KEY POINTS:
Everyone wants a tax cut.
Unfortunately that is not a good feeling, given Treasury anticipates budget deficits for the next nine years after budget surpluses for more than a decade. The cupboard is anticipated to be bare but the appetite for tax cuts has yet to be filled. A potential positive is that Treasury forecasts are inevitably wrong and generally too pessimistic. Time will tell.
The backdrop, total core Crown revenue (predominately tax revenue) has increased by $28.8 billion (from $33.1 billion to $61.9 billion)] in the last 12 years. Tax reductions over this period have generally been limited to that provided to working families under the Working For Families' package of resulting in an incremental benefit of $3.6 billion.
Gone are the opportunities to more easily cut taxes and spend more on Government initiatives.
One of two options will likely result: dishonesty in the sense of ignoring the problem and living beyond one's means or the reality that difficult times mean that difficult decisions will need to be made.
Assuming the latter, the decisions will involve considering how Government spending can be cut or revenue raised - both anticipated to be made in unfavourable economic times. Logic would suggest that both levers will need to be pulled. It will not simply be a question of raising taxes.
Difficult decisions, by definition, are difficult. People will be negatively affected and people vote bringing into play the phrase that "dishonest politicians are a function of dishonest voters".
For example, refer to the Mood of the Boardroom survey results concerning the prospect of GST increases and the introduction of a capital gains tax. In both cases the overwhelming sentiment was against such a change (82 per cent and 63 per cent respectively). But interestingly if the quid pro quo meant decreases in other existing taxes, the negative sentiment materially reduces (36 per cent and 38 per cent respectively).
Difficult decisions must be rational and appropriately considered. Two recent tax examples where this was arguably not the case are Labour's proposed reduction to Inland Revenue's interest rate for underpayments of provisional tax to the level that is paid for overpayments (from 14.24 per cent to 6.66 per cent) and National's proposal to jettison the current R&D tax credit rules.
Yes, there is a problem with the current interest rates - for many taxpayers the underpayment rate is too high and in many instances they are exposed to the rate simply because of volatility in their earnings during their tax year or because it can take five to 10 years for a dispute to be finally resolved.
If those are the problems, there are real targeted solutions available, such as not charging interest where provisional tax has been paid using the "uplift method" and in terms of tax disputes, simply applying a lower rate commensurate with actual time value of money.
There would have been huge kudos to Labour if they had sought to introduce a proper fix to this problem.
As for National's announcement concerning the repeal of the R&D tax credit rules, the proposal seems no more than a LIFO approach to tax policy - "last in, first out".
Relevant, also, to any current tax debate is that tax is one of the levers that governments can use to stimulate activity, including attracting and retaining foreign and domestic capital and labour.
The popular approach of recent times has been to avoid its use on the basis that the market is a more efficient determinant of economic activity. But markets sometimes fail and government intervention is welcomed - for example current deposit guarantees.
Also relevant is the backdrop of global mobility and competition for capital and labour, factors that have never been greater, with the ultimate prize being the increase in national productivity and real wages.
Successive Australian governments in the last few years have introduced a range of measures showing their competitive spirit for capital and labour:
* The "Australia's Future Tax System Review" that looks to make the Australian tax position even more competitive.
* Successive reductions in personal tax rates in Australia over the last nine years.
* An R&D regime that will be enhanced by a two-tiered tax credit worth up to 20c per dollar spent for firms with a turnover under $50 million and up to 10c in the dollar for firms above that threshold.
* Legislation abolishing capital gains tax for most foreign investors where 50 per cent or more of the underlying assets are not land.
* A reduction in withholding tax on certain distributions from Australian managed investment trusts to foreign investors from 30 per cent to 7.5 per cent.
* A tax rate of 15 per cent on superannuation funds including an ability to receive a refund of franking credits on dividends they receive to the extent that they exceed the 15 per cent tax rate.
* Reductions in withholding tax on interest and royalties in certain major tax treaties.
But the past is the past. Of more relevance is that other than the proposed personal income tax reductions, both major parties still have a blank canvas around any substantive tax initiatives to help navigate the economy out of the current negative sentiment.
National has highlighted a near-term goal of a three-tier personal tax system with the highest rate of no more than 33 per cent on income above $50,000 but that still leaves open what tax initiatives, if any, will actually be undertaken to enable that goal to be realised.
Like the recent "me too" initiatives around the deposit guarantee arrangement, the likely outcome could easily be "copying" some yet-to-be-announced tax initiatives by other jurisdictions.
Time will tell what will happen but it's not just the government of the day that influences that course, but also officials who probably more importantly need to challenge themselves and be challenged as to how tax should be factored into future decision-making. This is particularly relevant with tax when many of the policy designs are complex and not capable of easy dissemination or general debate.
Take, for example, the fact that there are tax incentives for non-resident investors in particular to own 100 per cent of a New Zealand business without any local equity participation. Sure there are other non- tax incentives that also drive this but tax is right up there. This doesn't need to be the case and will in fact be fiscally positive if addressed but progress on this issue is far from timely.
There was an overwhelming consensus in the survey that a destination of tax reform (not just the next step) is a key part of any rational tax debate, also that there is a need for a framework to be applied whereby tax initiatives can be rationally considered and evaluated. In part, this is a further explicit validation of the importance of the existing Generic Tax Policy Process.
The question is whether some further refinement of the process is required to challenge the status quo and bring relevant stakeholders to the table. At a minimum the current environment requires real dialogue, not just written submissions. It also requires actions - including rulings - on a timely basis, not death by 1000 consultative cuts - Inland Revenue interactions.
* Thomas Pippos is managing tax partner of Deloitte.