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Tax reform group's report 'meek', radical tax cuts needed, says NZIER:

Friday 22nd January 2010

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The Tax Working Group's final report is insightful but meek, says the New Zealand Institute of Economic Research, which says some pain of economic adjustment must be accepted if the economy is to perform more strongly.

"Anyone who seriously thinks that the TWG's recommendations are radical needs a reality check," the leading economic consultancy's chief executive Jean-Pierre de Raad says in a commentary issued today.

"In an insightful and thoughtful, but ultimately meek report, the TWG confirms that New Zealand’s current tax system is harmful to growth through its heavy reliance on taxing personal and corporate income. The tax structure distorts people’s employment, saving and investment choices.

"The group’s recommendations are sensible and orthodox, but somewhat mild. As a package they are hardly controversial or radical, despite some of the immediate hip pocket reactions to specific proposals.

"If New Zealand is to close the income gap with Australia, we need to do much more than matching Australia’s personal income and business tax rates," the institute says.

"A broad suite of growth-friendly policies – including bolder tax reform – needs to be implemented and a shared economic vision established. We need to accept that the adjustment to a higher long-term growth path might cause some short term pain, and we need political leaders to commit to seeing the reforms through."

"Given the growth challenge New Zealand faces, our concern is that the proposals of the TWG do not go far enough."

Aiming only to catch up lost ground "is far too timid an approach".

"We should be looking at genuinely radical reductions in tax rates on mobile capital and labour, increases in GST, and tax arrangements that support growth and innovation. This requires a vision of what kind of New Zealand we want to be in 10 years’ time, and debating what kind of tax system would support that."

The answer would require tax reforms to be accompanied by reining in government spending, better targeted and more effective, with an internationally excellent health and education system, and an overhaul of the social welfare system.

“What we have done over the past 25 years has clearly not delivered enough change," NZIER says.

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