KEY POINTS:
The Business Council for Sustainable Development's study on tax policy reform, which puts forward options to cut personal income taxes, couldn't be better timed.
It comes as Australian headlines trumpet "The Kiwis are coming" - highlighting the need to cut personal income taxes here to stop the haemorrhaging of our skilled people across the Tasman.
In 2005, an OECD report showed almost a quarter of our highly skilled people had left the country - the biggest exodus of skilled workers from any developed nation. Almost 80 per cent hopped across the ditch to Australia. The numbers have since increased.
An Australian Immigration Department analysis released this week caused a shock when it showed New Zealanders had replaced Britons as the largest cohort of permanent immigrants. Australia's out to mop up skilled people from New Zealand and elsewhere, as Immigration Minister Kevin Andrews made clear.
In the past, Australia's higher tax rates and lifestyle costs acted as a brake on attracting New Zealanders. But as the Australian study shows Kiwis now favour booming Queensland over New South Wales (Sydney). And the tax-cutting programme that Australian Treasurer Peter Costello has overseen has tipped the tax scales in Australia's favour.
Deloitte figures for the Business Council's forthcoming Budget Business Summit show just how much better off most New Zealanders will be when Costello's latest tax cuts take effect next year.
The analysis (see table) shows a worker on $20,000 a year will be $1530 better off in Australia. Those on $100,000 annually will have $3670 more cash in their pockets. But those taking home $240,000 a year will be worse off (on paper) to the tune of $730 - although it's doubtful how many in that bracket will lose out, given their ability to use tax shelters.
On top of that Australian-based workers get an employer contribution to their super funds equivalent to 9 per cent of their income.
Deloitte's comparative analysis on the size of the tax wedge will already be lasered into Finance Minister Michael Cullen's brain. Cullen's own advisers at Treasury would have produced similar comparisons as Costello set off down the personal tax-cutting path, so reducing the personal income tax advantage New Zealand used to enjoy over Australia before Labour introduced a top tax rate of 39 per cent on incomes above $60,000 without any measures to stop bracket creep.
Other figures mustered by Deloitte provide compelling reasons why New Zealand's income tax rates are not the most internationally competitive, comparing our top rate and threshold to those of other countries:
* Australia - 45 per cent at A$150,000 (to rise to A$180,000)
* United States - 35 per cent at US$349,700 (for singles)
* Britain - 40 per cent at £34,600
* Canada - 29 per cent at C$120,887 (excluding provincial taxes)
* Ireland - 41 per cent at ¬34,000 (singles)
* New Zealand - 39 per cent at NZ$60,000.
This analysis should be a wake-up call for the two major parties, which will put competing tax packages in front of voters next year - although Cullen may cut the ground from under National by signalling tax cuts in next year's Budget.
Deloitte has put forward two medium-term options which will be debated at the council's November 1 summit with Cullen:
* Dropping the corporate rate to 28 per cent ($360m cost) and shifting the top 39 per cent and middle 33 per cent rates down to 28 per cent at a cost of $1.6 billion and $0.6 billion respectively, leaving the 19.5 per cent rate unchanged.
* Leaving the corporate rate at 30 per cent but bringing the top personal and middle rates down to 30 per cent at a cost of $1.3 billion and $0.4 billion respectively.
But while the council goes on to suggest leaving the current low income rebate for people earning $9500 or less, it seems unlikely that Cullen would opt for the first option without an accompanying cut to the 19.5 per cent rate.
The council has also tabled a much more radical third option, which increases GST from 12.5 per cent to 20 per cent and uses the increased revenue to lower both personal and company tax to 20 per cent, while keeping Government spending to its current 30 per cent of GDP. There would be a rebate for people earning $10,000 or less to keep their tax rate at 15 per cent.
Increasing GST would be extraordinarily regressive if it was not accompanied by major personal tax cuts. But even though the council suggests beneficiaries would be compensated for price rises and Working for Families allowances would be adjusted, it has not presented the fiscal analysis to underpin the option. Any trade-offs would need close analysis if low-income people were not to be excessively penalised.
One problem with the third option is that there is no analysis showing whether the GST increase would affect people and companies equally. But it's worth recording that the Government's own Growth and Innovation Advisory Board has suggested it is worth considering and been fobbed off by ministers.
Twenty-four per cent of 846 respondents to the council's ShapeNZ running poll supported option 3, compared with 25 per cent support for option 1 and 21 per cent for option 2 - effectively rating the options on a par.
That poll also showed 76 per cent in favour of lower personal income taxes - with 13 per cent making it their top voting issue for next year's election.
National's Bill English and United Future's Peter Dunne have both signalled they intend to keep pressure on the Government to lower tax rates.
The more intriguing issue is whether Cullen's pre-emptive strike will be a bold one, or the kind of tradeoff between a health fund (tax) and personal tax cuts that the council floated last week.
Clarification: In last week's column, which picked up on the possibility of establishing a dedicated taxpayer-funded health fund, I mentioned that people might opt to die rather than be a burden on younger generations. Some readers were horrified at the notion that some people might choose to die rather than go through costly medical treatments just to gain a few extra years of life. I should point out the operative word was "opt" not "be forced".
