Reform of the tax system
Tax reform is a centrepiece of this Budget. The Government's objectives are to encourage savings and productive investment, to ensure the tax system rewards effort, to make the tax system fairer and to attract and retain skilled people in New Zealand.
However, the Tax Working Group found that New Zealand's tax system risked becoming unsustainable and relied too heavily on those taxes most harmful to growth such as corporate and personal income taxes. It also lacked integrity and fairness. The Working Group found compelling evidence of widespread avoidance, mostly through taxpayers exploiting differing tax rates. In addition, sectors with low effective tax rates, notably property, have expanded at the expense of the rest of the economy.
The Government set two criteria for tax reform.
The first was that the package both needed to be fair and to be seen to be fair. This is the only way to make worthwhile tax changes permanent and enduring. The package addresses some of the more obvious anomalies in the current system. It is also broadly neutral in terms of its impact on the income distribution. While higher income earners pay more tax and therefore receive larger personal income tax reductions, these groups also bear the impact of most of the tax base broadening. All household income groups will receive on average around a 0.5% to 1% increase in their real disposable income.
Given the Government's commitment to strong finances and delivering public services, the package is also broadly fiscally neutral. With public debt forecast to increase in the short term, it would be irresponsible to saddle the next generation with further debt to pay for tax cuts now.
This Budget introduces a package of tax reform that will improve incentives to save, work and invest in a way that is fair and fiscally neutral. It is based around a shift towards lower and more uniform rates of income tax, more indirect taxation and broadening of existing tax bases. This represents the most thorough and beneficial overhaul of the tax system in 25 years.
