Employers push for tax cut

By JIM EAGLES business editor

Business lobby groups today launched a renewed campaign to get the company tax rate down by releasing an economic study showing it would boost the economy without costing the Government a cent.

The Employers and Manufacturers Association (EMA) and Business New Zealand - which commissioned the study from economic consultants Infometrics - want to use its findings to get a company tax cut firmly on the political agenda.

They have already given a copy to Finance Minister Michael Cullen and will meet him next month to discuss the implications.

The proposal has also been raised with National Party leader Jenny Shipley, the Treasury, the Council of Trade Unions and the McLeod tax review committee.

Alasdair Thompson, chief executive of the EMA, said a lower company tax rate was high on the priority list for business because it would do so much to promote growth.

The significance of the Infometrics analysis, he said, was that it showed this could easily be achieved "and it would not cost the Government a cent to implement".

The Infometrics study involved modelling the economic effect of slashing the company tax rate from the present 33 per cent to 20 per cent over a six-year period.

Running that scenario through Infometrics' general equilibrium economic model indicated that when fully implemented the tax cut would directly cost the Government $958 million a year in taxes. But it also found that the cut would lead to:

* 1.1 per cent growth in gross domestic product.

* 3.6 per cent more investment.

* 17,000 new jobs.

* 1.5 per cent higher exports.

* 0.9 per cent more imports.

* 0.6 per cent lower inflation.

This, according to the model, would produce a matching gain for the Government of $958 million. It would be made up of an extra $352 million in company tax because of higher profits and more firms paying tax in New Zealand; $345 million more personal tax as a result of increased earnings; $154 million in reduced welfare payments; and a $107 million reduction in nominal costs to the Government as a result of lower inflation.

Mr Thompson said the study's findings were hugely encouraging for New Zealand business. They identified a very effective way to boost economic growth, create new jobs and increase capital investment without undermining the Government's finances.

In fact, he said, the benefits would almost certainly be much greater than the study indicated because it made no attempt to quantify "the biggest potential gain of all", namely the reversal of the drift to Australia caused by its lower company tax rate.

With a 20 per cent corporate tax rate "New Zealand and overseas investors would be far more likely to invest in the growth of New Zealand companies, with fewer of them seeking to relocate in Australia.

"As in Ireland, where the [manufacturing] company tax rate has been 10 per cent (not imputed) for many years, adopting a progressively lower company tax rate could result in steady and persistent growth."

In its explanation of the results Infometrics indicated that, if anything, they were conservative.

For instance, the modelling assumed that the corporate tax base would rise by 10 per cent as a result of companies electing to pay more of their tax in New Zealand, which "is probably modest".

It also estimated that - because of deductions, losses carried forward and transfer pricing - the effective company tax rate at present was about 18 per cent and that under the new regime the effective rate would fall to 11 per cent. "Arguably this may be too large a reduction."