John Armstrong: Cullen crosses personal tax cuts Rubicon

Will he or won't he? Michael Cullen cautioned observers against trying to read too much into his body language while he was being questioned yesterday about what a cut in company tax could mean for personal tax rates.

However, what was noticeable was his relaxed demeanour when the subject of personal tax cuts was broached - as frequently happened during the press conference marking the release of the long-awaited discussion document reviewing business tax.

While Dr Cullen could hardly dump on a review which was a condition of Labour's confidence and supply agreements with United Future and NZ First, the document represents something of a crossing of the Rubicon for the finance minister.

He has long expressed doubt whether cutting company tax from 33c to 30c would bring the economic gains that proponents claim. He has scorned personal tax cuts as unaffordable.

The discussion document still ranks a reduction in the company tax rate as a "possible initiative".

But having waved it in front of the business sector, Dr Cullen may find it well-nigh politically impossible to withdraw it, especially as the discussion document concedes there may be some "fiscal headroom" for it.

Apart from giving National a political gift, failing to go ahead with such a cut would provoke a backlash from business and further stall the Government's "economic transformation" agenda.

However, a cut in the company rate places more pressure on Dr Cullen to cut personal rates. It would widen the gap between that rate and the top personal rate of 39c - thereby increasing the incentive to shelter income in companies and trusts.

Knowing the discussion document would prompt questions about personal tax cuts, the Government initially sought to quarantine that issue by stressing that was outside the scope of the review.

However, trying to discuss the business tax review in isolation is a bit like going on stage with just the back two legs of the proverbial pantomime cow - and Dr Cullen did not pretend the company and personal rates could be separated.

While understandably unwilling to talk specifics, he was quite happy to mention the factors which might influence the final decision on personal rates.

He warned giving a large dollop of help on the business front would drastically limit what he could do on a personal level - as well as probably requiring Labour to chop back new spending proposals timed for election year in 2008.

However, he accepted there was an "issue" in allowing a gap to grow between the company rate and the top personal rate.

He also hinted that Labour - for reasons of equity - would also want to give tax relief to those on incomes below $60,000 if it cut the top rate of 39c.

But that would mean spending more than the $300 million already budgeted for the lifting of tax thresholds flagged in last year's pre-election Budget.

He refused to go further, saying the questioning was getting too hypothetical.

However, one thing was for real. Yesterday's discussion about tax cuts was a discussion about tax cuts rather than a discussion about Dr Cullen's attitude towards them. Labour will be hoping that marks the start of a trend.