Tax Reform will Help Lift our Growth Potential
A core aim of the Government is to boost the productivity and income growth of New Zealanders. Taxes have pervasive effects on behaviour, and often change behaviour in ways that undermine economic performance. Poor tax system design can create incentives that worsen imbalances in the economy.
Taxes are needed to fund a wide range of valuable government services and income support. One virtue of good expenditure control is that it reduces pressures for tax increases, leaving more income in the hands of taxpayers.
However, the current fiscal situation and the need to continue to provide quality government services precludes simply cutting tax rates. Any reduction in taxes must be funded by additional revenues from elsewhere. Therefore the Government has developed a broadly fiscally-neutral tax package; in fact the package is forecast to be slightly revenue positive from 2013/14 onwards.
- Figure 1 - Operating revenue
- Source: The Treasury
In broad terms, the package uses revenue from increases in GST, the removal of tax preferences on buildings and other depreciable property and tougher thin capitalisation rules on foreign investment to fund across-the-board reductions in personal income taxes, and a lower company tax rate. The package is designed to boost growth by:
- improving incentives to work, upskill, train and save
- improving the financial incentives to remain in, move to or invest in New Zealand, and
- addressing tax preferences on depreciable property, particularly rental housing, that have distorted the current pattern of investment in New Zealand.
In addition the package contains a range of measures aimed at improving the fairness of the tax system. Action is being taken to improve the integrity of the tax system by reducing opportunities for taxpayers to design their tax affairs to unfairly access low tax rates or social support.
The reductions in personal tax rates more than fully compensate for the extra GST that income earners will pay on their after-tax consumption. Beneficiaries and superannuitants will be permanently compensated for the increase in GST by increases in benefits and superannuation payments.
By shifting the burden of taxation on to less internationally mobile tax bases, the tax package is also designed to improve the long-term sustainability of the fiscal position.
The Government has updated the current revenue strategy to reflect the changes resulting from the tax package (see Annex 1).
Improving rewards from work
The package reduces all income tax rates. Even after allowing for the higher GST rate, real after-tax incomes from working will increase. This will raise incentives to seek or remain in paid work, and boost incentives for workers to increase their incomes through education, training, on-the-job learning and promotion. New Zealand has one of the most internationally mobile labour forces in the OECD. According to OECD data, about 17% of highly skilled workers born in New Zealand now live overseas. Boosting real take home pay will help attract and retain talented workers.
Reducing economic imbalances
New Zealand has run persistent current account deficits on its external balance of payments over a long time period. These current account deficits reflect an imbalance between national saving, which comprises the combined saving of households, businesses and government, and total investment undertaken by businesses and government in tangible and intangible capital, and households in new housing. Current account deficits need to be funded offshore and persistent deficits have accumulated into a high level of external borrowings that make the economy vulnerable to changes in international investor sentiment. Lower income tax rates will help build a greater pool of national savings over time, which will reduce our reliance on foreign capital with consequent benefits for the current account and for local investment over the long term.
This imbalance of saving and investment has developed over decades and will not be fixed overnight. However, this package reduces tax rates on personal income, including returns on savings, and lowers the tax rate on savings vehicles and companies to 28%. This is expected to boost household saving rates. These lower tax rates reward saving and investment, while the base broadening measures will lessen the incentives to make tax-directed investment and help direct investment to those areas that are more productive from the national perspective. This will boost productivity and create jobs.
