21 Jan 2010

Key won't commit on land tax

8:04 pm on 21 January 2010

The possibility of a land tax has real difficulties and people should not assume the Government will implement one, says Prime Minister John Key.

Such a tax was one recommendation raised by the Tax Working Group, which released its report on Wednesday.

Mr Key says while problems with the tax structure on rental properties need to be dealt with, but a land tax is not necessarily the answer.

He also says the Government has ruled out a capital gains tax on the family home.

The report proposes radical changes to the tax system, including cuts to personal and company tax rates, raising the rate of GST and introducing a land tax.

Mr Key says lowering the top personal tax rate would encourage people to make money and spend less time trying to avoid paying tax. In the past when tax rates were lower, people spent less time trying to shelter their income and more time making money, he says.

Finance Minister Bill English says any changes to the tax system would have to be carried out as a package and would need to be fair.

Mr English said the Tax Working Group had made a strong case for change, and had done a good job of outlining the theory of a perfect tax system.

The Government was not giving its views either way on any proposals, he said, but was looking for a package which is fair and strengthens the economy.

"It's quite important to see these things together. For instance, the ownership of investment property is pretty highly correlated to higher incomes, so you can imagine a situation where people who own investment property, if they were paying more tax, that may be offset to some extent by changes in their income tax."

Any of the recommendations taken alone would be controversial because they would affect someone in a particular way, he said.

Tax group leader defends proposals

Tax Working Group chairman Bob Buckle says he agrees with Mr English that any tax changes should be part of a package.

"That's precisely what we're saying. Any increase in GST, for instance, needs to be accompanied by compensation for those on lower incomes."

Professor Buckle said the current system is not conducive to encouraging economic growth because it relies on tax on personal and company incomes. It is also unsustainable and unfair, he said.

"Many wage and salary earners, for example, pay up to a third and some of them up to 38% 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."

Rent rises predicted

The Property Investors' Federation is warning rents will go up if the Government approves a recommendation to restructure property taxes.

The Tax Working Group proposes more tax should collected from rental properties and recommends property owners lose the right to claim depreciation on their buildings.

Federation president Martin Evans says that in many cases rents received by landlords are not covering mortgages. Landlords will not be able to absorb any tax increases, he says, and will have to pass on these costs to tenants.

Agriculture could be hit - farmers

Federated Farmers economics spokeperson Philip York says a land tax of 0.5% could cost farmers $520 million, unfairly penalising the agricultural sector and stifling economic growth.

Business New Zealand chief executive Phil O'Reilly says his organisation supports reductions in income tax and company tax, and a rise in GST. However, he says a land tax would essentially be a tax on enterprise.

Council of Trade Unions secretary Peter Conway supports further taxes on investment property, but would be concerned if the effect of tax changes was cuts to services or user charges.

'Unfair on lower-income earners'

Labour finance spokesperson David Cunliffe says property owners outside the top tax bracket could end up paying a disproportionate amount of tax.

Green Party co-leader Russel Norman says cutting the top rate of income tax would increase inequality. It is unfair to ask those who earn less to pay disproportionately more in tax, he says.

The Federation of Budgeting Services says support and compensation will be needed for lower-income earners and beneficiaries, as well as some middle-income earners, if they end up paying more tax under the changes.