Tax move puts cat among pigeons

By Brian Fallow

Between the lines

Although hardly unexpected, Australia's move (Democrat senators permitting) to cut the company tax rate to 30c in the dollar will add stridency to calls to lower the rate on this side of the Tasman.

The Manufacturers Federation wants a cut to 25c. No other measure, it says, would do more to rebuild New Zealand's flagging international competitiveness.

Treasurer Bill English said yesterday that the Government remained committed to lowering the rate to match Australia's 30 per cent, which comes into effect mid-2001.

He glossed over the Government's decision only weeks ago to give priority next year to a further small cut in the lower personal tax rate.

And the timing of a company rate cut remains dependent on how fast the economy improves.

No pump priming here. It is a matter of waiting for the reservoir to refill.

Labour's Michael Cullen meanwhile argued that a lower corporate tax rate in Australia could not be looked at in isolation. Australian companies have to pay a payroll tax for employee superannuation and Australia has a capital gains tax. (So do we on some things, but it's a matter of degree).

If the world trend to lower corporate taxes continued, Dr Cullen said, New Zealand could not continue to swim against the tide.

But fiscal circumstances would not permit a cut in the corporate rate during the coming three years. Higher priorities applied, he said, such as restoring income-related state housing rentals, reducing the barriers to tertiary education and improving access to public health services.

"If tax was a crucial factor in location we would have had a rush of Australian corporates relocating here over the last decade to take advantage of our lower taxes. Instead the traffic has been the other way," he said.

Indeed it has, and the reasons should give both Dr Cullen and Mr English pause.

Australia already has the advantage of a significantly lower tax-to-GDP burden, a much larger and more affluent market, and a willingness to get down and dirty with things like export subsidies in the textile industry and generous tax treatment of research and development.

That's enough advantages already. We don't need to give them any more. We can't afford to.

The package announced by Peter Costello yesterday largely pays for a lower corporate rate by scrapping accelerated depreciation provisions which favoured certain, capital-intensive industries like mining.

Mr English hails this as support for his Government's approach that tax breaks for particular industries are less effective in encouraging competitiveness than across the board tax cuts that benefit everyone in business.

He may be right, but we are now looking at the worst of both worlds: no tax breaks and higher corporate rates.