Low and 0% company tax rates could spur investment and growth

Canada's 21% company tax rate and the zero company tax rate levied in the UK for start up businesses are just two models New Zealand should be examining for their potential here, the Employers & Manufacturers Association suggests.

"Dropping the company tax rate is becoming normal international practice," said Alasdair Thompson, EMA's chief executive.

"Most other countries are dropping their company tax rates to reward entrepreneurialism and spur growth.

"Canada and the UK are dropping their company tax scales every year. Most other countries have lower company tax rates than ours, including Australia, Ireland and Singapore. Twelve countries in the OECD cut their company tax rates last year; none put them up.

"Canada's tax rate on all business earnings will be 21% by 2004. The UK has just cut its tax rate for company earnings up to 10,000 pounds from 10% to zero.

"Essentially company tax is a withholding tax that doesn't add to Government's ultimate revenues from tax - after a company has paid tax, dividend imputation credits allow its shareholders to claim it back.

"But a low company tax rate represents a powerful driver of investment and economic growth as new businesses are attracted, and all companies are encouraged to retain earnings for re-investment in expanded capacity, skills and jobs, rather than paying out earnings to shareholders.

"New Zealand companies pay out a higher proportion of earnings to shareholders than anywhere else at 82% of earnings.

"New Zealand is risking the potential of this measure. If we were an early adopter we would attract investment dependent growth.

"Not only is Canada reducing its company tax rates each year, but the earnings level at which the cuts kick in are also progressively phased down.

"Tax on company earnings up to $200,000 in Canada has already been dropped to 12% with the tax rate on earnings of $2-300,000 last year dropping to 21%. This year the tax rate for company earnings over $300,000 was reduced to 25% and is scheduled to go to 21% by 2004. (www.fin.gc.ca/toce/2002/faster_e.html)

"The UK's Chancellor of the Exchequer, Gordon Brown, recognised the incentive for growth created by lower company tax rate by announcing cuts to the UK's company tax rate structure.

"The UK Budget this year, as well as introducing the zero rate for the first 10,000 pounds of earnings, saw small company tax rate reduced from 20% to 19% for earnings up to 300,000 pounds. The main UK company tax rate is below New Zealand's at 30%. (www.inlandrevenue.gov.uk/rates)

"Small businesses in the UK are defined as either employing less than 50 people and/or earning less than 2.8 million pounds and/or with balance sheet assets up to 1.4 million pounds.

"At present we have amongst the highest company tax rates in the OECD and Pacific Rim countries.

"Cuts to the company tax scales are urgently needed as a key ingredient for lifting our economic performance back into the top half of the OECD.

"It's hard to understand Government's reluctance to use lower company tax rates to grow our GDP. There's no advantage from being last cab off the rank on this issue."

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