13 February 2012

Plunket claims about corporate tax simplistic and misleading

Casey Plunket’s claims (Chapman Tripp press release 10 Feb 2012) about the role that corporate tax plays in New Zealand are misleading, says Rob Salmond, author of The New New Zealand Tax System.

Plunket says that New Zealand does not need a capital gains tax because of its robust corporate income tax regime. Plunket’s argument overlooks two important points.

First, while New Zealand’s corporate income tax is indeed larger than most in the OECD, New Zealand is also more forthcoming than the rest of the OECD in allowing shareholders to fully write-off corporate income taxes against their already-low personal income taxes.

“Using corporate taxes as a reason to not have a capital gains tax, Mr Plunket ignores the relatively generous compensation that shareholders now receive elsewhere in the tax system.”

This issue is addressed on pages 100-104 of The New New Zealand Tax System.

Second, Plunket says Salmond ‘confuses legal liability with economic liability.’ In fact, it is Plunket who is confused about how economic liability for corporate tax works.

Shareholders do not ultimately shoulder all the burden of corporate taxes, as Plunket claims. Firms can raise the funds to pay corporate taxes in at least three ways:

• they can fund the tax from their customers through higher prices;
• they can fund the tax from their workers through lower wages;
• they can fund the tax from their shareholders through lower profits.

Firms can also engage in all of these activities at once in order to pay the tax.

Individual firms decide among these strategies based on the risk of financial repercussions from the affected party. When shareholders can easily move their investment elsewhere, for example, firms will be less likely to ask shareholders to fund the tax.

“There are sharply divergent views among leading economists about how much of the corporate tax burden is ultimately borne by consumers, workers, or shareholders. Little of this research supports Mr Plunket’s view that ‘the corporate income tax is a tax on shareholders.’ Making policy proposals based on this assumption is simplistic and misguided.”

This issue is discussed on pages 48-52 of The New New Zealand Tax System.

Links

• Plunket's press release: http://www.infonews.co.nz/news.cfm?id=85125
• NZ Herald article on The New New Zealand Tax system: http://www.nzherald.co.nz/simon-collins/news/article.cfm?a_id=135&objectid=10783837
• The New New Zealand Tax System sales page: http://ips.ac.nz/publications/publications/show/325

ENDS

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