Speech to Employers and Manufacturers Association
8am, Tuesday, 28 November 2006
Crowne Plaza, Albert St, Auckland
I am speaking to you this morning as the Leader of the United Future Party, who just happens to be the Minister of Revenue.
United Future is a business friendly party that encourages initiative, innovation, investment and self-reliance.
We believe in preserving, enhancing and sharing our nation's prosperity, and in promoting government policy that encourages initiative, rewards hard work, and creates jobs.
We are a centre party, all about doing what is best for New Zealand, and not at all about promoting a particular ideology, or view of the world.
We are interested in doing things that work, not just forever talking about them.
The Business Tax Review currently underway is a classic example of our approach.
It represents the most comprehensive review of business tax arrangements since 1988, and arises as a direct consequence of the confidence and supply agreement between United Future and Labour.
You may recall that at the last election United Future committed itself to a business tax rate of 30%, as well as increased incentives for research and development.
The post-election negotiations with Labour resulted in the agreement to hold a Business Tax Review, and my own appointment as Minister of Revenue, responsible for carrying out that review, in conjunction with the Minister of Finance.
We began work jointly and with our respective key Inland Revenue and Treasury officials late last year.
Our initial proposals were released for public consultation in July.
They included a reduction in the company tax rate to 30 cents; and improved assistance for research and development, as per United Future's policy.
They also included proposals for new tax incentives to boost export market and skills development, matters of particular interest to the Labour Party, and a series of more technical changes to depreciation and asset write-offs, building on the substantial changes introduced in the 2005 Budget.
Altogether, they amounted to a programme which, if implemented in full, would cost just under $2 billion a year.
If, as a result of a reduction in corporate tax rates, there were to be changes to personal tax arrangements, the total cost of the package could climb towards $3 billion.
United Future pushed for a Business Tax Review because we considered that with the targeted tax relief being provided through the Working for Families package, which could see a household on $43,000 better off by $336 a fortnight from next year, the priority was clearly for business tax reform.
We have argued for a reduction in the corporate tax rate because of the need to retain competitiveness with our major trading partner, Australia, in the first instance.
A corporate tax rate of 30 cents, without the accompanying capital gains tax, stamp duties, or compulsory superannuation levies, would certainly achieve that goal.
But that is not the only step we believe we should consider, which is where the targeted incentives for research and development, export markets and skills development come in.
For many small businesses, a 30% tax rate may not offer much advantage.
That is why the review has proposed initiatives that would improve productivity, business investment and competitiveness.
When businesses invest in R & D activities, export market development and skills improvement in the workforce there are wider benefits to the country as a whole.
Businesses invest in R & D to improve their products and processes, and that contributes to productivity and competitiveness.
At present, many businesses under-invest in R & D because they do not capture all the benefits.
R & D tax credits should help to resolve the problem of under-investment in this area.
Tax credits for export market development are another possibility.
They could be a solution to businesses under-investing in developing new markets, which has wider implications for other businesses and for the economy as a whole.
Similarly, raising skill levels should also help to increase productivity.
Employers may be reluctant, at present, to spend more on developing the skills of their employees because they are easily lost to the business when employees change jobs, though the skills are not necessarily lost to New Zealand.
Tax credits for skills enhancement should help to reduce under-investment in skills development as well.
The excesses of the 1970s and early 1980s have understandably given tax incentive schemes of this type a bad name, and one of the real challenges we confront is batting off the cynicism that we are about to repeat that awful nightmare all over again.
I am not a natural advocate for schemes of this type – but I am also pragmatic enough to acknowledge that we do need to do more to boost export performance, and tax credits may well be a way of assisting us to achieve that.
The challenge in my mind is not therefore whether we have targeted tax incentives, but rather how they can be best designed to achieve the objectives we seek for them, and resolving that is a critical element of the work now being undertaken.
To return to my original theme, the exercise we are currently engaged in is a business tax review, not a general tax review.
At the same time, it will be almost impossible not to consider the implications of any significant changes in the corporate tax rate for personal taxes, a point Dr Cullen and I acknowledged the day the Business Tax Review document was released.
A reduction in the business tax rate will widen the gap between the top personal tax rate and the business rate, which is generally considered to be undesirable, although I note from recent discussions with Ireland's Finance Minister that the gap between the two in that country is now 30%, without adverse effect.
United Future's solution is to work over time towards a 30:30:30 alignment in the corporate, trust and top personal tax rates, although I acknowledge that is an aspiration that will not be achieved quickly, and will certainly not be part of the current package.
Tax rates, however, are only a part of the picture.
The income thresholds at which the particular rates apply are an equally important element.
In 2000 when Labour put up the top personal tax rate to 39 cents on incomes over $60,000, it was supposed to affect the top 5% of income earners only.
Now, 12% of taxpayers are caught by that rate – and they pay 51% of all income tax.
Just to retain relativity with the 2000 position, we would probably be looking at adjusting the top threshold to somewhere over $90,000, with consequential adjustments to other thresholds.
That move alone would restore about $35 a week to the after-tax incomes of people in the top tax bracket
So adjustments in tax thresholds can deliver a far more effective real tax cut to more taxpayers than a simple rate reduction.
