Luring foreign offers stretch Kiwis' loyalty

By SIMON COLLINS

Debate is raging over whether New Zealand should buy jobs with tax breaks.

Christchurch electric goods manufacturer PDL is finding it hard to be a loyal Kiwi as foreigners dangle low taxes before the company's eyes.

"We get wooed to go to Singapore, Ireland, Scotland - everyone is writing to us saying, 'Come to our place, bring your R&D bods and we'll give you all these tax breaks," says PDL chief executive Mark Stewart.

"We don't go because I guess we are patriotic Kiwis. But we need to look around the world and say, 'Can we match these?"'

PDL, which employs 230 New Zealanders, has already built factories in Australia and Malaysia.

Auckland-based Designer Textiles has succumbed to Queensland's lure and built a factory in Brisbane, which now accounts for a third of its business.

Chief executive Kerry Harding says it was attracted by tax incentives to develop new export markets and a cash incentive based on the value-added content of exports.

Almost everywhere, Governments are cutting company tax rates to entice such businesses.

In France, the company rate is dropping from 37.77 per cent to 33.3 per cent; in Australia from 36 per cent to 34 per cent this year and 30 per cent next year; in Germany from 56 per cent in 1998 to 25 per cent over five years. New Zealand's rate is 33 per cent.

Norway, Denmark, Sweden, Finland and the Netherlands have adopted "dual income taxes," charging lower rates on income from capital and higher rates on labour income.

Ireland has gone the furthest, with a 10 per cent company tax on manufacturing (12.5 per cent across the board from 2003).

Many countries also offer tax breaks for research and development (400 per cent of research costs in Ireland), tax holidays for new factories (eight years in Costa Rica) and grants ($60 million for a new $1.4 billion Comalco alumina refinery at Gladstone, Queensland).

Dual income taxes are based on cutting taxes on capital because it can now go elsewhere, while labour can be taxed more because most workers will not leave.

Almost alone, New Zealand has shunned such "intervention." But many people at Tuesday's business forum in Auckland will urge Prime Minister Helen Clark to match the incentives.

"There is no reason why new business coming to New Zealand can't have a lower tax rate and, yes, accelerated writeoffs of equipment," says Feltex chief executive Chris Davis.

Auckland Export Institute president Bob Fenwick says Ireland attracted IBM and Microsoft by offering them no tax for five years and then 5 per cent. "That's the only way you're going to get [investment]. Five per cent of a big pot is a hell of a lot better than nothing."

Giving such tax breaks is not easy for a Labour/Alliance Government. In Ireland, they caused a sharp rise in the share of national income going in interest and dividends to investors, and a drop in the share going to workers.

Petrus Simons, an economist with the Alliance advisers Integrated Economic Services, supports deductibility for R&D costs but advocates a full cost/benefit analysis before rushing into any wider tax breaks.

"The best way to stimulate investment in New Zealand is to maintain the current value of the exchange rate. That is far more effective than fiddling around with tax schemes."

But centre-left economist Brian Easton says we should offer tax breaks to genuine new industry, even though that might reduce workers' share of national income, because new industry would generate jobs for the unemployed.

As others argue, the advantage of a low exchange rate might disappear tomorrow. Tax breaks give investors more certainty that the country will support jobs in the longer term.

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