Cullen rejects case for company tax cut

Finance Minister Michael Cullen was sceptical yesterday about the case for a cut in company tax.

Speaking at a post-Budget seminar sponsored by the Business Herald, Bell Gully and Deutsche Bank, he said it was not valid to compare a 30 per cent nominal company tax rate in Australia with 33 per cent in New Zealand.

Australian companies had other levies to pay, including contributions to employees' compulsory superannuation.

"Secondly, for New Zealand resident shareholders, company tax is merely a withholding tax. They are eventually taxed at their marginal tax rate, so if a shareholder has, say, a 39c marginal tax rate, the only difference between a company tax rate of 30 and 33 per cent is that an extra 9c rather than an extra 6c has to be paid at the end of the day," said Dr Cullen.

"The actual benefit of a lower company tax goes to foreign resident shareholders, for whom it is, in the main, the final tax. Leaving aside the political question of whether our fiscal priority is to give tax breaks to foreigners, the core question is whether this actually attracts any new foreign investment."

He asked if the business community was really saying that the profit potential of investment options for foreigners here rather than elsewhere was so finely balanced that 3c on or off the company tax swung decisions.

"I doubt it. My recent experience is that after-tax profits in New Zealand have been driven by factors like the level of the dollar, the weather, consumer confidence, overseas prices and the state of the world economy. A 3 per cent tax on profits would have been swamped by these first-order influences on revenues and costs."

Finally, it was said a lower tax rate might allow higher levels of retained earnings to be reinvested.

"This assumes shareholders are willing to forgo dividends," Dr Cullen said. "Even if they are, the level of reinvestment is governed more by the prospects for future profits than by the untaxed amounts left over from past profits." It was just as important to ensure that the economic environment created opportunities for profits.

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