Government may cut income tax, increase other taxes

Updated at 9:41 pm on 1 December 2009

The Government will consider cutting personal income tax rates when the Tax Working Group makes its final report this month.

Radio New Zealand understands the Goverment will probably move to cut personal income tax rates in line with its pre-election promise.

But it is not clear what changes it is prepared to make in other areas to offset the cost of such cuts, since the overall tax take cannot be reduced.

The Tax Working Group met in Wellington on Tuesday before finishing its report, which is due to be presented to the Government before Christmas.

The group has been considering a range of options such as increasing the goods and services tax (GST), extending the capital gains tax or introducing a land tax to raise extra revenue.

This would give the Government room to cut personal tax rates and possibly the company tax rate.

Finance Minister Bill English says he cannot confirm the Government is committed to further tax cuts but says the only change it has ruled out is taxing the family home.

Raising GST problematic

Mr English says increasing GST would be difficult.

'One of the problems with that is that if you have any increase in GST you have to compensate people on lower incomes so they're not worse off, and that uses up a lot of the additional revenue.'

Mr English also says it's difficult to discuss any tax in isolation.

'I hope the Tax Working Group will put to us some packages to see how the bits fit together.'

The group, which comprises academics, private sector experts and officials, has spent five months considering ways to overhaul the New Zealand tax system.

Its main job has been to find ways to plug the $1.6 billion hole that would be created if the Government aligns the top personal, trust and company tax rates at 30 cents in the dollar. The top personal tax rate is currently 38 cents in the dollar.

Mr English told the conference any tax changes which come out of the group's work have to be fair and equitable and have public support.

"Changes which are widely understood and have a reasonable level of public support make the most difference to economic performance, because those kind of changes tend to stick."

Tax system outdated - Buckle

The head of the Tax Working Group, Professor Bob Buckle of Victoria University, says the tax system is outdated and needs an overhaul.

Professor Buckle told the conference the group has focused on making changes that will enable the Government to raise taxes as fairly and efficiently as possible.

"Reforms should involve changes to the tax mix, to the tax levels and the tax base. That is, we think there should be serious consideration to base broadening options."

Mr English will consider the group's report early in the new year, and says it is possible any options the Government adopts will be included in the 2010 Budget.

Gareth Morgan presents radical tax proposal

Economist Gareth Morgan put a radical proposal to the working group.

He suggests that instead of tinkering with capital gains taxes, a land tax or GST there should be a comprehensive capital gains tax on all capital, including the family home, of 1.25%.

He says that would raise $19 billion a year.

It would allow income taxes to be cut to 25% and every adult would be guaranteed a minimum income of $10,000 a year.

However his proposals were not universally popular.

Arthur Grimes, who argues for a land tax, says a comprehensive capital gains tax would tax plant and equipment, which would encourage investment to shift to Australia to avoid the tax.

His argument in favour of a land tax is that land can't move.

Listen to Gareth Morgan speaking to Checkpoint ( 5 min 55 sec )

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