Lobbyists seek 28pc personal tax rate

Business lobby groups are calling for cuts in personal tax rates as well as lower company taxes as part of the Government review of taxation.

The Business Roundtable, the Chambers of Commerce and Federated Farmers want the company tax rate cut from 33 per cent to 25 per cent over the next three years, and the top personal rate from 39 to 28 per cent.

The proposal is broadly supported by the Institute of Chartered Accountants as well, though it would prefer the company, trustee and top personal rates to be aligned.

The reason for including personal tax cuts in a reform of business taxation is that about half of all businesses by number, and perhaps a third by income, are not incorporated but sole traders or partnerships. Hence they would not benefit from a lower company tax rate.

Under the imputation regime the final tax rate on dividends is the shareholder's marginal personal tax rate, for New Zealand shareholders at least.

Such cuts, the business groups argue, would be consistent with the ministers' declared intention that the review deliver "bold" measures and not just tinker.

Using the Treasury's rule of thumb, they estimate their proposal would reduce annual tax revenue by $4.4 billion when fully phased in by the 2009/10 year.

They would fund that by using about a third of the new-initiatives money set aside in the Budget - $1.9 billion a year for the next three years - and cutting spending by $500 million.

The rest, about $2 billion a year, would come from running smaller operating surpluses, which, all else being equal, means borrowing more to fund capital spending.

They argue, however, that the $4.4 billion estimate takes no account of any increase in the tax base that might be stimulated by the cuts themselves.

"We agree with the Minister [of Finance, Michael Cullen] that tax cuts are not self-funding," said Business Roundtable executive director Roger Kerr, "but if well designed they can increase economic growth."

US research suggested a 10 per cent cut in income tax increased taxable income by 4 per cent.

It that held true in New Zealand, the cost of the tax cuts would be about $3.3 billion a year.

A spokesman for Cullen said evidence that tax cuts resulted in an expansion of the revenue base of that magnitude was not strong.

"And the fiscal cost is large. It would involve sacrificing spending this Government has prioritised and borrowing more to fund capital projects, which we don't think is sensible."

Kerr said Government spending had been growing too fast and had contributed to imbalances in the economy. "Regardless of this package, we would argue for lower increases in spending anyway."

Charles Finny, chief executive of the Chambers of Commerce, said Australia's company tax rate at 30 per cent was already lower than New Zealand's and could fall further.

Federated Farmers president Charlie Pedersen said the personal tax rate mattered most for most farmers.

"Our tax policy has always been really simple: A lower and flatter tax rate because smaller government will lead to more growth and lower tax leads to more investment in businesses."

The Government is expected to release its proposals in June.


Tax review

What do the lobby groups want from the business tax review?
* Company tax and top personal tax rates cut in two stages to 25c and 28c in the dollar respectively by 2009/10, and no payroll tax.

Hw much would it cost?
* $4.4 billion a year.

Where would it come from?
* Forgoing a third of unallocated spending increases in the next three Budgets, cutting some existing spending and borrowing more for capital projects.