Address to Corporate Tax Update 2001 Forum
Stamford Plaza Hotel, Auckland
Delivered by John Wright - Parliamentary Under Secretary to the Minister of Revenue
I bring greetings from Revenue Minister Michael Cullen who, unfortunately, through illness can't be here with you today but sends his best wishes for your conference and - me - to give this presentation on his behalf.
When Dr Cullen spoke to last year's Corporate Tax Update, the Coalition Government had been in office for just under six months. On that occasion he outlined the direction of tax policy under this government, and the shape of our longer-term policy work.
Much of that has now become a reality. Probably our most important task on becoming the government was to restore confidence in government and the political process, by delivering on the commitments and promises we made. From all perspectives, including that of tax, it is critical that people are able to trust the government.
One of Labour's election promises was to increase the top personal tax rate to 39 percent on income over $60,000. I appreciate that this has not been a popular measure with audiences like this one. I accept that it has generated the need for considerable buttressing legislation. But Labour had announced before the election its intention of raising the top rate, and it was a commitment.
The rationale for the increase in the top tax rate, which affected only about 5 percent of the country's earners, was that those who could best afford to contribute a bit more to the country's well-being should do so. Dr Cullen predicted that the increase would result in an extra $237 million in tax from PAYE each year for new spending.
The forecasts are proving to be accurate. For the income year to March 2001, at least $270 million in extra revenue from tax deducted at source is estimated to have resulted from the increase in the top rate. Furthermore, the resulting gain is estimated to exceed $280 million for the fiscal year to June 2001.
Both Coalition partners had made a pre-election commitment to restoring the floor for New Zealand Superannuation from 60 percent to 65 percent of the average, ordinary time weekly wage. A further commitment was to abolish the interest on student loans for low-income students while they studied. Again, it was important to meet these commitments. The extra revenue from the increase in the top personal tax rate is helping to fund these initiatives.
Tax receipts and revenue in the corporate sector are also looking healthy, especially for industries that are exporting, and from tourism. Company income tax receipts for the year to June 2001 were up $484 million, nearly 12% higher than for the previous year.
From a tax perspective, the most dramatic performers were agriculture, forestry, fishing and mining. This group brought in $178 million in tax and showed massive growth over the previous year, with revenue up 96 percent.
Manufacturing brought in $931 million in tax, up 34 percent from the previous year. Total receipts from the wholesale trade were $492 million, up 43 percent. From the retail trade they were $289 million, up 27 percent.
These numbers indicate that the tax system is doing its job. It is raising the funds to support our social infrastructure. The increase in corporate tax receipts from the primary and manufacturing sectors also evidences the progress we have made in building the economy.
There is a direct link between the health of the economy and the health of the tax system. Obviously, a growing economy underpins a growing tax base and thus our ability to meet expenditure commitments.
More arguable is whether the tax system can be designed to boost the economy. One aspect of this question is whether we should lower the company income tax rate. The arguments for doing so seem to be twofold. First, a lower rate is seen as attracting foreign investment. That is important. Foreign investment can provide not only the capital that we lack, but it can also provide New Zealand with skills and knowledge.
A second argument for lowering the company tax rate is that other countries are lowering their rates. Australia is moving to a 30% rate. Other rates in the Pacific rim are: Hong Kong - 16 percent; Japan - 34.5 percent; Korea - 28 percent; Taiwan - 25 percent; and Singapore - 26 percent.
The argument is that if our company rate is significantly above that of our neighbours, companies will move to these jurisdictions, which will lead to a loss of tax revenue as company income is diverted to those countries.
These arguments need to be seriously considered.
However, a low company tax rate is not necessarily the quick-fix panacea that some would have it to be. The reality is more complex. For a start, it is important to look at the fiscal implication of lowering the rate.
Lowering the company tax rate by 1 per cent would cost the Government about $125 million a year, with about $45 million to $50 million of that going to foreign-owned companies.
New Zealand would have to reap clear tangible economic benefits from forgoing this amount of revenue. The fiscal costs are very certain, but the benefits less so.
Much has been made of Ireland's 10 percent company tax rate for the manufacturing sector. From various discussions the Government has had with Ireland's officials and business leaders it is now clear that other factors are equally important to Ireland's recent success in attracting foreign investment. For instance, its investment in skills over the last two decades, its targeted approach to attracting investment, and its partnership agreements between the government, business and trade unions. In short, the corporate tax rate may be only one of several factors in its success.
