers are all broad estimates. It would be desirable for the Parliamentary Finance and Expenditure Committee, after the election, to hold an inquiry and find out what these changes would cost using the data and input from the finance sector along with the advice from Treasury,

IRD, the Reserve Bank and MBIE and also to find out what progress has been made on the recommendations of the 2011 Savings Working Group and the 2013 Retirement Commissioner’s Review of Retirement Income Policy to address these issues,” Mr Neilson says.


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