Tax

Hon Pansy Wong

In the past few decades, we've fallen further behind the countries we like to compare ourselves with - for example, our neighbour Australia. Our exports aren't growing fast enough.  Our businesses are struggling with red tape. The independent Tax Working Group has found that our tax system has major problems with integrity, fairness, and incentives.

In New Zealand there are two key forms of tax, income tax and a consumption tax called Government Services Tax (GST). Tax on income is taken automatically at payday prior to a worker receiving their pay and therefore is not affected by behaviour. People earning more are taxed at higher percentages and combined with the fact that they earn more they pay far more tax than lower income earners.  Goods and services tax (GST) is a tax on most goods and services in New Zealand, GST is added to the price of taxable goods and services at is currently at a rate of 12.5%. This tax on consumption and services means that whenever people chose to spend money that it taxed at a low level.

Last month the Government received the report of the Tax Working Group which was established in May 2009 to advise Ministers on medium-term tax policy. This report will be considered as part of the May Budget process.

An area of concern is that out of an Inland Revenue sample of 100 of the highest wealth individuals in New Zealand, only about half are paying the highest marginal tax rate on their income. These taxpayers are not necessarily doing anything wrong but are merely taking advantage of the opportunities offered by the current system to shelter income from higher rates. This calls into question the integrity and fairness of the system.

The current system allows taxpayers considerable freedom in the choice of entities through which they conduct their affairs. For example, individuals can hold their investment assets directly, or the assets can be held indirectly by placing them in a company, a trust or a portfolio investment entity. A business can be operated as a sole trader or through a company or trust.

The main thrust of the Tax Working Group report is that New Zealand's taxation system falls too heavily on wage earners and companies and this damages growth. Correspondingly the tax on consumption is low compared to other countries and there is little impact on investment property. The Group agreed that increasing the GST rate to 15% would be an efficient way to change the system as this would reduce the taxation bias against investments and savings. Those on lower incomes would need to be compensated for this increase.

The Government has heard this message and as part of a package of tax changes in Budget 2010, we are looking at reducing personal taxes across the board and carefully considering a modest increase in GST to no more than 15 per cent.

We're acutely aware that a rise in GST would have an impact on lower and middle income New Zealanders. Any increase would be accompanied by reductions in personal taxes, as well as up-front increases in benefits, NZ Superannuation, and Working for Families payments. No decision has yet been made about increasing GST - we have asked for more work to be done on this.

We need a tax system that creates incentives for people to work hard, improve their skills and get ahead here in New Zealand. And we need a tax system that encourages saving and boosts the productivity of investments, details of our tax reform package will be released in Budget 2010.