Savings Working Group looks at Nordic tax system

Tuesday, 24 August 2010

The government's Savings Working Group announced yesterday, looks to be at least as much about tax as it is about savings.

The working group, headed by Grant Thornton chairman Kerry McDonald, has a much wider brief than anticipated, with a specific instruction to look at both adopting the Nordic two-tier tax system as well as indexing tax rates to inflation.

Last year's Tax Working Group - set up along broadly the same lines as this latest group - looked briefly at the Nordic model but concluded such a radical change would require more work.

The approach adopted by the Nordic countries - Sweden, Norway and Denmark - taxes income from labour and income from capital at broadly different rates.

This dual approach has company and investment tax rates, dubbed taxes on capital - set comparatively low - around 15-20%, for example and with labour income being taxed at the marginal personal income tax rates.

This approach bypasses the issue of countries competing on company tax rates but it also means the probability of higher tax on personal income.

The Inland Revenue Department (IRD) is understood to be less than keen on the approach - IRD senior official Matthew Benge told the Tax Working Group conference in December the tax authorities in those Nordic countries have become constantly involved in turf wars on the issue of what is capital income and what is labour income.

The working group has also been asked to look at indexation of tax rates to inflation, so as to eliminate the phenomenon of fiscal drag pulling taxpayers into higher brackets.

The working group is to report by the end of January 2011 and Finance Minister Bill English said yesterday that, depending on what its proposals are, there could be changes in the 2011 Budget.

Apart from Mr McDonald, the working group members are Capital Markets Research director Dr Craig Ansley; Motu Economic and Public Policy Research senior fellow Dr Andrew Coleman; financial columnist Mary Holm; Reserve Bank assistant governor Dr John McDermott; PricewaterhouseCoopers partner Paul Mersi; and Bank of New Zealand head of market economics Stephen Toplis.

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