Fran O'Sullivan: It's time to starve Cullen's beast

You have to starve the Beast. That's the most important thing about tax: if you leave the money in Wellington, it is going to get spent.

The original quote was aimed at Capitol Hill, Washington, not Wellington. But the sentiment applies here where Finance Minister Michael Cullen has "form" when it comes to feeding the governmental "beast" with Other People's Money, to the point where many in business believe it's time the beast was sent to Weight Watchers.

Cullen's beast has grown very fat indeed after seven years of Government surpluses. He's posted a $11.5 billion surplus for the June 2006 year, boosted by a one-off, non-cash adjustment to tax revenue of $1.8 billion.

Overall tax revenue increased by $5.3 billion over the previous year. Even when the one-off, non-cash adjustment of $1.8 billion is netted off, you are left with a very clear picture: corporate profit growth led to a $1.2 billion increase in company tax revenue; wages and employment growth led to a personal income tax boost of $1.6 billion.

This revenue increase is just another rung on Cullen's fiscal ladder.

He's wallowing in cash, as the accounts show. The cash surplus is stable at some $3 billion, marginally down from the $3.1 billion recorded last year.

This demonstrates once again that Cullen has masterful abilities as a supreme fiscal hoarder with a "result we can be proud of".

It also gives confidence that a major cut to company and personal tax rates could be sustained without a blowout.

But when it comes to disgorging some of that $3 billon of over-taxation so that others can take part in the feeding frenzy, Cullen is still putting off the day of reckoning.

Business is clamouring for Cullen to share some of that $3 billion now, by bringing forward the cut in the company tax rate from 33c to 30c in the dollar to take effect on April 1next year, rather than the prospective date of April 1, 2008.

Despite the fact that this cut would mop up only some $540 million on an annualised basis, Cullen is standing firm.

He's already spent some of the $3 billion feeding his beast. The rest will be allocated in his 2007 Budget.

The headline rate for company taxation is an important marker in the international competition for capital and investment. Getting New Zealand's rate down from 33c - high by Asia-Pacific standards - is also an important factor to ensure more New Zealand companies maintain their head offices here.

But the Government faces a conundrum: how does it ensure New Zealand companies stay here, yet avoid a situation where it slashes the top company rate and sees a significant portion of the $540 million go to Australia in the form of increase profit-shipping, with the inevitable flow-on effect to our external accounts?

The more foreign investors buy up New Zealand companies the more the problem appears to be exacerbated.

This is a difficult situation but the policy options that are so far being considered lack creativity.

Trying to avoid the circular scenario is one of the key reasons Cullen wants to put so much emphasis on directly implementing tax benefits which will have the effect of persuading more businesses to invest in research and development or exporting.

Trouble is, while Cullen sits on his cash pile and accumulates ever increasing tax-revenue streams the individual businesses and personal income taxpayers that wish to retain some of that surplus revenue and invest in their own pursuits now, go begging.

Cullen argues that he has to take into account the future fiscal outlook before deciding whether to cut the corporate rate to 30c as part of the Business Taxation Review agenda. He argues that every year.

I suspect that even if fiscal outlook pointed to rocketing economic growth (unlikely) and even bigger surpluses, Cullen would still want to play Cassandra when dealing with other people's money.

He argued again last week that it was important that the Government maintained its prudent fiscal approach so that it could continue to make sound decisions and investments to further enhance economic growth and prosperity into the future.

But Treasury has repeatedly advised him that significant personal income tax cuts would spur higher economic growth. Cullen disputes the claim, saying it simply isn't true.

He has already (indirectly) signalled that personal tax cuts will have to be considered once the business tax review options are finalised. But despite the push from Labour's political allies - New Zealand First leader Winston Peters and United Future leader Peter Dunne - to ensure major personal income tax cuts take place, there is no sign yet that any resultant tax cuts will be substantial.

Analysis released today by the Centre for Independent Studies outlines that, in nominal terms, the Government collects 62 per cent more tax than it did in 2000.

Centre analyst Phil Rennie notes that even using the "conservative" cash surplus of $3 billion would allow for significant cuts.

As an example the top, middle and corporate tax rates could be dropped to 30c in the dollar, and the lower-middle rate could be lowered to 18c in the dollar for $3.l5 billion.

Rennie - a former Treasury official - suggests Cullen could also use the annual $1.9 billion provision for unallocated spending in future budgets to fuel further cuts.

Meanwhile, small businesses and individual tax payers will increasingly face a cash squeeze as the Reserve Bank keeps the hammer on interest rates.

When Labour came to power it wanted to penalise "the rich" by getting the top 5 per cent of income earners to pay more tax and slapped a 39 per cent rate on incomesover $60,000.

In 1999, just 6 per cent of New Zealanders earned over $60,000, contributing 35 per cent of total personal tax revenues. By this year, 10.78 per cent were on the top tax rate as bracket creep took its toll.

Treasury projections forecast nearly 17 per cent of taxpayers will be on the 39 per cent rate by the end of fiscal year 2008 with nearly 50 per cent of total personal income tax revenues being derived from this bracket.

Dunne - who is jostling with Peters to claim parentage over any resultant personal tax relief - argues that a mixture of tax cuts and threshold adjustments should take place. Peters argues for a cut in company tax rate to below 30c so New Zealand companies are more competitive against Australia.

Both are in the position to put pressure on Cullen through the confidence and supply arrangements their parties have struck.

Cullen will need their votes to get next year's Budget over the line, so their bargaining power is high.

Dunne - who is also Revenue Minister - has been in the box seat for now. But Peters also wants an electoral credit out of the exercise.

Ironically, the competition the pair engender is probably the best chance New Zealand companies and personal income earners stand to put a stop to the Government's massive tax plunder and put their money back in their pockets.