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Don Brash Writes - No. 13, 23 July 2003.

Don Brash Writes

No. 13, 23 July 2003.

A top tax rate of 30%?

I gave a speech at the National Party conference in Christchurch 10 days ago in which I proposed a company tax rate of 30% (on a par with the Australian company tax rate) and a top personal tax rate to match. As I suggested some weeks ago, a tax change of this sort would give a tax reduction to almost half of all full-time taxpayers. It would also make New Zealand a more attractive place for those with skill and entrepreneurial drive to live in, thereby making it likely that our rate of economic growth would increase, to the benefit of everybody.

But, as expected, some complained that a tax cut of this kind would benefit mainly high income New Zealanders. Certainly, cutting the income tax to 30% would directly benefit only those earning over $38,000 a year, but $38,000 is hardly a high income by New Zealand standards, and it is certainly not a high income by international standards.

Even with a cut in the tax rate of this kind, those earning high incomes would continue to pay very much more tax than those on low incomes. As I've noted before, at the moment a person earning $25,000 with a non-earning partner and two young children is paying only about $27 a year in income tax, after taking account of Family Support and Child Tax Credit. By contrast, somebody in the same family circumstances earning $100,000 pays $30,270 in income tax. If the 33% and 39% tax rates were reduced to 30%, the person earning $100,000 would still pay $26,010 in income tax, or nearly 1,000 times more than the person earning $25,000. That hardly seems unduly favourable to the high income earner!

We need a change in attitude towards successful business people

In the same speech in Christchurch, I deplored the fact that so many New Zealanders applaud great rugby players, great netball players, great golfers - some of whom earn very large incomes - but despise our successful business people. Only the business people who claim to be more concerned with "triple bottom lines" than with building a profitable business enterprise seem to earn our respect. That must change if we are to have any hope of keeping the business people whose drive and initiative will be crucial to building the kind of economy which can give us the well-paid jobs, the good schools, and the hospital system which we clearly want.

Last Friday, the National Business Review published its annual survey of New Zealand's affluent. I'm not on it of course - not by a very considerable margin! I am delighted to see so many of my fellow Kiwis succeeding in almost every line of business. But it is sad that it seems that getting on that list appears to be an adequate reason for the Inland Revenue Department to go on a fishing expedition, asking all those with assets above some threshold to answer pages and pages of questions.

I'm all for ensuring that all New Zealanders pay what they legally should, but this fishing expedition seems to have been aimed at all those who appear wealthy, irrespective of how recently they have passed a clean tax audit. That is surely not the best way to encourage our successful business people.

A limit on government spending?

One of the other growth-promoting suggestions in my Christchurch speech was that we should aim to restrain the growth of government spending to the rate of inflation plus the rate of population growth. In other words, I suggested that we should aim to hold the level of government spending per person, in inflation-adjusted terms, to its present level. If we were able to do that, we would reduce core government operating spending from its current level of about 32-33% of GDP to about 27% of GDP over a 10 year period as the economy grew relative to government spending. Sounds easy to do, especially given the substantial growth of government spending over the last two or three decades.

Actually, achieving no further growth in real government spending per person would be a considerable challenge, and would require us to achieve major cost savings in some areas of government spending, perhaps especially by getting those on benefits into productive employment, so that we could spend more, as we almost certainly need to do, on law and order and the defence of our borders.

But it could be done. Some other developed countries have levels of core government spending lower than ours, and we had a lower ratio in the past. Getting the relative size of the government sector down would make a useful contribution to increasing the country's sustainable growth rate, and that must surely be the primary objective of any responsible New Zealand government.

Interestingly, holding inflation-adjusted government expenditure per capita was a policy adopted by the government of the state of Colorado in 1992, and it has been a resounding success in restraining state government expenditure and reducing state taxes. Between 1995 and 2000, Colorado enjoyed the fastest economic growth of any US state, and tight restraint on state government spending is seen by many observers as one factor in this growth. There is no reason why a similar approach would not work in New Zealand.

Don Brash

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