Taxing times

BRIAN FALLOW talks to David Carter about how lower tax rates can help New Zealand to avoid Third World status.


A company tax rate of 25c in the dollar would be a great target, says National finance spokesman David Carter, although it would take some time to get there.

Relegation to the Opposition benches has not shaken Mr Carter's political creed: smaller government, lower taxes and less regulation.

The direction taken by economic policy from the mid-1980s to the end of the 1990s was the right one, he says.

"I don't think people saw the gains because we didn't stick with it for long enough. New Zealand did grow quite well through the 1990s, but other countries grew as fast or faster. That's the problem.

"New Zealanders are finally waking up to the fact that New Zealand's economic performance is just not satisfactory and that unless we lift our game we are doomed to Third World status," Mr Carter said.

"We need to move towards smaller government, towards Government spending of 30 per cent of GDP [it is 33 per cent now] and then lower."

But not like a bull at a gate. "New Zealanders won't accept dramatic expenditure cuts, so it has to be at a pace commensurate with economic growth."

Any New Zealand finance minister these days has to live with the fact that underlying growth in the economy will deliver only about $1 billion of new revenue a year, on average and after inflation, to fund new spending initiatives or tax cuts.

Among those competing priorities, Mr Carter says, "I would aim significantly for tax cuts and I personally believe the emphasis has to be substantially on corporate tax."

But a cent or two off the corporate tax rate would not be enough.

"It has to be significant so that people take notice of the fact that we are putting emphasis on growing the economy, through corporate New Zealand."

Would a cut to 25c in the dollar, from 33c now, be enough?

"It will take some time to get there."

But that would be a reasonable target?

"It would be a great target".

There is a trade-off between deeper cuts in the company tax rate and more widespread cuts to personal income tax rates.

"I strongly believe the emphasis in the short term has got to be corporate, then moving to balance it up [by cutting the top personal rate] as soon as you can."

Cutting the company tax rate to 25c would cost - Mr Carter has the figure at his fingertips - about $1.5 billion a year. That is about three-quarters of what Finance Minister Michael Cullen's superannuation fund will cost.

And the wider the gap between the company rate and the top individual tax rate, the greater the incentive to shelter personal income in corporate structures.

Mr Carter agrees there should not be a substantial difference between the rates.

Tax avoidance is alive and well since the Government raised the top personal rate to 39c in the dollar, he says.

"People were sort of prepared to accept 33c for high-income New Zealanders, with the hope that it would come down in time . . . There is a threshold at which people think that's simply too much money to be paying. That is where we are now."

The flatter the tax scale the better, Mr Carter says. "But it takes time to move to that, both because of fiscal constraints and because it takes time for voters to become comfortable with it."

The purist view of company tax, which can be heard from the Business Roundtable, is that it is just a withholding tax and that because of dividend imputation what matters is a shareholder's personal marginal rate.

But Mr Carter points to the predominance of small businesses in New Zealand.

For them it is a simple calculation. The less profit that goes to Inland Revenue, the more is left to plough back into the business and the more incentive there is to do so.

This is not rocket science, but then Mr Carter does not pretend to be a rocket scientist - or its economic equivalent.

Amiable and unassuming, he is widely regarded as not in the same intellectual league as Bill English or Michael Cullen.

The perception is of a trusty lieutenant, a safe pair of hands.

His role model is the hard-working technocrat Sir William Birch, not the visionary Sir Roger Douglas.

"Where Roger Douglas went wrong was he just forgot to explain what he was doing. He knew where he was going and thank God he did, but New Zealanders have to be taken along. Otherwise, well three years later they have got another vote."

Scion of a well-to-do Christchurch family, Mr Carter studied agricultural science at Lincoln then got involved in the international cattle breeding trade. For a period in the middle and late 1970s there was big money in the new technology of ovum transplants.

A farmer still, he recalls the impact on rural New Zealand of the abrupt removal of supplementary minimum prices and financial deregulation in the 1980s. "I remember those $50,000 exit grants for farmers who went bust. There were suicides.

"But look at how far we have come since then. New Zealand agriculture is probably on the soundest footing it has been for 30 years."