KEY POINTS:
Regrettably, and avoidably, New Zealand company tax and interest rates are very high. They are both the least hospitable to investors in the developed world.
It's not hard to see why we are laggards in both domestic and foreign direct investment and economic growth derived from investment.
A
review of company tax rates has been completed. The foreshadowed outcome is a meek tax rate reduction.
There will also be tax concessions on company spending the Government deems to be "good expenditure", such as research and development, promoting exports and upskilling employees.
Since 2001, the Employers & Manufacturers Association has pushed for a significant reduction in the company tax rate and has been somewhat sceptical about tax incentivising "good expenditure".
Modelling by the association in 2001 showed what would happen if the company tax rate was cut to 20 cents. Overall tax receipts would increase, with a significant increase in gross domestic product (GDP).
In short, we'd all be wealthier and have more money for education, health and infrastructure investment.
Lower company tax rates equal more investment equals more tax.
Multi-nationals operating in New Zealand are also more likely to record a greater proportion of their income here and a 20 cent tax rate would act as a magnet for investment.
If this seems too good to be true, then perhaps the OECD report on company tax rates is more convincing.
In recent decades there has been a clear trend of decline in the OECD's 30 countries' company tax rates.
The decrease in company tax rates across the OECD has not led to a reduction in company tax receipts as a share of GDP.
That's because reductions in rates have often been partnered by a broadening of the tax base and a rapid growth in company profits as a share of GDP.
Interestingly, countries with a lower company tax rate often collect more tax from companies than those with a higher tax rate.
For example, Australia's company tax rate is lower than ours yet produces receipts equal to 5.3 per cent of GDP (2003). That compares with New Zealand's 4.7 per cent of GDP.
However, both Australia and New Zealand company tax paid as a percentage of GDP is high.
The rates (2003) for other countries include: United States 2.1 per cent; Switzerland 2.5 per cent; Britain 2.8 per cent; the Netherlands 2.9 per cent; Spain 3 per cent; Japan 3.2 per cent; Canada 3.4 per cent; Ireland 3.8 per cent.
Having dropped its company tax rate to 30 cents a few years back, Australia is keenly aware that the tax burden it places on companies is still too high. Since dropping its company tax rate, tax receipts from companies shot up to 5.7 per cent of GDP.
The call to drop the Australian company tax rate is getting louder, and it is highly likely to be heeded.
Yet here in New Zealand, our Government steadfastly refused to lower the company tax rate. Even now they are only proposing a small drop, and continue to bang on about how much revenue it is going to cost them.
Why is it politicians have such difficulty understanding that less means more when it comes to lowering tax rates, thereby increasing taxable revenue?
New Zealand has to compete in a global market. Business managers are responsible for maximising earnings before interest and tax.
They have to find ways to increase productivity and revenue and control costs.
They cannot control two important costs: interest and tax, which are both government responsibilities.
In these circumstances, business is, unfortunately, risk averse.
Hence our investment in productivity-enhancing technology, and research and development are also the lowest in the developed world.
It also goes quite a long way to explaining why New Zealand business has failed to grow the proportion of income derived from exports.
The outcome of the tax review and our balance of payment deficit, the highest in the developed world, shows we urgently need meaningful dialogue between Government, the Council of Trade Unions, the business community and their representatives to formulate a plan to raise living standards and reduce reliance on borrowing.
In the final analysis, it's up to New Zealand businesses to step up to the challenge, but it would be nice to know the nation was truly behind them.
* Alasdair Thompson is the chief executive officer of the EMA (Employers & Manufacturers Association).
