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Opinion: This will transform the economy won't it? Yeah right

By Simon Louisson of NZPA

Friday 28th July 2006

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"Is that it?" was the main response from business this week to the Government's long-awaited business tax review document.

Revenue Minister Peter Dunne had demanded a review as a condition for United Future's support for the Labour-led Government. The Government was always luke-warm and the 26-page document showed it.

Dunne billed it as the most significant review of business tax in 18 years.

But the document released on Tuesday was limited in scope, thin on research and, most of all, timid in vision.

The whole process was poorly thought through - changes to business tax cannot be made without implications for income tax rates and these were placed outside the scope of the review.

Finance Minister Michael Cullen said the proposals were intended to help businesses prosper, increase competitiveness, improve productivity and the potential for economic growth.

Fiddly little changes such as those proposed have about as much chance of achieving those goals as New Zealand has of determining the outcome of global free trade talks.

Part of the reason for Ireland's economic jump-shift in the 1990s was a radical revamp of its business tax.

Australia's last budget delivered nearly $NZ60 billion of tax cuts. This offering - costing $2 billion if all options were accepted, and Dunne said they won't be - is puny by comparison.

KPMG tax partner John Cantin slated the document as "dull and boring and seemed overly constrained by attention to fiscal costs".

"It would be better to have a vision of what is really possible and then to work out whether New Zealand can afford it or not."

Business reaction was understandably scathing.

"It's a skinny document for something heralded as a bold and innovative," Deloitte tax specialist Thomas Pipos said.

"It's no road map to the promised land. To say it is embarrassing would be over the top, but not by much."

Jo Doolan, a tax partner with Ernst and Young, said Australia was already talking of dropping its rate to 28%.

She did not see why New Zealand could not afford to set a programme on progressively lowering business tax rates as far as 20%.

Cullen peppers speeches with the word "transform" but to transform, you need to change direction, or make substantial change.

He articulated his lack of vision and timidness when he ruled out deep cuts to the company rate or consideration of a capital gains tax or a change in the GST rate.

"We considered some much larger structural changes but the gains were uncertain," he said.

The discussion document's main thrust is to trim the company tax rate from 33% to 30% to match Australia's.

Other proposals include tax credits for research and development, export credits, skill development, and further changes to depreciation and deductions.

The cut in the headline company tax rate would cost an estimated $540 million a year.

The focus on tax credits rather than accelerated deductions was assessed as more helpful to start-ups that are not yet paying tax.

Tax credits between 7% and 15% are proposed, which, based on a 33% tax rate, would be equivalent to allowing deduction rates of 121% to 145%.

Doolan rubbished moves toward export incentives as almost "returning to a bygone era".

Scott Kerse, a tax partner with PriceWaterhouseCoopers, said he was bemused by the thought of virtually reintroducing export credits, which was a complete turnabout from New Zealand's free trade thinking that has prevailed since the demise of Muldoonism.

Cullen himself has long argued against cutting the business tax rate as only benefiting foreign companies. He reasons business tax for locals is really only a holding tax. In the end, company owners pay tax according to their appropriate income tax bracket.

Taking this argument to its extreme, company tax should be abolished in favour of a foreign residents' tax.

Most New Zealand-owned and operated businesses are operated by a trust or partnership and will not benefit from a company tax rate change, Kerse said.

If the main plank of these proposals - to cut the business tax rate - is accepted, the wedge between that rate and the top margin income tax rate will be further increased - to 6 percentage points.

That will give greater incentive for individuals to structure their taxes to take advantage of that difference.

Two of the great advantages of New Zealand's tax system - its simplicity and fairness - will be further eroded.

Cullen has attempted to quarantine the issue of personal tax rates by saying that was outside the scope of the review. But of course a change to one affects the other and even he accepted there were "obviously potential implications".

Cullen, who led the charge at the last election against tax cuts, indicated any adjustment to personal rates would not just be the top rate. And he understood that going down that path would multiply the costs. Spending plans already announced would then be threatened.

National Party finance spokesman John Key cast doubt that any tax cuts will be delivered. He cited Cullen last year questioning the affordability of his own much ridiculed changes to personal tax rate thresholds - the chewing gum tax cuts.

"If things are so tight, that that may be jeopardised, why should we believe any of this is going to happen?" Key said.

Cullen has placed the Labour Party in a bind. If it rejects the main ingredients of this package it will hand National a huge political gift. If it accepts them, then it will almost certainly have to adjust income tax levels, something that stick in Labour's ideological craw.

Failing to come up with something better thought through and more imaginative will further speculation on Cullen's future as finance minister.

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