Budget Speech (Continued)
Mr Speaker,
I now turn to the Budget's second objective, that of improving the tax system.
Tax reform is a centrepiece of this Budget.
We want a system that rewards effort and helps families get ahead.
One that attracts and retain skilled people in New Zealand.
One that encourages savings and productive investment.
And we want to make the tax system fairer.
Mr Speaker,
Tax has a powerful influence on savings and investment decisions. Uneven tax rates have been a major drag on growth. Sectors with low effective tax rates have expanded at the expense of the rest of the economy.
The Government is strongly of the view that investments should stand on their own merits, and not be unduly influenced by tax.
There is also compelling evidence of widespread avoidance, mostly brought about by taxpayers exploiting differing effective tax rates. The system lacks integrity and fairness.
The Tax Working Group of 2010 echoed the findings of the earlier McLeod Tax Review of 2001 on these matters.
We also required any changes to be broadly fiscally neutral. Given the increase in public debt of recent years, it would be irresponsible to saddle the next generation to pay for tax cuts now.
Over four years the package delivers around $15 billion of tax cuts. This is matched by a similar level of revenue increases from less economically damaging sources.
The total package has a cost of $460 million in the first year due to some revenue initiatives which cannot be immediately implemented.
The main elements of the tax package are a shift towards lower and more uniform rates of income tax, more indirect taxation and broadening the existing tax bases.
It represents the most thorough and beneficial overhaul of the tax system in 25 years.
From 1 October 2010 we will lower personal income tax rates, and increase the rate of GST to 15 per cent.
The increase in GST has been estimated by Statistics New Zealand to raise the level of prices by about 2 per cent.
To put this in perspective, this is less than actual CPI inflation in each of the past six years.
The Government is concerned to protect the vulnerable and those less well off from this one-off rise in the general level of prices.
This continues the approach taken in last year's Budget, which preserved income support and entitlements in the face of the global recession.
The tax package will protect the incomes of New Zealanders in two ways.
First, for income earners at all taxable income levels, the reduction in personal income tax will be sufficient to match the increase in GST.
Second, the package will provide, from 1 October 2010, an immediate lift in the levels of New Zealand Superannuation, all main benefits, student allowances and Working for Families payments. This will be sufficient to offset the estimated impact on prices due to the rise in GST.
The payments will be adjusted to ensure the full CPI effect is captured, excluding the CPI impact of the tobacco excise increase.
Revenue raised, from GST and other base broadening measures, will be used to fund an across the board reduction in all income tax rates.
The changes to personal income tax rates, to apply from 1 October 2010, will be as follows:
The initial income tax rate applying up to income of $14,000 will reduce from 12.5 per cent to 10.5 per cent.
The tax rate applying to income between $14,000 and $48,000 will reduce from 21 per cent to 17.5 per cent.
The tax rate applying to income between $48,000 and $70,000 will reduce from 33 per cent to 30 per cent.
The tax rate applying to income over $70,000 will reduce from 38 per cent to 33 per cent.
These are substantial and worthwhile tax reductions.
They mean that, for example, a typical two earner family, with two children who earns the average household income, will, after allowing for the increase in GST, be better off by $25 per week, or $1,285 per year.
When combined with the tax cuts already delivered from 1 April 2009, that family will be better off by over $43 per week or $2,245 per year.
The changes also mean that since March 2009 the marginal rate of income tax faced by taxpayers earning between $40,000 and $48,000, just below the average wage, will have almost halved from 33 per cent to 17.5 per cent.
Taxpayers wanting to know how their own position is changed by today's tax package can consult our website, www.taxguide.govt.nz and make this calculation.
Mr Speaker,
The Government believes that in a world of mobile capital, business income is particularly sensitive to tax rates.
When New Zealand's company tax rate was set at 33 per cent more than 20 years ago that rate was competitive by world standards.
Since then company tax rates show strong downward momentum around the globe.
The tax rate applying to New Zealand companies will reduce from 30 per cent to 28 per cent. This will apply from the start of the 2011/12 income year.
28 per cent will also become the standard tax rate applying to most savings vehicles.
It will apply to vehicles taxed as companies, including Group Investment Funds, unit trusts, life insurance and superannuation funds. It will also be the maximum tax rate applicable to Portfolio Investment Entities, known as PIEs.
Lower income taxpayers will still have access to lower rates via imputation credits from companies and electing lower PIE rates.
The tax rate applying to trusts will remain at 33 per cent, the same as the new top personal rate of income tax.
The previous gap between the 33 per cent tax rate for trusts and the 38 per cent rate for higher income individuals has spawned widespread use of trusts as tax planning vehicles. Trusts have an important role in our economy, but this should not be driven by tax advantages.
Applying a lower and more uniform tax rate to most forms of capital income will improve the durability and integrity of the tax system. It will encourage individuals to save and companies to invest.
Mr Speaker,
The Tax Working Group also reported that anomalies arise through the use of taxable income as a means of determining eligibility for certain Government assistance. Taxable income may not always be a good measure of true economic circumstances.
As an initial step, from 1 April 2011 investment losses will be added back to taxable income for the purpose of determining a family's eligibility for Working for Families assistance.
Further changes of eligibility for Government assistance, including student allowances, covering areas such as distributions from trusts and income from cash PIEs, will follow after the Budget. Officials will release a paper setting out the issues and proposed solutions later this year for implementation from 1 April 2011.
