Tax cuts back on agenda

Critics of proposed changes to the tax system need to consider an overall package rather than just the impact of individual elements, says the head of the group which conducted the review.

The Tax Working Group yesterday released its recommendations to revamp the tax system which it says is broken and needs comprehensive reform.

The group proposed reducing personal tax, increasing GST from 12.5 percent to 15 percent, a method of taxing capital gains on residential rental properties and a low-rate land tax. It said the company, top personal and trust tax rates should be aligned to improve the integrity of the tax system.

Also, it wanted depreciation rules tightened up and tax loopholes closed including on property.

So far the only option ruled out by the Government has been a capital gains tax on the family home.

Finance Minister Bill English wants to offer personal tax cuts in May's budget but with no extra money needs to find a way to pay for them.

The Government is not commenting on options saying it will carefully consider the report.

However both Mr English and Prime Minister John Key have highlighted issues with property investment where over $200 billion is invested but made a $500m loss last year, hitting the tax take by $200m.

Ideas the group suggested that are likely to find favour are personal tax cuts paid by taxes on rental properties and an increase in GST.

There has already been strong criticism of the idea of increasing GST by unions, some political parties and budgeting services. Fears have also been raised of increased rents should property investments be targeted. Federated Farmers and businesses are against any land tax.

Group chairman Bob Buckle told Radio New Zealand this morning that he welcomed Mr English's comments that change would be part of a package. He said that was the way to look at recommendations.

"A lot of the reaction to date has not actually recognised that," Prof Buckle said.

"For instance when we talk about GST it's only one of a range of options -- we say that we see some merit in raising GST moderately to 15 percent. However, we say any increase in GST would need to be accompanied by compensation for those on lower incomes and that would only be part of a package, we would suggest, which would reduce personal tax rates across the board."

Prof Buckle said the current system was unfair and the group had been surprised by the magnitude of the problems.

"Many wage and salary earners, for example, pay up to a third and some of them up to 38 percent of their income in taxes yet those on high wealth and high incomes are able to quite easily divert their income to pay lower tax rates."

He said the system did not encourage economic growth and was not sustainable.

"We tend to rely on taxes on personal incomes and company incomes which are more damaging for growth and we tend to tax lightly those things which are less damaging for growth," he said.

"We would suggest that as part of a system wide package you would reduce taxation of labour and taxation of investment and switch towards increasing taxation on property and consumption and broaden the tax base -- spread the load."

Labour Party finance spokesman David Cunliffe said the party would consider the report and urged caution that any changes did not disadvantage workers.

Green Party co-leader Russel Norman said the recommendation to align the top personal tax rate with the corporate rate should be rejected because those earning less would end up having to pay more. He said tax loop holes should be shut down. The Greens supported a capital gains tax and would also like to see environmental taxes introduced.

The Council of Trade Unions hoped for tax cuts but said there did not need to be a reduction in the top rate. It opposed increasing GST as did the Tourism Industry Association which said the move could hurt its industry.