Tax cuts: High earners set to benefit most

Big personal tax cuts for middle and high-income earners are likely to be announced in the May Budget and take effect from October this year.

The tax cuts of up to $4 billion will be funded mainly by increasing GST from 12.5 per cent to 15 per cent, and cutting depreciation tax breaks on buildings.

Prime Minister John Key pledged to give across-the-board tax cuts in his statement to Parliament yesterday on his plans for the year.

There would be upfront increases in social welfare benefits, superannuation and working for family payments to compensate for the GST rise.

He acknowledged that higher income families would benefit more from the tax cuts, because they pay more in tax. Lower income earners would be no worse off - unless they owned rental property - and he expected them to be better off.

He said the Government would not increase GST "unless it saw the vast bulk of New Zealanders better off". "GST is a very difficult tax to avoid, no matter how people structure their financial affairs. As David Lange once observed, even drug dealers pay GST."

His plan also set new priorities in science and innovation, and in exploiting the financial gains in gas and oil exploration and mining minerals - on conservation land.

"We are not magicians," he told reporters. "We are not a Government that has spare cash, so we are having to move things around to make sure we can invest in areas we think are most critical for our growth."

Referring to comments by Reserve Bank Governor Alan Bollard on Sunday about New Zealand's gap with Australia, he said: "Alan Bollard might be satisfied with the crumbs off Australia's table - I want the entree, the main course and the dessert."

It is thought that the Government's present aim with the October tax cuts will be to align the top personal tax rate of 38c and trust rate of 33c with the corporate tax rate of 30c.

But there is still more work and modelling for officials to do before that looks like a certainty. At the very least there is an expectation that the top personal tax rate will drop to 33c.

The Government may want to keep something in reserve in case it has to match a cut in the Australian business tax rate from 30c.

The measures will have the effect of reinstating, in a broad sense, the tax cuts that National cancelled because of the recession, and funding them from elsewhere.

Yesterday's statement was the Government's response to the tax working group which urged reform for a "broken" tax system by lowering personal taxes, and steering investment away from residential property to more productive sectors.

Herald calculations on the basis of one of the scenarios in the tax working group report (cutting personal tax rates to 30c, 19c and 10.5c) would see someone on $50,000 get about $12 a week net, taking into account higher prices with the GST increase.

A person on $90,000 would get about $50 more a week.

Mr Key has defended his plan against accusations it is skewed to the rich and is light on boldness.

"If you look at the incremental change we have made in 2009 and we intend to make in 2010 and will complete in 2011, the New Zealand economy will be a vastly different place."

The Government rejected a land tax which was unpopular, a comprehensive capital gains tax on realised property because it would take too long to get revenue from, and the risk-free method (RFRM) of taxing residential investment properties because it was too complicated.

Mr Key confirmed the Government planned to approve new mines on conservation estate but said they would have to meet strict environmental tests.

He also signalled a drive to increase oil and gas exploration, and said there would be changes to Crown Research Institutes to encourage investment and economic growth.

On social issues, he indicated rules would be tightened so that wealthy families could not rearrange their finances to qualify for working for families payments.

He reiterated the Government's plans to make it harder to get a sickness and invalids benefit and said greater funding efficiencies would be made in tertiary education.