Preferred Option
Given the problems and objectives outlined in the sections above, and the alternative options available, the preferred option consists of four components:
- Changes to personal tax rates and thresholds;
- Introduction of an Independent Earner Tax Credit;
- Repeal of the R&D tax credit; and
- Changes to KiwiSaver.
Each of the preferred components will require technical changes to legislation and regulation to give effect to the substantive changes. The substantive changes, and their impacts, are discussed below.
Changes to personal tax rates and thresholds
The preferred option involves making amendments to the Income Tax Act that would rebalance the personal tax rate structure as follows:
| Rate | 1 April 2009 | Rate | 1 April 2010 | Rate | 1 April 2011 | ||
|---|---|---|---|---|---|---|---|
| 12.5% | Up to $14,000 | 12.5% | up to $14,000 | 12.5% | up to $14,000 | ||
| 21% | $14,001 to $48,000 | 21% | $14,001 to $50,000 | 20% | $14,001 to $50,000 | ||
| 33% | $48,001 to $70,000 | 33% | $50,001 to $70,000 | 33% | $50,001 to $70,000 | ||
| 38% | over $70,000 | 37% | over $70,000 | 37% | over $70,000 |
Rationale for the preferred option
Globalisation, in terms of increased international competition for goods, capital and labour, is changing the context in which domestic taxes are set. Globalisation is on an upward trend, and though individual countries such as New Zealand can run against those trends in the short term, doing so is generally unsustainable in the longer-term. Importantly, New Zealand cannot ignore the impact of globalisation on its labour market. Our vulnerability as a nation to labour mobility was discussed under the ‘Status Quo and Problem' section of this statement.
These trends have significant implications for New Zealand's tax policy settings: taxes on labour in particular can no longer be set independently of international developments. The consequences of doing so are increased out-migration of the personal tax base (and the skills and knowledge bases). Setting personal and corporate tax rates independently of each other is also increasingly undermining tax system integrity via tax planning and arbitrage opportunities as well as tax-motivated incorporation.
Given the relative mobility of New Zealand labour, the sensitivity of human capital to taxes, and the need to compete internationally for skilled labour, a coordinated strategy for reform of the personal tax rate structure in New Zealand is necessary.
The damage to growth arising from high MTRs and ATRs (through personal taxes in particular) has also been highlighted under the ‘Status Quo and Problem' section of this statement. This damage is impeding growth which is a key determinant of the quality of New Zealanders' living standards. The preferred personal tax changes aim to reduce this damage (i.e. reduce the negative impact of taxation on labour productivity, participation, and migration decisions). The changes should be viewed as part of a strategic objective of reducing MTRs and ATRs over time as macroeconomic and fiscal conditions allow. This longer-term drive to reduce the impact of taxes on economic decision-making is a fundamental part of following the BBLR approach to tax policy.
The preferred tax structure changes outlined above will lower individuals' MTRs and ATRs in a manner that is fiscally responsible and appropriate in the macroeconomic context. The package is fiscally sustainable as it is funded through the removal of the R&D tax credits and certain KiwiSaver changes. These are discussed in more detail below. Consequently, the preferred option is self-funding and does not result in imprudent debt consequences for the government. Given the tightening economic conditions as a result of a recessionary period and a crisis in the global financial sector, the short-term fiscal stimulus provided by the tax cut package should assist in reducing the severity of the macroeconomic situation for New Zealand. Current economic conditions have underscored the need to act quickly in providing this stimulus.
The reduction in personal tax rates under the preferred option will also assist in easing the tax base integrity concerns arising through tax avoidance and tax arbitrage that occur out of a disparity of rates across investment forms - particularly by closing the gap between the top personal tax rate and the corporate tax rate.
