In an interesting, and provocative, article in yesterday’s Herald, Gareth Morgan was his belligerent best http://tinyurl.com/2a6m4nl. But he raises a very good point. Was it really necessary to drop the company tax rate from 30% to 28%?
The Tax Working Group was adamant that the tax rates for top marginal, Trust and company rates needed to be aligned in order to make irrelevant the ‘tax avoidance’ industry that had arisen due to the rate differential. I agreed that the Trust rate and the top marginal rate needed to be aligned (and have blogged on this before), however, understand that company rate alignment wasn’t as important due to the way dividends are taxed.
Company rate alignment with Australia is often talked about as an economic and competitive necessity. However, we all know that taxes across countries are not equal. For example, Australia has a payroll tax, and Australian companies pay 9% compulsory superannuation payments (increasing to 12%). I once heard Dr Cullen ‘threaten’ a business audience, who were questioning him on the rate differential between NZ and Aust, to drop NZ’s company tax rate to match Australia’s but introduce all the other taxes paid by Australian companies. This was met with huge resistance, and the discussion around the necessity of transtasman company rate alignment suddenly went quiet. The fact that Dr Cullen did, in fact, drop the company tax rate meant that NZ companies enjoyed a tax advantage over their Australian counterparts.
The IRD understands that rate misalignment can foster the tax avoidance industry, however, only when it gets to the level where it becomes worthwhile to pay significant amounts of lawyer and accountant fees to organise and maintain these legal structures. The IRD are unsure exactly what this level is, but know that a 3% level probably isn’t that threshold: 5% probably is. Credit where credit is due though – Peter Dunne did get $119m in budget 2010 to chase the tax cheats. This is needed and the investment will be well worth the cost if past history is anything to go by (about a $60 pay-off for every $1 invested in chasing tax debt, let alone tax avoiders)
Who will benefit from a drop in the company tax rate? As Gareth Morgan pointed out, tax accountants and lawyers will be laughing all the way to the bank - and the very wealthy who can afford to pay for such advice. Other winners are the foreign-owned companies and investors, as many of the commentators have highlighted. Foreign owned companies and overseas investors tend to take profits off-shore (NZ shareholders already benefit from imputation which means most of the company tax on their shares gets rebated to them), therefore charging these characters less tax does nothing to increase productivity and stimulate economic growth.
The hit to government revenue from this rate drop is $340m in 2011/12 and $450m in 2012/13. Affordable in these economic times? No. Necessary? Probably not. Foster economic growth? The economic and Fiscal Update estimates that the total tax package in budget 2010 will increase GDP by 0.4% in 4 years time, and 0.9% by June 2017. So no, this will not stimulate economic growth at all. Will it attract Australian companies to NZ, or stop flight to Australia? No. Company tax burden is a lot higher in Australia. Will investors flood to the NZ stock exchange or suddenly invest in our ‘productive economy’? Not according to Treasury. So why was it done? Who knows. Ideas…
A very bold post Stuart!
More seriously, massaging tax regimes is vastly insufficient to drive the development of a high-value added advanced economy. It is good at redistributing slices of the existing pie though.
Beats me – I don’t understand why it was necessary to drop it further either as 30c plus imputation credits is very competitive…..
Stuart I got the impression from reading the article of how poorly we PAYE workers have been served by the current govt and the previous govts “…So Cullen’s retrograde step had no other rationale but populism – he needed to be seen to be slogging the well-off, even though he knew darn well he wouldn’t be. His was the epitome of political cynicism….”
When will we the voter see a well balance and thought out tax structure. All I see are add ons from what ever persuasion is in power which just increases the growing mess the tax system is in, and allows those with the skill or finances to manipulate the tax system for their benefit at the expense of the valuable worker yet again.
p.s. the boldness of this post is certainly eye catching!!
Good post, Stuart
Would have been good to see Labour drop the company tax but raise the minimum wage significantly higher.
Although I now understand this flys in the face of Treasuries monetarist regime. We have been subjected to is policy for the last 25 years. I think changing aspects of this is your challenge to make voters know the leopard has changed spots.
Yes I do know Labours record is better than Nationals on minimum wage, but frankly that is not good enough.
I’m certain Labour does want a fair society, I think you need be a bit more innovative on how you create wealth for the many and share it around.
Sounds like Labour is learning from lessons of the past and looking forwards to change in the future
“Peter Dunne did get $119m in budget 2010 to chase the tax cheats.”
