Tuesday 3 July 2018

Tax Working Group Tea Leaves

The group, chaired by Sir Michael Cullen, has been advised by officials not to recommend cutting company tax or offering a specially discounted tax rate to small businesses.

However, it has been encouraged to consider dangling a couple of other lollies in front of investors and businesses.

In particular, Inland Revenue and Treasury officials advising the working group said there was a case for inflation-adjusting the tax system – even though they acknowledged that would be a "significant change".

That would be a boon for people with money in bank savings accounts and term deposits.

They would then only pay income tax on interest on their savings after interest payments were adjusted for inflation, rather than on the whole sum.

Age Concern, Consumer NZ, the Financial Services Council and the Taxpayers' Union lobby group argued for the change in their "Fair Tax for Savers" campaign in 2014.

It had already been raised as a possibility by Cullen in March.

Inflation-adjusting the tax base would remove "one of the biggest distortions" in the tax system and would also have implications for business tax, the officials said.

But in less positive news for some taxpayers, the officials advised against cutting New Zealand's 28 per cent company tax rate.

They said the rate was "relatively high by international standards" and looked at the implications of cutting it to 23 per cent.

But they concluded a cut would not be in the country's best interests, mainly because a lot of the benefits would go to foreign investors.
I like inflation-adjusting interest earnings. The current setup means that during times of higher inflation, the real tax on interest earnings is very high. This builds a wedge between returns from investing in real assets and investing in interest-bearing assets.

It would also mean there would be little case for a capital gains tax where getting rid of the interest distortion would get you most of the way towards what capital gains tax fans want anyway.

On company tax, you're always balancing a few margins. Too high a company tax rate relative to other countries and you scare away foreign investment. But too big a wedge between the top personal tax rate and the company rate and you encourage sheltering income in companies. So, all else equal, if international company tax rates are dropping, then New Zealand's should also drop somewhat, but if top personal tax rates are increasing, then the company tax could go up a bit.

Recommending a hold-steady on company taxes despite declining international rates then could be a signal of income tax increases at the top end. Or a recognition that the current government has shifted scaring away foreign investors to the benefit side of the ledger.

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