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Section 6 - Economic and fiscal priorities

We recognise that you will want to make quick progress on your stated priorities, so this section provides some thoughts on strategic areas where you may wish to consider options or implementation issues now, and also frames issues around a medium-term agenda. In doing so we provide our "first best" advice and we hope that you will find it useful.

Personal tax reductions

The National Party public material on tax cuts has a strong focus on competitiveness, productivity and international mobility. Treasury's advice is largely consistent with this and aims to improve efficiency and productivity growth, shift investment towards more productive uses, maintain revenue integrity and tackle distributional/equity concerns.

Our overall advice is that:

  • Our tax system is basically sound. However our increasing integration into the global economy, especially Australia, is putting increasing pressure on the New Zealand tax system.
  • These pressures are best addressed through a strategy of incremental reform towards a clear long-term vision for the New Zealand tax system.
  • The international dimension is crucial. New Zealand probably has the most internationally mobile labour force in the OECD. We also have very high levels of inward investment.
  • We consider that, from a growth and productivity perspective, the highest priority is to reduce the current top personal tax rates.
  • A broader programme of rationalisation of income tax rates and base broadening would offer greater productivity gains than rate reductions alone.
  • Aggregate measures of income distribution are relatively insensitive to large changes in tax scale design. Transfers have a far bigger impact on aggregate measures of income distribution. Net taxes (taxes less transfers) are negligible or negative for the bottom half of households ranked by income. Therefore, we suggest using suitably targeted transfers (and base broadening measures such as a new capital gains tax) to deliver equity objectives.
  • Average corporate tax rates in the OECD continue to trend down, and New Zealand's 30% rate is now relatively high, with small OECD countries having an average company tax rate of 26% in 2008.
Personal Tax Reductions: Treasury comment, recommendations or implimentation advice
Policy proposals Treasury comment Recommendations/implementation advice
Personal Tax Reductions - A 3-year plan of personal tax reductions.  You have estimated 4-year cost of $5.7 billion met by savings of $6 billion.  Lowers current 21% rate to 20% and increases 33% threshold to $50,000.  Reduces 39% rate to 37%.
  • Reductions in 39% rate should have positive economic effects.
  • The largest reductions in average tax rates occur above $40,000, which is helpful from a human capital and productivity perspective.
  • The timeframe is extremely tight. Delivery of legislation pre-Christmas is dependent on the specific nature of reform, quick resolution/formation of the government, and ability of private sector to manage implementation.
  • Our suggestion would be to focus on the top personal rates and bring it down to 30% or lower.
  • This would harmonize top investment and income tax rates at this level.
Introduce Independent Earner Rebate (IER) that benefits most taxpayers earning $24,000-$50,000.
  • The IER reduces average tax rates in the $24,000-$50,000 band, so increases participation incentives in this band (including by increasing income inequality between beneficiaries and IER recipients).
  • The IER is targeted at non-recipients of other transfers.  This reduces its fiscal cost but increases its complexity.
  • As the IER is not paid to beneficiaries, Working for Families (WFF) recipients and superannuitants it will have little effect on work incentives for those groups, except where it encourages beneficiaries and WFF recipients to swap to the IER.
  • The IER delivers significant gains to a group that also benefited from the 1 October 2008 tax cuts.  Other tax changes may be a higher priority from a productivity perspective.
  • This is a non-traditional feature of the design and we would like to work with you to understand your objective better before advising on the IER and any alternatives.
  • As the IER design is new it may pose implementation challenges for IRD.
  • Detailed design still needs to be worked through.

In addition to the changes outlined above, you might also like to consider:

  • Developing a strategy of incremental reform towards a clear long-term vision for the New Zealand tax system. This would have a number of advantages including: guiding each step in a series of tax reductions, introducing more certainty and clearer expectation around the direction and motivation for change, and establishing a debate focussed around medium-term strategy rather than immediate issues.
  • Introducing other changes to the tax system as part of medium-term strategy to:
    • reduce the corporate rate below 30%, and
    • move towards a tax system more heavily weighted towards consumption taxes and, over a longer horizon, a greater contribution from property taxes.
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