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Taxing times

By Donal Curtin

Friday 23rd June 2006

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Tax changes are in the air. We've seen one set already in some detail - the proposed treatment of people's investments. And another is rumoured, though has yet to see the light of day - a payroll tax.

This latest cunning plan appears to be a response to calls from business (and policy analysts worried about New Zealand becoming a 'branch economy' outpost of Australia) for our corporate tax rate (33%) to be brought down to Australia's (30%), to make operating here more competitive with across the water.

"Fine," the government response goes. "You want parity with Australia? You can have it. You get their 30% tax rate - plus the sort of payroll tax Australian companies face."

However, there's a sleight of hand going on here. The argument seems to be that in practical terms there isn't much difference between the overall tax burdens in the two countries: they might have the lower corporate tax rate, but we don't have a payroll tax. They have higher marginal tax rates for individuals, but we have a higher GST. They have capital gains tax, but tax breaks on retirement savings. And so it goes.

The reality of the situation is that Australians, overall, taking all kinds of tax into account - in their case state and local as well as federal - are taxed less than we are. And that's pre the latest tax cuts announced in the Australian Budget, which widen the gap further. You don't have to take my word for it: that conclusion comes from a massive report the Aussie Treasurer commissioned into how Australia's tax compares with other countries'. 'International Comparison of Australia's Taxes', published in April, included New Zealand in the comparisons: of the 30 OECD countries, Australia ranked eighth lowest in terms of overall tax, with New Zealand 12th.

On the single issue of whose companies are taxed most, it's very hard to tell. The raw numbers could suggest it's something of a draw: direct taxation of companies is 5.1% of GDP in Oz, 4.7% here. But as the report stresses, "the disaggregation of income taxes into its individuals and companies components must be treated with significant caution". In Australia's case, there is one large distortion: the tax on the vast pool of compulsory super funds counts as company tax, when in reality this is a tax falling on the investors themselves. That's why it's probably best to concentrate on the big picture of the overall tax take.

In terms of the structure of taxes, New Zealand stood out as the only OECD country that has neither social security contributions nor a payroll tax. Only 11 of the 30 have payroll tax (and of those, five have them at very low levels). But nearly everywhere tends to have social security 'contributions' (as high as 15% of GDP in France), with Australia and New Zealand the only exceptions.

One result is New Zealand ends up with one of the smallest 'tax wedges' - the difference between what it costs an employer to hire someone and what the employee takes home as disposable income. Lower tax wedges are generally regarded as good, for both employers and employees. Indeed, the absence of social security contributions on either employer or employee, and the absence of payroll tax, might be part of the answer to why New Zealand (as various research studies have shown) tends to hire more freely in economic upswings than most other countries. It's a good reason why moves to introduce a payroll tax ought to get a thorough tyre-kicking.

It's also worth noting that comparisons of tax burdens, like this latest Aussie one, are only half the answer to the question of who's getting the best deal from their government - the half that looks at how much the government takes. The other half is what value taxpayers get back in return by way of government services. Companies might well live with higher taxes than Australia if, for example, they were getting better infrastructure or more skilled school leavers as a result.

This may sound incredible to non-economists, but in New Zealand's national accounts we typically don't measure the output of government services like health and education. We can count the output of butter and wine, but it's several orders of magnitude more difficult to count the GP visits or the maths lessons, so we don't. Instead, we count the inputs (for example, teachers' salaries). And there's no point in climbing into Statistics New Zealand about it: until relatively recently, that's how most countries did it.

The good news is statisticians are beginning to get on top of it. In Britain, for example, they made a start on measuring actual health outputs by counting 16 different activities within their National Health Service. More recently, after a major review, they found the first stab was too simplistic: a routine cataract operation and a heart transplant were each counted as one 'operation'. So they've now broken out some 1,700 different treatment types which can be aggregated to give a summary measure of what actual health outputs are produced.

We're still far from getting those sorts of numbers here, but it's possible when we can see the full picture of both taxes raised and services provided, we might judge ourselves better off than the Aussies. But comparing the ride in from Sydney Airport with the ride in from Auckland, I somehow doubt it.

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