Bernard Hickey: Real reform that's politically possible

John Key. Photo / Mark Mitchell.

The Tax Working Group has followed its brief of finding a set of tax reforms that would make a difference to the economy and be both revenue neutral and politically acceptable. That is no mean feat and will challenge the government to make significant tax reform in the May 2010 budget.

Essentially it is proposing a new set of taxes on property investors to pay for cuts in the top personal income tax rates and possibly a cut in the family trust and corporate tax rates. It has also sensibly steered clear of a wholehearted endorsement of an increase in the GST rate to 15 per cent or a full Capital Gains Tax.

Both would be politically distracting from the main task of rebalancing the economy by broadening the tax base to property investment and removing massive incentives to avoid tax.

Heartening comments from John Key yesterday (who read the draft of the 74 page Tax Working Group report over the Summer Holiday) mean there is a significant chance of reform that would make a difference. The combination of new property taxes and income tax cuts would have a good chance of delivering the longer term boost to economic growth that both John Key wants and the government's budget needs.

The key factoid in the report and the one that shifted the debate is this: NZ$213 billion is invested in rental property and those assets made a combined loss of NZ$500 million in 2008, reducing tax income by as much as NZ$200 million.

This is clearly unsustainable. The amount invested in rental property is four times that invested in the stock market and it is essentially untaxed. Decisions are being made for tax reasons, not because they make economic or business sense.

John Key cannot brush this report aside in the same way as the 2025 Taskforce report was flicked away for being too radical and doctrinaire. The Tax Working Group report is a sober and careful collection of proposals that have the majority backing of technocrats, business leaders and economists. It is essentially apolitical, which makes it impossible to ignore in an MMP environment.

Let's see what John Key and Bill English do now. If they ignore it, they are essentially saying they are not reformers and will not listen to the best advice in the country. The May 2010 budget could be very significant indeed.