News and Opinion, sponsored by RaboPlus

By Danica Hampton

The NZD/USD has staged a bit of a recovery over the past 24 hours. After falling below 0.6820 yesterday morning, NZD/USD managed to push above 0.6950 last night.

Once again, debt issues in Greece stole the limelight. However, instead of imposing doom and gloom, investors were cheered by media reports suggesting European policymakers had made an “in principle” decision to rescue Greece from its debt troubles.

Investors hope that official assistance for Greece will help stop the debt crisis from spreading elsewhere in the world. While European equities were flattish, Wall Street has rebounded strongly. The S&P500 is currently up 1.6%.

Against a backdrop of strong equities and improving risk appetite, the USD was sold heavily as investors trimmed back safe-haven positions. EUR/USD spiked sharply from sub-1.3700 to nearly 1.3840.

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By Bernard Hickey

Prime Minister John Key has announced in his opening speech to parliament that a land tax, a Capital Gains Tax and a tax on equity in residential property investments would not be considered in the May 2010 budget and had been ruled out by the Government. It was however looking at unspecified measures suggested by the Tax Working Group to tax property more to help pay for an unspecified reduction in the top personal tax rate.

(Updates with My view that Key exposed himself today as a timid follower, not a leader. Update 3 includes reaction link. Update 4 includes link to video of Key’s tax comments. Update 5 includes link to full speech)

Read the full speech here.

Watch on YouTube here.

“Some of the options discussed by the Tax Working Group are not favoured by the Government, for a variety of reasons, and will not be progressed,” Key said in speech notes prepared for the address and obtained under embargo by Interest.co.nz in Wellington.

“In particular, we will not be developing any proposals for a land tax, a comprehensive capital gains tax, or a risk-free return method (RFRM) for taxing residential investment properties,” Key said.

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Economist, fund manager and motorcyclist Gareth Morgan has criticised the Tax Working Group (which he was on), describing its recommendations as a ‘half-cocked, grab-bag of fine tunings from a cumbersome committee that diagnosed a broken system but proposed little real reform’.

Writing in the NZ Herald, Morgan gave the group a mark of 4 out of 10.

While the TWG’s list of Band Aids was a bit disappointing, it was a great public service to see it clarify what we all know, that our tax system is an incoherent patchwork of tax regimes that amount to facilitating far too much tax avoidance activity, ensnare too many folk in poverty traps through poor integration of the tax and benefit systems, and exert undue influences on economic decisions by making some wealth-augmenting activities taxable and others not (property speculation).

The TWG didn’t set out to design major reform and so under the constraint from that limitation on its brief, its recommendations were necessarily a series of patches with much of the fundamental weakness in our tax and benefit system not addressed at all.

Morgan said, however, he liked the ideas of removing all loadings on depreciation and equalising the various income taxes (corporate, personal and trust).

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The Victoria University coordinated Tax Working Group is set to release its report with various options for tax reform at 1pm on Wednesday, Treasury said.

I will be attending the news conference in Wellington and reporting from the presentation of the options. I welcome any suggestions for questions and lines of inquiry from readers. Here is my piece from December 3 which was written after the Tax Working Group’s final public conference in Wellington.

Just a reminder on what I think might come out from the Tax Working Group, which includes various figures from government, business and academia.

I think the government will look at equalising the top income tax rate with the corporate and trust rates at 30% in the 2010 budget. The NZ$1.6 billion cost of this could be paid for by one or two smallish taxes on rental property investors such as the denying depreciation on buildings, making depreciable buildings taxable on sale, denying the offsetting of rental losses against other income or imposing a Risk Free Return Method for taxing the inflation-adjusted equity in rental properties.

I’d like the government to equalise the income tax rates at 27%, increase GST to 15%, replace Working for Families with a NZ$2,000 per child semi-universal payment and impose a land tax, but that’s politically too hard before the 2011 election. I’d like the government to campaign before the 2011 election for a 25% equalised income tax rate, a 0.5% land tax with a NZ$50,000 per hectare threshold and an inflation adjusted, universal Guaranteed Minimum Income to replace all benefits, including New Zealand Superannuation.

Bernard Hickey picks out 10 charts from 2009 in a series of videos to play over the Summer break. In this video he looks at how much disposable incomes would fall in the various tax brackets if either a 0.5% land tax or 1% land tax was imposed. This chart was prepared for the Tax Working Group and shows how it works as a progressive tax.

Bernard Hickey interviews NZX Chief Executive Mark Weldon about tax reform and the investment climate. Weldon, who is a member of the Tax Working Group, supports the idea of a land tax because it broadens the tax base, is efficient and sends a signal to New Zealanders about where to invest.

He also talks about the prospects for introducing a tax on equity invested in rental property on a Risk Free Return Method (RFRM) and removing depreciation as a legitimate expense for property investors. Weldon likes the idea of a 30-30-30 income tax system where the top income tax rate matched the corporate tax rate and the family trust rate (currently at 33%).

Weldon also talks about the possibility of a differential corporate tax rate where companies making more than NZ$3 million could pay a lower rate so New Zealand could compete with a potentially lower corporate tax rate in Australia. He is confident the John Key-led government will introduce some pragmatic reforms.

“I’d like to see some really big direction of travel commitments, such as a package that moves to tax property and real estate and broadens the base materially in capital markets, and that moves to get rid of the rorts in the unlisted public sector, such as the bizarre situation where Hanover has opted out of regulation and there is no regulator,” Weldon said.

“I think in taxing capital markets you’ll see some pretty meaningful change,” Weldon said.

Your view? We welcome your comments below