Well done. Hope that this energy is directed at the big time tax cheats and not chasing after Mum and Dads struggling on low incomes and minor investments. Imagine them willing to pursue those involved in the Wine box rort. Not likely!
That was suprising… I thought the goal was to align everything at the top at 30c in the dollar… Maybe the new goal is everything at 28c..? Farrar talks about how National wants 9 years, maybe this level of alignment at the top is the end game..?
I have always thought that every tax rate should be either 10%, 20%, 30% or 40% whether it be progressive tax rates, GST, saving tax rates, company tax rates, trust tax rates, etc… I.e. If you can’t do your taxes on the back of a napkin something is wrong…
Jeremy You might remember that before PAYE you were given a set of tables and sorted through the bits and pieces to claim or not to claim. Took ages. Curiously keeping one table from one year to the next, the rates and details shifted up and down without any apparent cause.???
So thanks to PAYE it is now so simple and the envy of many around the world.
Ianmac “Imagine them willing to pursue those involved in the Wine box rort. Not likely!”…well they can’t possibly do worse than Labour in this area given that Labour allowed the rorters a free reign for 9 years!
@Ianmac, I would suggest getting rid of PAYE, I think it works very well, just saying that the progressive rates (including those on PAYE) should fall under 10%, 20%. 30% or 40%…
*wouldn’t suggest getting rid of PAYE
If that $119 million to chase tax cheats means that we will get an extra $7.14 billion (at $60 for every $1 spent) I suggest we give the IRD 10 times as much and then we would not have to pay any tax at all. I think you will find Stuart that it is closer to $5.
I don’t think we should have politicians deciding tax rates. Especially leftwing ones as they usually have very little idea on how to run a business. And the country is just one very big business. Political parties should instead state what percentage of GDP they think is really needed to run the gummint and Treasury and the IRD sort it from there after each election.
I made the comment yesterday that lowering top tax to same as Trusts to remove need to rort the system is redundant if those who can use a company vehicle can get a 5% benefit this way.
I must say it continues to bother me that a commentator and not the journalists bring this up.
@Rebecca – Labour was busy with other things so many things to deal with as government.
Spud please read this.
Looking after those who rort the system and giving tax advantages to land lords at the expense of the poor PAYE worker, which I am led to believe Lab use to seek to protect this group?
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10648752&pnum=0
You say (with a bit of pride) “I once heard Dr Cullen ‘threaten’ a business audience, who were questioning him on the rate differential between NZ and Aust, to drop NZ’s company tax rate to match Australia’s but introduce all the other taxes paid by Australian companies.”
This really summs up labour to a tee. Also a contributing reason why your lot will enjoy at least the next 7.5 years in opposition.
Would it not be better to focus on growing the economy and reducing taxes as much as possible to be competitive internationally and having an advantage over other countries?
Well – the Nats seem to think so and they are the government we all elected to do exactly that.
@Herodotus – read it. It’s a pity that there were rorters,
, but it’s not Labour’s fault that people chose to dodge their taxes, it was the rorters themselves. 
I do think that the top tax bracket could’ve started at a higher income level. But good on them for introducing WFF to help people out!
@Monty – I think Cullen meant that the business community had it easy compared to Australia.
- Psst – what else are they planning?
“Would it not be better to focus on growing the economy and reducing taxes as much as possible to be competitive internationally and having an advantage over other countries?”
Monty you forget, National made catching Australia the catchcry of the election and since. Funny how catch australia doesnt include all their other taxes, compulsory super @12% from employers or pesky things like raising our minimum wage. Soon enough, probably not this election but after that people will see National is just the same old thing from 20 years ago…and it didnt work then
“but it’s not Labour’s fault that people chose to dodge their taxes, it was the rorters themselves”
Spud should we not have good law enacted not one whereby there are holes that enable this sort of thing to exist?
And from this acticle those in power were aware of these rorts but still continued on, and in some cases also draw on the likes of WFF. I have read and heard comments from Lab regarding the tax system but non of what I have heard gives me the impression that they are going to anything but take from a few to give to a few and still leave great big gaps for the wealthy to continue to rort the system.
Why do you think that the 39% level of $60k was right. This level covered many essential services, teachers, police, nurses etc. yet allowed those on million$ incomes to also have the same marginal tax rate as this group.
