Time for a Positive Future Direction for Tax

A new report by Maxim Institute, released today, recommends a series of changes to the New Zealand tax system, which would see productivity and economic growth rates improved.

Steve Thomas, the author of the report, “Lifting the Bucket: Tax policy and economic growth,” recommends changes to the tax stystem over the medium-term, including:

• establishing a two-step personal income tax scale with a bottom rate of about 10% and a top rate of about 27%, which would take effect at a threshold of about $27,000;

• increasing GST to 15%;

• dropping corporate income taxes to 27%;

• lowering trust tax rates to 27%; and

• setting an upper-limit benchmark for government spending at 30% of GDP.

These recommendations have been analysed in the report, “Maxim Institute: Analysis of tax proposals,” which provides costings for this package. The analysis indicates that the recommendations are feasible, balanced and suitable for detailed consideration by the Government. (This report is available upon request)

Rebalancing the tax base

“The tax system should be designed in a way that is friendly towards economic growth. Some of the key drivers of growth are innovation, investment, enterprise, increasing skills and using resources efficiently,” says Maxim Institute researcher and author of “Lifting the Bucket,” Steve Thomas.

“At the moment we rely most heavily on tax bases that are the least growth-friendly. High income and coporate taxes can damage people’s incentives to take risks and innovate.”

“We need to move toward a system that relies more on consumption taxes, like GST, and less on income and corporate taxes, so that the tax system is more growth-friendly on the whole.”

Thomas argues, “Economic growth is not the only factor that leads to wellbeing, however it is still a crucial ingredient. Boosting New Zealand’s productivity and economic growth rates is vital if Kiwis are to enjoy higher living standards and to have better opportunities in the future.”

Putting a lid on government spending

“In contrast to the proposals presented by the Tax Working Group in January and the Government’s foreshadowed Budget tax plans, our proposals do not require the Government to keep collecting the same amount of tax as it does now,” says Steve Thomas.

“Government spending is growing beyond what we can afford. Unless we significantly boost productivity, raise taxes or go further into debt, the government cannot keep spending at current rates,” according to Thomas. “We recommend a benchmark limit for government spending at 30% of GDP. That upper limit would not be legislated butit would be a guideline to which governments would be held accountable by voters at election time, says Thomas.

He explains, “Our estimates show that if government expenditure is reduced from the current level of 36% to 30% of GDP over the medium-term, the savings in 2009/10 terms would be in the order of $3 billion each year, or 1.7% of GDP, as the Government works towards the benchmark.”

“However, to seriously bring government expenditure back to affordable and sustainable levels will require New Zealanders to change their expectations about the role of government,” warns Thomas.

Current public expectations

“There may not be much public appetite for some of these changes now,” says Steve Thomas. “UMR research commissioned by Maxim Institute showed that many of our recommendations are contentious. For example, the majority of New Zealanders polled oppose an increase in GST even if personal income taxes were lowered at the same time, and most do not want to see Government spending decrease on the programes surveyed, such a KiwiSaver and New Zealand Superannuation.

“These survey results show that reducing government expenditure and adjusting the tax base may not be popular,” says Steve Thomas, “but that does not mean we can afford to carry on as we are.”

ENDS

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