Gareth Morgan: One step forward, and then a stumble

Accountants and lawyers were the biggest proponents of the change, as they stand to gain an inflow of 'tax restructuring' work. Photo / Dean Purcell

The Budget was really about improving the tax system. So much effort that should be generating national income goes in to organising tax affairs to reduce the payment to government.

It seems incongruous that 23 years after the collapse of the Roger Douglas regime that halved the top marginal tax rate of 66 per cent, we'd still be trying to get the tax regime back to something resembling that heritage.

Politics is so circular, clumsy and inefficient at times, isn't it?

A 20-year journey to confirm the economic cost of having tax rates that depend on what taxable entity you use is policy inefficiency at its best.

Unwinding former Labour Finance Minister Michael Cullen's 39 per cent "rich pricks' tax" is a step forward for sure; what a shame Bill English undid that progress with a step back by dropping the company tax rate precipitously.

That trusts faced one rate, companies another, and individuals all manner of different rates under Cullen's "get the rich" regime, which predictably led to widespread tax avoidance by the "rich" as they simply moved income into trusts.

This left only those who didn't have that flexibility - because their income was taxed at source by PAYE - sitting on the 39 per cent (and then 38 per cent) top marginal rate.

They were hardly the "rich" targets of Cullen's feral politics of envy.

Indeed many of them, with families and mortgages, were Joe and Jo Average. So Labour had to extend its Working For Families benefit system into the middle class in order to mitigate the damage wrought by its "tax the rich" politics.

The irony is that we knew, and Cullen knew, all this - it was, after all, the rationale for why Roger Douglas had flattened the tax rates.

So Cullen's retrograde step had no other rationale but populism - he needed to be seen to be slogging the well-off, even though he knew darn well he wouldn't be. His was the epitome of political cynicism.

The Key/English regime is to be congratulated for rectifying that dumb policy, after a decade of wasted resources paying tax accountants to restructure to avoid it.

Which makes it even wierder that they would now open up another wedge between companies and persons and trusts, the former taxed at 28 per cent and the latter at 33 per cent maximum.

There is no more sense to this than Cullen's 33/38 per cent wedge, which makes it fascinating to examine why it's been done.

I have nothing against lower tax rates; of course the budget must be funded. But differential tax rates are counter-productive.

The superficial rationale - and we heard a bit of this from some members of the Tax Working Group - is that we have to stay competitive with Australia and apparently this means we have to move our headline company rate to wherever theirs is going - no matter that our effective rate is already lower.

Apparently if we don't then more and more international companies will locate their South Pacific branches in Australia. If you believe that headline tax rates have that sway, then your gullibility is formidable.

Headline company tax rates are not comparable across different tax jurisdictions, simply because each country has all manner of different writeoffs, payroll taxes, compulsory insurance levies such as ACC and so on that make a simplistic comparison of headline tax rates worthless.

Just one example will demonstrate this. Australian companies will soon have to pay 12 per cent (as opposed to 9 per cent currently) of their wage bill in compulsory superannuation. Kiwi firms pay 2 per cent.

The Aussie effective company tax rate is nowhere near as low as 28 per cent.

So who is pushing this patently hollow rationale and what might their motives be?

You won't be surprised to learn the proponents are accountants and lawyers from the big corporate firms - those who stand to generate themselves heaps of fees from "tax restructuring" work that "rich" Kiwis will need now to commission in order to arbitrage the 33/28 tax wedge as they move income from trusts to companies.

It is incongruous that Bill English has lain down and been trodden under by this Trojan horse of self-interest.

Clearly the Key/English Government has either swallowed the threat that if we don't match Australia on the headline corporate tax rate there will be a hollowing out of our corporate sector by the Australians, or it has been naive enough to think that the national benefit from stealing a march on Australia will outweigh the distortions to Kiwi taxpayer behaviour from implementing a company rate that's lower than the trust and top personal rate.

Cullen proved conclusively that the latter imposes untold damage to economic performance - though it generates heaps of unproductive fee work for tax accountants.

Corporate tax and legal advisers have wrought a bit of damage on New Zealand lately with their slick advice that assisted Australian banks to avoid New Zealand tax.

The Government would do well to remember that and be very wary of advice from those sources.

Pure self-interest promoted cynically as national interest should be ignored.

The 28 per cent company tax rate is a "Cullen-style" mistake, albeit this time playing to National's prejudices.

* Gareth Morgan is a director of Gareth Morgan Investments and was a member of the Tax Working Group.