More tax cuts still needed says Treasury

 

The Treasury is calling for further cuts in personal and company tax, plus higher GST and the introduction of a capital gains tax, but the government has ruled out all of these moves.

 

The tax cuts are a “key priority” to revive growth and make New Zealand more competitive, Treasury Secretary Dr John Whitehead said in a speech to business leaders in Wellington this morning.

“There is a growing view that the high mobility of our skills base means high personal income taxes are especially harmful for New Zealand’s growth and productivity.

“There is also growing evidence that productivity is being held back by high corporate tax rates.

“With average OECD rates trending down, keeping our corporate tax rates competitive will be a priority. The pressure on us will be even stronger if the review of Australia’s tax system currently underway leads to further company tax cuts across the Tasman."

Dr Whitehead said that despite the large and continuing deficits in the government’s accounts over the next decade, New Zealand’s tax rates should not be allowed to get too far out of line with other economies, and preferably should be better than other countries.

A spokesman for the Minister of Finance said that Mr English shared the Treasury’s goal of lower tax rates ‘over time” but the major constraint was affordability.

Government deficits are forecast to increase from nearly $3 billion dollars in 2009 to $9.6 billion in 2012 and $8.4 billion in 2013.

Doing as Treasury proposed would involve increased borrowing, or cuts in public services or in entitlements.

“The government is not prepared to do that. A capital gains tax or an increase in GST are not on the government’s agenda, a spokesman for Mr English said.

As stated in the budget the government will implement tax cuts only when they are affordable.

The tax cuts are part of the Treasury’s recipe for growth which also includes further public sector reform, and a shift to taxing consumption and assets including a capital gains tax, and regulatory reform.

However the Treasury agenda is not necessarily the government’s agenda, with Finance Minister Bill English and Prime Minister John Key each now seeking advice from their own group of informal private advisers.

Dr Whitehead acknowledged that “meaningful tax reform is not an easy undertaking, and it’s harder in times of fiscal stringency,” but he said Treasury’s judgement was that “many of New Zealand’s current policy settings will not deliver the performance we need.”

The spokesman said Mr English remained committed to lower tax rates “over time”, and to the 30/30/30 formula for personal, corporate and trust tax rates.

 

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8 Comments & Questions

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No wonder English is seeking separate advice if tbis is an indication of "new" Treasury thinking. Someone needs to tell Whitehead the world has changed dramatically in the past couple of years.

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What part of 'we can't afford it' don't you understand?

Your mob would have been much better employed trying to rein in the previous spendthrift government than coming out now advocating tax cuts in a manner whihc suggests that Bill English/John Key are dead against them.

We would all love tax cuts but in the current economic environment it ain't happening

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So, Tom, if tax cuts are so out of the question, are you then advocating that tax rates should be increased to get us out of the hole faster?

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this country has to encourage and support growth of the proverbial pie of export earnings instead of useless rhetoric discussing ways to divide the same pie up.

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As many studies have shown, a tax cut will within a very few years actually increase the total tax paid for many reasons. Treasury have done their own study some years ago to also demonstrate this. A pity Treasury was not telling the previous very foolish minster of finance.

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Treasury *was* telling the previous Minister of Finance. He didn't *want* to hear it, so he decided not to. Anyway, tax cuts are only half the picture. Far more important is killing the enormous bloat of Government expenditure - up $18 BILLION in real terms over the last 9 years, for no appreciable difference in output.

This cowardly budget should have abolished Working For Families, re-instituted interest on student loans, and put in place some very tough conditions on people who breed while on a benefit (i.e unless you have your baby within nine months of becoming a beneficiary, then you are not given any extra for having that child - you should not be having children you can't afford to raise and there's no excuse for an "oops" in this day and age). I'm not even going to mention the enormous number of completely useless Government and quasi-Government bodies that should have been abolished or had funding removed - Families Commission, anyone? And has everybody forgotten Government funding of lobby groups? There are huge amounts of money the Government does not need to be spending, and therefore huge amounts they do not need to be taking from the long-suffering taxpayer.

No economy can sustain high growth rates when Government activity makes up more than about 25% of GDP. New Zealand's proportion is well above that. We need to stop focusing on the small issue of tax cuts and look at the bigger issue of why Government has gotten so bloated. Then we need to look at what Government *should* be doing and make adjustments accordingly.

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Is it just me being thick, or would cutting personal tax not be completely pointless if GST (hence the prices of everything) is increased? Seems a bit like giving with one hand and taking (even more than was given) with the other.

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It's all about appearances - they're concerned that high earners (who produce the wealth redistributed by the Government) are put off by high income tax, which is very, very visible. Make income tax too high and those people who support the Government (and the 30% or so of New Zealanders who pay no net tax) will bugger off and take their money elsewhere, so the whole system becomes unaffordable.

On the other hand, GST (being a sales, or consumption, tax) is less visible - you only see the final price - so is less offputting to the highly-mobile high-earner segment. They consume more, so they pay more overall and will still be supporting, via the Government, those on lower incomes. They are less likely to get fed up and take their money overseas, though.

Sounds cynical? This is how governments think - rather than mugging someone, just pick their pocket. They don't even know about it until it's too late...

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