COMMENT: Good politics, but will it fix a "broken" tax system?

Pattrick Smellie,  Tuesday, 09 February 2010 13:38

Prime Minister John Key is obsessed with two things about the New Zealand economy. One is the fact that productive industry has been shrinking as proportion of the economy for more than five years.

The other is the price of houses - an issue that Reserve Bank governors and other politicians have identified for years and done nothing about.

Key's outline today of the tax and economic policy agenda for 2010 hints at fixes for the first of those two issues.  And on the second, it deals as decisively as a cautious Prime Minister who knows the value of the public's trust dares to go.

By ruling out a land tax, Key has killed potentially unsurvivable grizzling from homeowners, the elderly, and the farming community - three groups that cover an awful lot of National voters - and Maori, whom he needs on-side.

By ruling out the risk-free return method (RFRM) for calculating rents on residential investment properties, he has softened the blow for residential property investors, many of whom also vote National and whose various lobbyists had already reached shrill heights of rhetoric ahead of today's speech.

On the other hand, by leaving open the prospect of axing depreciation deductions on investment properties, Key is finally doing something to put a spanner in the ludicrously favourable tax treatment of residential property investment relative to other forms of investment.

This is an important point.  Yes, investing in rental property has been a rational decision for New Zealand investors, but not only because other investments - finance companies, shares, and new businesses - were riskier, but because the tax system was making them even riskier by favouring housing.

That will, to some extent, come to an end when, as seems inevitable, depreciation allowances currently denying the government about $1.3 billion a year in tax revenue are closed in the Budget on May 20. In the end, no sane government can let a sector with $200 billion of assets go on claiming $150 million a year in tax losses.

Whether the government will go the next step and try to "ring-fence" losses on rental properties to prevent write-offs against other income remains to be seen.  As accountants know, for every ring-fence, there is always a loophole.

Key is also giving plenty of notice to prepare for a GST increase, and he has staked his trustworthiness on doing so only if the "vast bulk of New Zealanders" - i.e., those not rorting the tax system - are better off.

From the political perspective of a government that would like two or three terms in office, this all looks relatively deft.  But from the perspective of a government seeking a step-change in economic performance, it is minor stuff.

New science and innovation tax breaks seem likely, and a fall in company and top personal tax rates will be important to maintain international competitiveness and remove some of the arbitrage opportunities that the current mish-mash of tax rates allows for high earners.

But one thing today's announcements don't do is the one the thing the Tax Working Group said was most important - fixing a tax system that shows no sign of being able to sustain the very large growth in government debt and spending forecast over the next decade.

written by Noraini, 10 February 2010

The new tax system is very unfair to low income group and the average New Zealanders. He has to stop thinking only the rich and high income group are the only group he has to gain support. Look many of low income group and the average income are majority population and contributing actively to the economy which he overlook. The Low income group should pay any tax and certainly Key does not favour and ripping off the poor/low income group is no justise at all!!

written by Don Baxter, 10 February 2010

We were promised changes to the broken tax system that would:
1) Be fiscally neutral ie. The Govt. would end up with the same total tax take.
2) Be fairer to all tax payers; Beneficiaries, Superannuatants, Low to Middle and High Income
earners Income
3) Help stimulate the economy.
4) Make a level playing field for all forms of investment (ie. tax negatively geared property investment- that at the present time has an unfair tax advantage over any other type of investment).

Subject to fine details yet to come; I congratulate the Govt. on the tax changes proposed as they keep the promises made.
Most importantly they have skilfully avoided the changes that could have hurt the NZ economy at a time when we are in a fragile recovery. Well done!

written by Judith Bennett, 10 February 2010

The current tax system is very unfair to a small group of tax payers (9% or 308,000 people) who pay nearly 50% of the income tax. Low income people- those under the average wage of $20,000 or 1.49 million people do pay only 8% of the income tax take. And over the last couple of years there has been a huge increase in people effectively paying no tax. So which group is being ripped off? See the govt budget at the NZ Treasury web site and key facts for tax payers

written by Peter King, 10 February 2010

Whacking the rich just makes everyone poor. Whacking the poor makes everyone poor too.
The Govt needs to do less whacking generally.
The problem in NZ is Govts (both Lab & Nat) have only proved good at whacking. NZ just needs a bigger pie. For that we need less red tape not more. Ireland proved if you reduce income taxes to 20% and eliminate the hidey holes not only do you get more tax overall but the economy takes off because tax loopholes stop being incentives. Unlike us their problem is now they can't devalue. The problem is Treasury has no idea how to evaluate this and clings to a BAU base case with little changes on the sides.

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