Income tax down, GST up, cheapest ways to lift savings: Working Group

Friday 12th November 2010 6 Comments

A lower top tax rate and higher consumption tax are the easiest and cheapest ways to boost the country’s poor savings record, according to the Savings Working Group.

Increasing the goods and services tax to 20% and cutting the top personal tax rate to 29.2% would be fiscally neutral and have a positive impact on both private and national savings rates, according to background papers prepared by the Inland Revenue Department for the government-appointed group tasked with finding ways to lift New Zealand’s savings across the board. IRD’s major concern with the option was that it would impact on the distribution of taxation.

"Revenue neutral changes that incorporated a reduction in the tax rate applied to income from savings would lead to increases in private savings and parallel increases in national savings," the Inland Revenue said in a paper entitled 'Sensitivity of Household Savings to Taxation'. Still, "the model does not incorporate a number of key determinants of the level of savings and would not be relevant for lower income individuals (who do not save much) and the very wealthy."

That would be an extension to Finance Minister Bill English's rejigging of the tax system in this year’s budget that lifted GST 2.5 percentage points to 15% and cut personal tax rates in a bid to stoke investment and savings, something that’s happened faster than Treasury and Reserve Bank officials anticipated.

Other options explored include an expenditure tax for retirement savings that was likely to have a small positive impact on private savings, but a small and ambiguous impact on the national level. It would have an impact on KiwiSaver and other superannuation funds that could cost $800 million a year, rising to $1.9 billion by 2024.

Extending the lower portfolio investment entity (PIE) tax rates to other forms of investment would have a similar impact on savings as the expenditure tax, though would only cost about $300 million a year.

A split tax system with different rates for capital and labour income would have a modestly positive impact on private and retirement savings, though the overall impact would likely be small and ambiguous, and would cost more than $3 billion a year. Partially excluding interest income, which was suggested in Australia’s Henry review, would have a similar impact on the savings rates, and cost an annual $1 billion.

Linking the tax base to inflation would also have a small and ambiguous impact on overall savings, and a modest lift in private savings, at a cost of about $1 billion, the papers said.

Last month, chairman Kerry McDonald told a media briefing compulsory savings wasn’t a silver bullet to fix New Zealand’s dismal savings record, with Australia’s experience mixed on whether 18 years of enforced saving has lifted the national rate.

Businesswire.co.nz

Comments from our readers

On 12 November 2010 at 1:26 pm fred said:

why not include into the kiwi saver brand the option where one can put money towards extra payments to ones mortage or student loan where the employer can also make a, say 4% payment instead of payments to the other kiwi saver funds....

On 12 November 2010 at 2:24 pm anitas said:

what is the point of all this saving when so many small business's out there are going or about to go broke because no one is spending and then as a country we will all be broke. What is the point of all this extra cash/savings I may have in my pocket when on the other hand I have to pay increased costs for council rates, ACC, other government charges etc etc. We need to find a balance and at the moment we have none. Curb council spending/cut government spending, control interest rates then we may find some balance.

On 13 November 2010 at 12:13 pm Brian said:

Ihave said it before.We have too many beurocrats and expensive polies; who constitute together an overhead factor which is too high and will send us broke as it would any business; which in reality is what n.z is.

On 13 November 2010 at 5:57 pm arty said:

Either interest rates that keep pace with true inflation (not the partial and selective figures RBNZ produces)or a tax incentive is the only reason to save. Being a significant saver myself for 35 years, I have seen my savings purchasing power decrease daily. Example in 2000 300k brought reasonable home in an area near me, today the same home sells for 700k. Tell me how saving keeps abreast with this sort of dollar depreciation and there are 100's of examples as to why saving does not work. I regret saving cash myself and would struggle to recommend others to save cash.

On 13 November 2010 at 6:47 pm Dave Murphy said:

Mr X and his family are short of a living salary and his older children help him out. How much more will he save when he pays extra GST on spending the gifts his older children give?

On 25 November 2010 at 10:16 am PK said:

A technically accurate report that simply refuses to acknowledge the large elephant in the room - specifically "envy politics". The top 10% of income earners pay over 50% of the total income tax - but any attempt to reduce that top rate will create a hue and cry from commentators who will provide misleading statistics about the cut - as they did last time it was done. The facts are that the majority of the New Zealand population will be broke when they retire - and will require hand-outs for a basic subsistance living standard.