Tax reforms to be fair, gradual, fiscally neutral

Gradualism, fairness and fiscal neutrality to guide tax reform, says English

by Pattrick Smellie

Rising tax rates in countries hit by the global recession give New Zealand a rare opportunity to position itself as a relatively lowly taxed country without pursuing the radical tax rate cuts outlined in yesterday's 2025 Taskforce report, Finance Minister Bill English told a tax conference this morning.

While New Zealand's fiscal position had deteriorated seriously as a result of the global recession, it was not as badly hit as many other countries that New Zealand compares itself with, English said.

"New Zealand has a unique opportunity to improve its relative position. We have come out of this recession in sufficiently good shape to have some choices beyond surviving and keeping our credit rating. Countries that had banking collapses will all be putting taxes up and they will have to remain high for some time.

"We have the opportunity to be considered, to take the long term point of view. Not all the changes we wish to make need to happen at the start," he said, although policy decisions flowing from reviews of the tax, capital markets and minerals reviews, and anything picked up from the 2025 Taskforce report, could become part of the 2010 Budget.

However, Australia's banking system had not collapsed and its public finances were "among the strongest in the world", meaning it had a wide range of choices as it also went through a major tax system review.

"We compete directly with Australia," said English. "If they make significant changes to their tax system that advantage people or businesses in some way, they will be in a better competitive position than we are."

A New Zealand response could be required relatively swiftly if that occurred, he said.

English stressed that while the tax system was unable to meet future revenue needs in its current form, any reforms would be fiscally neutral.

"We don't want to be collecting any more tax revenue than we are at the moment," he told reporters after his speech to the Tax Working Group's one day public seminar on tax reform options. "If we want to lower (tax rates) in one place, we would have to raise them in another."

He declined to be drawn on specific tax reforms, except to say that a higher rate of GST was problematic as it would require compensation to lower income earners. While a capital gains tax had been ruled out on the family home, all other options for reforms were deliberately being left on the table for discussion.

A three cents in the dollar drop in the company tax rate to 27% was estimated to come at a cost of $500 million a year, TWG member and managing partner at Ernst & Young, Rob McLeod, told the conference.

The government has a long term aim to align company, personal, and trust tax rates at 30%.

In a direct reference to the political unacceptability of many of the 2025 Taskforce's recommendations, including top corporate and personal tax rates aligned at 20%, English said: "Changes that are widely understood and are supported make the most difference to economic performance. Those sorts of changes tend to stick.

"Those without support simply don't last and can't make that much difference to our economic performance."

(BusinessWire) 10:44:51

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