That is why we were pleased the Minister of Finance adopted United Future's policy of indexing thresholds in the 2005 Budget, but important though it is that thresholds be indexed to prevent them slipping behind real income levels, the reality is that indexation of itself will not resolve the imbalances now becoming obvious.
Our election policy also included a tax free threshold for all income earners of $3,000, which was roughly equivalent to abolishing the current Low Income Earner Rebate, and cutting the tax rate on the first $38,000 of income to just under 18 cents in the dollar.
United Future's present view is that coming on top of the significant changes the Working for Families has introduced, any personal tax changes in the future are more likely to be a combination of rate reductions and threshold adjustments, rather than across the board rate cuts.
As far as the Business Tax Review is concerned, the process from here is broadly as follows.
Later this year, when we have a clear picture from both Treasury and Inland Revenue of the current revenue position, and the likely future track, Dr Cullen and I will consider the final scope, shape and content of our business tax reform package, with a view to decisions being taken in February/March next year.
At that point we will also consider the personal tax issues, and whether there is scope for change in that area.
Our proposals will then go through the normal Cabinet process, prior to being signed off by both our Caucuses, in time to enable me to introduce the necessary legislation to Parliament in May.
It remains our intention that the tax changes arising from this review take effect from 1 April 2008.
Beyond the Business Tax Review, there are three other important tax initiatives that should be referred to here.
The first relates to international tax, in particular the Controlled Foreign Company rules.
A review of these rules is long overdue.
The Business Tax Review foreshadows this, and we will be releasing a Discussion Document before the end of the year.
This will involve analysis of whether New Zealand should modify its treatment of CFC income, and whether there are measures that could reduce tax compliance costs for CFCs.
We will also be looking at other parts of the system such as non-resident withholding tax rates, the thin capitalisation rules, foreign dividend withholding payments, and the conduit relief rules.
In many senses, modernising the international tax rules will be critical to attracting and retaining investment in New Zealand, as will be our business tax regime.
The second issue relates to the charitable sector, something very close to United Future's heart.
Last month, I released a Discussion Document reviewing the current arrangements for charitable donations tax rebates.
Of particular interest to the business community will be the proposals relating to increasing the deduction available to businesses for charitable donations, and possible workplace giving initiatives.
Submissions on these and the other proposals in the document close at the beginning of next month, and it is my hope that decisions arising from the review can be incorporated into next year's Budget.
And finally, there is the issue of income splitting for households.
Research by both the OECD and the Families Commission supports United Future's long held contention that we do not do enough to recognise the plight of second income earners in a household, invariably a mother at home caring for the kids.
Targeted tax relief through policies like Working for Families has been the preferred way of addressing these matters to date, but there will come a time when more of the same is viewed as just middle class welfare payments.
Taxing households on the basis of the members within them, rather than just the individual income earner, which is really what income splitting is about, has the potential to not only be fairer, but also to recognise more effectively the contribution both partners are making to the running of that household.
It is not a costly policy to implement.
Treasury estimates in 2005 were that our policy of allowing couples with dependent children earning up to $120,000 between them to split incomes would cost about the same as dropping each of our current 21 cent, 33 cent and 39 cent tax rates by 1 cent.
United Future has long argued for income splitting for these reasons, but so far ours has been a lone advocacy.
I am working on another tax Discussion Document, due for release early in 2008, to canvass the tax issues relating to income splitting and household income, as per our confidence and supply agreement with the government.
I would hope, given the mounting public debate on issues relating to the work/life balance, that employers and manufacturers would take a close interest in this issue, and engage in the consultation process.
Finally, let me raise one other issue.
In July next year the Kiwisaver scheme commences.
As you will be aware, it is a voluntary contributory savings scheme, with – thanks to United Future's intervention – a mortgage diversion arrangement to assist first home buyers.
The government has been careful to point out that it is not the first step towards compulsory superannuation, and their caution about getting too far ahead of public opinion is understandable, giving the corrosive superannuation debate of the last 20 years, and the failure of compulsory superannuation proposals in the life of the Kirk Government in the 1970s and more recently, the Bolger/Peters government in 1997.
However, it is also true that converting Kiwisaver to a compulsory scheme would be very simple – the current opt-out provision for new employees could easily be removed, thus making the scheme mandatory.
United Future is not advocating that – yet.
But if it becomes clear over the next few years, that there is a groundswell for compulsory superannuation, then it may well be that in addition to adjusting Kiwisaver in the way I have described, future corporate and personal tax reform could well focus on tax offsets for the contributions made to compulsory superannuation.
I emphasise, though, that the searing effect of the superannuation debate since 1984 means that no party is likely to go out on a limb for this course, unless it is clear that it has sustained and substantial public support to do so.
The worst outcome would be to begin the compulsory savings journey – only to have politics as usual intervene for the third time in 30 years to cut it short.
Overall, the concessions we were able to secure from the Labour Party on tax issues during our post-election negotiations were amongst the strongest reasons why we concluded another confidence and supply agreement with the government.
Now, we look forward to its support in ensuring we deliver on those commitments.