The Tax Review is considering this issue, amongst many others, and we are looking forward to receiving its final report and recommendations. When the Review was appointed it was made clear that it would provide independent advice. Some commentators questioned that, but the Review has demonstrated its independence of mind. The government will not necessarily adopt the Review's recommendations, but it will consider them. Dr Cullen has made it clear, however, that he will not support proposals to tax homes or introduce a comprehensive capital gains tax. He has also promised that the Government will not implement any significant changes without first seeking a mandate from the electorate through the 2002 general election.
The trans-Tasman triangular tax problem is a longstanding one that successive governments have tried to resolve. In June Dr Cullen announced that Australia and New Zealand were working on a proposed mechanism for reducing the double taxation imposed by both countries on dividends received through triangular investment. Since then, Australian officials have visited their New Zealand counterparts for discussions on the issues. Officials are preparing a consultative document setting out a pro rata allocation proposal, and it is expected to be ready for publication later this year – and Dr Cullen is hoping sooner rather than later.
Both governments are committed to removing impediments to trans-Tasman business where possible. Finding a bilateral solution to the triangular tax problem could be a big step towards improving the ease of trans-Tasman capital flows.
The government also made an early commitment to the Generic Tax Policy Process, which builds opportunities for consultation into key stages of tax policy development. We have said this Government would follow the consultative process, and we have met that commitment.
One example of that consultation is the recent discussion document on tax and charities. It has attracted so much interest that we extended the original closing date for submissions from the end of July to the end of this month. At last count, over 800 submissions had been received. Many of the early submissions were form letters, but many of those arriving later have been longer and more personalised. They have tended to offer thoughtful analysis of the points raised for discussion, and will no doubt help to throw light on the operation of the income tax exemption for charities.
There has been some unhelpful scare mongering about the Government's intentions on the tax-and-charities issue following the publication of the discussion document. Let me say here that we hold the charitable sector in high regard for its contribution to New Zealand society. Indeed, implementation of some of the proposals in the document should help to increase donations to charities.
The Government has made no decisions on the proposals in question, preferring to await the outcome of the consultation process. If we have a preference at this point, however, it lies in having a central register for those charities that have tax-exempt status.
As many of you here may be aware, charitable activities have unfortunately been used for tax schemes. We want to ensure that the good name of legitimate charities is protected.
Another example of our commitment to the Generic Tax Policy Process is our research and development policy. Proposals to align the tax treatment of R & D with accounting practice are now in a bill before Parliament. R & D was a contentious issue last year, but we were able to work with the private sector to develop proposals that met their main concerns. This was an example of how the government can work with the private sector to achieve a good result.
Some people obviously think we should go further with R & D and offer tax incentives along the lines of Australia.
We have to be careful. In designing a tax system, there are two broad approaches. One is to have high tax rates and lots of tax incentives. That is the approach New Zealand had in the 1970s. The other approach is to have lower tax rates and a few incentives.
One area where the use of tax incentives may be effective, however, is the taxation of savings for retirement. As you may know, the Government is looking to reform the rules on taxing savings for retirement through superannuation schemes. New Zealand Superannuation will provide the basics of life in retirement, but it is not intended to be a substitute for personal savings.
To encourage New Zealanders to save for retirement, the Government has been considering some form of tax incentive, whether at the contribution level or over the period that savings remain in a fund. To that end, we have asked policy officials to consult with the savings industry on effective ways to lift savings through the tax system.
By the end of the month officials will be reporting on the outcome of the initial consultation, and proposals for the way forward. In the meantime, we understand there is some support in the industry for a rebate on contributions.
To conclude, the Government has made a number of promises on which we are delivering. Tax is no exception.
In one area, however, we are concerned that people may feel less trust in the Government. You will be aware that the government has proposed retrospective legislation affecting GST on inbound tour operators. Concerns have been raised that this may suggest the government might retrospectively change other tax laws. I would like to make it very clear that I speak for Dr Cullen when I say that in general, this government is very much opposed to retrospective legislation. In government, however, we have to balance benefits and costs, and in exceptional circumstances that can sometimes justify retrospective legislation. In the GST case, people had in most cases paid GST, but on the clear policy basis that tourists should be subject to GST. The proposal is to make that clear by retrospective legislation, but it is an exception to our general view that retrospective legislation should be avoided.
Again, on behalf of Dr Cullen, I wish you a most successful conference. Thank you.