Top rate of 30c is Govt's tax goal

Revenue Minister Peter Dunne

Aligning the top personal, company and trustee tax rates at 30c in the dollar remains a medium-term goal, even though pressures on the Government's finances rule it out in the short term, Revenue Minister Peter Dunne says.

Giving his annual speech to the International Fiscal Association on Friday, Dunne said a competitive tax system was vital in a world where capital and labour were mobile.

Even after last year's cut in the corporate rate to 30 per cent New Zealand's rate is above the average for developed - and especially small developed - countries, as is the proportion of tax revenue coming from company tax.

The Government awaited with interest the comprehensive review of tax policy being undertaken in Australia, Dunne said.

"Tax policy development[s] in Australia ... are of extreme importance to us, given that about 55 per cent of foreign direct investment into New Zealand is from Australia and we have effectively free labour mobility between the two countries."

New Zealand has a large diaspora by developed country standards. The OECD estimates some 15 per cent of the native-born population live overseas and for the highly skilled the proportion is closer to 20 per cent.

"That means New Zealand needs to be concerned about high tax rates on labour income," Dunne said.

The Treasury, in a recent paper on medium-term tax policy challenges, points out that New Zealand's income tax take, relative to gross domestic product, is higher than most OECD countries and abatement rates for Working for Families credits mean many taxpayers are exposed to effective marginal tax rates of more than 50c in the dollar.

Meanwhile, Dunne noted the chairman of the Australian review, that country's Treasury secretary Ken Henry, referred last month to the possibility it would recommend rolling back dividend imputation as a trade-off for a lower company tax rate.

The Treasury paper points out that reducing the rate of tax on capital income is not simply a matter of reducing the corporate tax rate.

"The personal tax system also taxes some forms of capital income, such as interest, and the final tax on corporate profits for many New Zealand shareholders is the top personal rate of income tax." Dunne said as company tax rates fell in other countries it provided incentives for multi-national firms to stream profits away from New Zealand.

But he suggested there were limits to how much further that process could go.

"So far international cuts in company tax rate have largely been financed by expanding tax bases, but this may become more difficult in the future," he said.

" The international financial crisis is leading to a worldwide reduction in tax collections which may also make further tax cuts less feasible."

The Government's tax policy programme includes introducing legislation on income splitting - a matter dear to Dunne's heart - some time next year.

Income splitting allows couples with children to split their income for tax purposes. National has said it will support the legislation through a first reading.

On the international tax front an expansion of the newly adopted active/passive distinction for foreign investment funds is under consideration.

"In a similar vein the Government is also looking at the advisability of introducing an exemption from the approved issuer levy and non-resident withholding tax for New Zealand bonds issued to non-residents," Dunne said.

"Such an exemption was raised at last month's Job Summit as a way to make bond issues and borrowing from overseas banks easier."

PM STILL HOPEFUL

Prime Minister John Key says it is his "preference" that the 2010 and 2011 personal tax cuts go ahead.

Speaking to Television NZ's Q+A programme yesterday, Key said we lived in dynamic times and he had to put a qualification on the reductions National had proposed would follow the April 1 cuts.

He said that as Prime Minister he had to balance the affordability of tax cuts with the preservation of New Zealand's economy.

"So my preference is that they go ahead but I can't rule out the fact that things become so dynamic or there's such an enormous change to the outlook that we have to look at them."