Top tax rate increase has led to major distortions

Dunne: Top tax rate increase has led to major distortions

UnitedFuture leader Peter Dunne says the Tax Working Group’s report shows that putting up the top tax rate in 1999 has led to severe distortions within New Zealand’s tax system.

Speaking in Parliament this afternoon in the debate on the Prime Minister’s Statement, Mr Dunne, who is also the Minister of Revenue, said the Tax Working Group’s report showed that since 1999:

• There has been a significant increase in the number and level of trust income, with significant spikes in those earning just below the top personal tax threshold.

• At the same time, the rate of growth in top incomes has slowed significantly, despite strong economic growth. Even so, the 5% of taxpayers assumed to be in the top tax bracket in 1999 has now grown to around 9%, although the actual figure is likely to be much higher.

• Some higher income earners are manipulating their declarable taxable income to boost their eligibility for Working for Families Tax Credits.

• A major hole in the tax treatment of investment property, with a $200 billion investment declaring $500 million in tax losses.

Mr Dunne said that with personal taxes, company taxes, and GST accounting for 91% of current tax revenue, a strong case existed for moving to a more broadly based tax system.

“For UnitedFuture, a priority has to be tax rate alignment.

“We note the Government’s medium term commitment to our 30:30:30 policy for top personal, trust and corporate rates, and see aligning at least the trust and top personal rates as an early priority, to deal with the 1999 distortions,” he said.

Mr Dunne welcomed the Prime Minister’s announcement that capital gains tax, land tax and a risk-free rate of return method for investment properties were off the Government’s agenda.

“UnitedFuture has long opposed capital gains tax as inefficient, cumbersome, and based on envy considerations ahead of sound policy, and I believe today’s announcement should signal its burial once and for all as an option for New Zealand tax policy.

“However, there is a need for a substantial shake-up of the tax treatment of investment property, in light of the $500 million in tax losses currently recorded, and the 10,000 families who now qualify for Working for Families Tax Credits as a consequence of deducting rental losses against other taxable income, and the Government will be considering seriously all of the recommendations of the Tax Working Group in this regard.

“This is not an attack on landlords or property investors as some have alleged – it is simply about ensuring fairness and balance in the tax system, and that, as a first principle, investment decisions are driven by the quality of the particular investment, not the tax advantages perceived to flow from it

“In this regard proper and effective enforcement of the law as it stands is especially important.

“For example, additional funding in the 2007 Budget for Inland Revenue to investigate some property transactions has produced tax assessments nearly ten times in excess of the funding provided.

Mr Dunne said the Tax Working Group’s recommendations to increase the rate of GST were “problematic.”

“There is no doubt GST is a very efficient system, and that New Zealand’s single rate, all-inclusive GST is among the best in the world – and UnitedFuture would not support any attempts to weaken that by, for example, exempting particular goods and services from GST.

“However, any move to increase the rate of GST could only be supported if it was accompanied by administratively uncomplicated tax rate reductions or transfer payment increases which had a positive impact on low and middle income households in particular,” Mr Dunne said.

Mr Dunne praised the Tax Working Group for the way in which it carried out its role.

“It taught two important lessons – first, New Zealanders do respond in a sensible and mature way to a structured tax debate, and second, and perhaps more important, that as the structure and scale of international tax systems become more dynamic, far more regular and thorough reviews of New Zealand’s tax system will be required to maintain our international tax competitiveness.

“It will no longer be good enough to have major tax reviews every decade or so, and I will therefore be looking at ways in which a Tax Working Group type process can occur on a more regular basis to ensure New Zealand has a world class tax system,” he said.

ENDS