Richard Prebble: Making the case for lowering tax rates

Tax has emerged as an election issue. The major parties, except the Greens, agree New Zealand must grow at 4 per cent plus to rejoin the First World.

In the past two years the country has achieved just 2 per cent. With increasing interest rates, a rising dollar and falling commodity prices, it will be hard to hold even today's growth rate.



Businesses blame New Zealand's high tax rates - a claim Finance Minister Michael Cullen disputes. He made tax an issue when he claimed in the Budget that it was over to the tax-cutters to make their case. He then said New Zealand was not heavily taxed by OECD standards.



Dr Cullen's case started to unravel immediately. He was forced that night to admit that he, not the Treasury, had written that section of the Budget and his own fiscal advisers did not agree.



The country's accounting firms have produced research that demolish Dr Cullen's claim that NZ is a low-taxed country. The latest, from KPMG senior tax partner Chris Abbiss, compared tax rates on people earning $20,000 through to $80,000 in five countries. It shows New Zealand taxpayers are more highly taxed at each level than those in Australia, Canada, the US and Britain.

Only taxpayers earning more than $80,000 in Australia pay slightly more tax - 28.9 per cent to our 28.1 per cent.



The survey shows that New Zealanders on low incomes pay substantially more tax than their counterparts in those four countries - for example, 19.5 per cent effective tax on $20,000 here, compared with just 3.2 per cent in Tony Blair's Labour Britain. New Zealanders on $40,000 pay 20.2 per cent tax, in Britain people earning $40,000 pay just 5.1 per cent tax. As the low paid are often people starting careers and repaying student loans, is it any wonder so many head overseas?



The situation with company tax is even worse. New Zealand has higher company tax rates than our major trading partners. In New Zealand, company tax is 33 per cent. In Australia it's 30 per cent, the United Kingdom 30 per cent, Korea 29 per cent, Switzerland 24.5 per cent and Ireland 16 per cent. So Dr Cullen's claim that New Zealand is not a high-tax country is false.



Now for his claim that it is over to us who advocate lower taxes for increased investment, growth and jobs, to make our case. With respect, it is the other way around. The top economic performers in the last decade - Ireland, Korea, the US - are all among the lowest taxed.



The New Zealand Government now spends about 40 per cent of GDP. There is not a single case of a country where Government tax and spending have got to 40 per cent of GDP and then have grown at 4 per cent a year sustainably.



Claims that New Zealand did not grow in the 1990s are just not true. Growth in the middle 1990s after the Douglas/Richardson tax cuts was over 4 per cent. We can see why tax cuts work. For an investment to return 10 per cent, under a tax rate of 33 per cent the real return must be 15 per cent. If the tax rate is 19.5 per cent (as the Government proposes for Maori companies) then to a earn 10 per cent net requires a pre-tax return of 12.4 per cent.



It is easy to see why the McLeod Tax Review recommended cutting company tax to 28 per cent, below Australia. Lower taxes mean more investment; more investment means more growth and more jobs; and it's a virtuous circle, a growing economy means more tax.



In the decade prior to Roger Douglas, when company tax was 49 per cent, company tax receipts averaged a billion dollars a year. In the next decade, after the tax rate was cut to 33 per cent, company tax receipts doubled to an average of $2 billion. That can only be explained by the fact that tax cuts do grow the economy.



Act is campaigning not only to cut company tax to 28 per cent but also to adopt the McLeod recommendation to have just two rates of personal tax - 28 and 18 per cent.

A cut in the top rate will encourage skilled people to stay here. The lowering of the bottom rate will give all workers a tax cut.



The margin between working and being on a benefit is too low. Act policy will help encourage the 400,000 working-aged, able-bodied beneficiaries back into employment, so becoming taxpayers.



Successive Governments have done nothing for medium earners - the school teacher on $40,000 a year who does not qualify for a community card, family support or a state house. Act's tax package gives that taxpayer $670 extra in the hand.



Can we afford it? We can pay for tax reductions out of the surplus and by cancelling Dr Cullen's risky super scheme that is going to gamble $2 billion a year on overseas sharemarkets which this year have fallen 10 per cent.



There is less risk in trusting New Zealanders to invest their own money in their families, homes and retirement savings. And it is the only way to grow our economy.

* Richard Prebble is leader of the Act Party.

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