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4.4  Composition of revenue in New Zealand

Though there may be scope to reduce expenditure levels, it may also be possible to finance expenditure at lower economic cost by improving the efficiency of the tax system. New Zealand's tax system is basically sound and generally performs well by international standards (2025 Taskforce, 2010). Past reforms have left New Zealand with the bulk of tax revenue being raised by taxes that have a relatively broad base, with fewer exemptions and concessions than most other countries.

Most OECD countries rely on three main sources of tax revenues: personal and corporate income taxes; social security contributions; and taxes on goods and services. Figure 17 suggests that New Zealand currently has a relatively large proportion of total revenue raised through personal and corporate taxes (see also 2025 Taskforce, 2010), which several models suggest are particularly damaging for growth (see section 3.2.2). This figure does pre-date the Budget 2010 tax cuts, which have reduced personal and corporate taxes relative to consumption taxes. However, there is scope to do more. In particular, as average corporate tax rates in the OECD continue to trend down, New Zealand's new 28% rate (effective in the coming tax year) will still be higher than the OECD average.[19] A relative reliance on capital taxes has the potential to be particularly damaging in an increasingly globalised world of highly mobile investment.

We also have a wide variety of effective tax rates on capital investment income depending on the type of investment and its source (see Treasury, 2008). Equalising rates of tax on different forms of investment would improve savings and investment, including standardising and lowering the rate of tax on different forms of investment income as far as possible and introducing a tax on capital gains to reduce the diversion of investment into tax-favoured or tax-exempt forms (Treasury, 2008).

Figure 17 – Composition of revenue, percent of GDP
Figure 17 – Composition of revenue, percent of GDP   .

Notes

  • [19]In the OECD area, the unweighted average corporate tax rate has dropped from 47.5% in 1981 to 37.1% in 1994, 27.2% in 2007 and 25.9 % in 2010 (Treasury estimates based on published OECD data).
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