For me having a top tax rate apply at such a low level was deficient in thinking especially as this level was maintanined for 8 years, and captured the likes of teachers, police etc not the professions that you would equate as being extremely rich.
Herodotus – I agree that 60k is too low for a top tax bracket.
Yes laws to close the gap on rorting are good, I’m sure Labour would’ve fixed this had they got elected back in.
Spud your faith is amazing
Perhaps you should make moves to enter Parliament
Spud for PM!
Be careful what you wish for
…
Monty about your last comment… what Cunliffe did would be ‘… a contributing reason why your lot will enjoy at least the next 7.5 years in opposition.’ IF a majority of NZ voters were buisnessmen.
‘Would it not be better to focus on growing the economy and reducing taxes as much as possible to be competitive internationally and having an advantage over other countries?’
It is comment’s like these coming from National supporters that make me laugh most of all. How can we be competitive in the world market you bloody dreamer? Australia alone has 5x our population, a far larger mass of fertile land with more natural minerals more wealth more everything… and National always bleats on about us catching up to them. About being ‘competitive and internationally advantageous’. We will never catch up to Australia in ANYTHING! Our GDP is a 4ucking grain of sand compared to those dominating the world market. We are a tiny country with a tiny population! We will never capitalistically successful like America or Australia or China or any 4ucking country! Our country was founded on lower class British emigraters leaving their country to find a better life… There is a damn good reason why the state was so heavily involved in our economy for so long, it was the same reason why Edward Gibbon Wakefield had to leave the NZ Company. It’s the same reason why today there are so many Monopolies and Oligopolies in NZ’s big industries… why the Banks are only owned by Foreigners and why we need foreign investors crawling over any economic project that requires any capital whatsoever… it’s why we import so much more than we export, why we have ended up in such massive debt through borrowing…
Wake up and realise that We have no capital, We will never catch up to Australia, We will never be competitive, We are a tiny country founded on workers and farmers in an isolated corner of the world and all of this bull$hit that flies out of National and their supporters mouths of competition and world markets is all dreaming and is totally irrelevant to so many NZers and to NZ as a whole.
I wrote the following on the afternoon of the budget
SPC says:
May 20, 2010 at 3:21 pm
…
At an economic level.
The retention of a significant gap between the top rate of income and the company tax – at 28%, maintains the incentive to transfer income into a company (doctors run surgeries through companies to reduce their tax liability etc, some accountants and lawyers probably do to). Many will also turn their trusts into companies – now that trusts will be at a significantly higher rate and are also being investigated for diversion of income from tax.
http://blog.labour.org.nz/index.php/2010/05/20/budget-2010-neither-fair-nor-fixing/comment-page-1/#comments
They closed one door to open another once the public become aware of the rorts – lawyers and accountants must be loving this government.
SPC – you do rock man, I learn something fro most of your posts.
The media have just let this slip under the radar.
johnbt
Many leftwing business owner have done good in running this country.
No bad when you consider most business owners are mainly concerned with their profit dollars and certainly not the welfare of society.
Monty
Where do you get the bit that lower company tax increases the economic growth. While it is a widespread myth I just wonder who you give credit to.
Lowering top tax and company tax does lots of other things but economic long term grow this not among them.
It surely increases the slide to greater inequity. That is not a good business climate.
Probably of little concern to multinationals.
Spud..in politics?? for PM??? Not sure if starch would do much to help me gain my faith in our politicians….
Hey, the Irish have a lot to be grateful for
Oh come on, worst case scenario, I become an iconic object of derision.
But oh the things I could do …
Aaaah yes but then you would have to drop the alias & express your own views in real words instead of just emoticons…it’s a scary world!!!
But how will you know it’s me?
Well if you actually expressed your own opinions then yes, we wouldn’t know it was you.
My guess you would probably have a potatoe somewhere in your campaign…unless of course you have named yourself after the guy in Trainspotting!
@Spud, the Irish deficit last year was over 14% of GDP… Not much to be thankful for there…
@Rebecca LOL
Challenge accepted!
Great – I shall look forward to seeing plenty of starch in abundance sometime in my voting future…
@Dylan: I sadly concur. Has everyone forgotten Ernie Rutherford’s immortal quote, “Gentlemen, we do not have money. We will have to think.”? Whatever happens, we’re not likely to prosper in the long term by selling more Remuera tractors and opening more drive-in burger joints.
@Jeremy H: I’ve also noticed the Irish unemployment rate has well & truly breached double digits.