Bernard Hickey: Ten tips to tax NZ out of dire straits

Bernard Hickey

The budget bomb has dropped and now we're looking over to the other side of the crater and wondering how the New Zealand economy can crawl through the rubble.

The forecasts for the next 10 years in last week's Budget made for grim reading, implying that New Zealand's per capita income will take at least four years to recover to 2007 levels and suggesting we face a fiscal black hole after 2020 as baby-boomer pension and health costs dig deep into the public purse.

Treasury Secretary John Whitehead floated ideas for sweeping tax reforms this week to help us leapfrog over that black hole. I think he's right to try to start a debate. We cannot afford our gold-plated pension scheme and we won't keep our best and brightest from migrating unless we build a fairer, simpler and cleaner tax system that encourages economic growth and investment in people and ideas rather than land.

Here are my 10 ideas for reform.

1. Flatten and simplify the income tax rates to a single rate of, say, 25 per cent with a relatively high threshold of about $30,000. Earnings below $30,000 would be tax-free.

2. Remove the various middle-class welfare entitlements such as Working for Families and student loans to remove ruinously high marginal tax rates on extra earnings and to simplify the tax system.

3. Reduce the corporate and family trust tax rates to the same rate as the single income tax rate to remove incentives to reclassify income (and losses) to get the best tax rate.

4. Set a limit on core government spending as a percentage of GDP in some sort of "Fiscal Responsibility Act". This could be about 30 per cent, which is where it was four years ago before the Labour Government's heavy spending kicked in.

5. Impose a flat tax on land, as is the case in Hong Kong. This would incentivise investment in capital and business ideas rather than land speculation. It's also much cleaner and cheaper to administer than a capital gains tax on property investment. Farmers and property owners would scream blue murder, but they have made out like bandits for decades.

6. Keep the promise to pay all retired people (that is, not means-tested) New Zealand Superannuation at 66 per cent of the average wage, but lift the retirement age to 70. Get the leaders of the two big parties to write this in blood and get them to promise never to change it.

7. Increase GST to 15 per cent to encourage investment rather than consumption.

8. Impose flat and low tuition fees for university and polytechnic courses to encourage more investment in knowledge and avoid the creation of student debt.

9. Tax earnings from investments in managed funds, stocks and other assets at the same 25 per cent rate as for income, profit and corporate taxes.

10. Remove tax exemptions and move most tax returns online. Aim to cut the size of IRD and the private tax advice industry in half.

Bernard Hickey is managing editor of www.interest.co.nz, reporting on interest rates, banks, finance companies and the economy.