Company tax cuts on hold for now

Businesses face the prospect of customers with more disposable income and employees with more reason to work overtime under National's tax policy, but they will have to wait for relief on the company tax front.

The flatter tax scale to be phased in by April 2007 will see the 84 per cent of income taxpayers who earn under $50,000 a year paying 19c in the dollar or less on the last dollar they earn.

Only the top 3 per cent of taxpayers with incomes above $100,000 will be caught by the 39c top marginal rate, compared with 11 per cent caught by the present threshold of $60,000.

"It's an extremely generous package," said PricewaterhouseCoopers tax partner John Shewan.

He was surprised by how far down the income scale the tax cuts extended, but disappointed that the top 39c was retained and that the promised cut in the company rate from 33c to 30c in the dollar would have to wait until 2008 "unless fiscal circumstances permitted" an earlier move.

"I would urge that they ensure that they do, because I don't think we can keep going for another two years with a [company tax] rate so far out of line with our nearest neighbour and other major OECD countries," Shewan said.

Deloittes tax partner Thomas Pippos said: "It's all about the direction of change and that should be viewed quite positively by business."

Previously announced plans to scrap the carbon tax due to come into effect in 2007 and the mooted capital gains tax on portfolio investment overseas would also be welcomed.

"The crux of the policy is quite simply to provide a lower tax burden and to restore incentives for taxpayers to get ahead by their own effort. It was intended as a loud and clear signal to hard-working New Zealanders that they can share in the benefits of a growing economy," Pippos said.

"Teachers, the police and hospital workers will not as a rule be exposed to the 39 per cent rate when the threshold moves from $60,000 to $100,000 - that's material."

National leader Don Brash said: "That top 39 per cent rate is still too high and cuts in at too low a threshold. But more changes will have to wait.

"Our priority in our first term of government is to reduce tax rates on low and middle income New Zealanders, to give people better incentives and ability to get ahead in life."

National plans to keep much of the Working for Families system introduced in last year's Budget for now, even though it believes it is fundamentally flawed and should be replaced by what it vaguely calls a "family tax structure".

Shewan said the Working for Families mechanism meant high effective marginal tax rates - how much you lose from your last dollar of income through tax and the whittling down of entitlement to family support payments.

"It has been a long time since we had [effective marginal tax] rates of 53c and 59c in the dollar. It's hard to encourage people to earn an extra $100 if they are going to lose $59 of it."

Business Roundtable chairman Rob McLeod, who chaired the 2001 review of the tax system, said that putting tax relief at the front end of the scale was expensive because everybody got it.

It had the biggest redistributive effect, but the biggest gains in economic efficiency and growth came from cutting the company tax rate and top personal rate because capital was the most internationally mobile factor of production.