A reduction in corporate tax appears to be an unlikely recommendation for the Tax Working Group but a capital gains tax, as expected, remains firmly on the table.
Some sort of new environmental tax may too be endorsed by the group, Chaired by Michael Cullen.
Speaking to the New Zealand International Fiscal Association last week, the former Finance Minister outlined details of a background paper the group is finalising.
The document, The Future of Tax: Submissions Background Paper, will be released on March 14 and aims to help people with submissions, which are due by the end of April.
In his speech, Cullen suggested it was unlikely that a reduction in corporate tax will be recommended by the working group, but strongly hinted environmental taxes would be examined in detail.
Although New Zealand’s 28% company tax rate is slightly above the OECD average, New Zealand and Australia are the only two countries with full imputation systems, he says.
“Empirical evidence for a connection between company tax rates and economic performance remains very weak.
“The kind of investment we need is likely to be based on far wider considerations than just minor differences in the headline company tax rate.”
He said calls to align New Zealand’s corporate and top personal tax rate would create “a race to the bottom in terms of revenue.”
In June last year, the OECD’s Economic Survey of New Zealand suggested the Government should consider changes to corporate tax settings.
“Because corporate taxes have both a domestic aspect to them, with small businesses, as well as an international aspect – for example attracting foreign direct investment – a broad-based analysis of the taxes in total of the New Zealand economy is warranted as part of an overall picture of how to improve the economy,” the report said.
Capital gains, wealth and an environmental tax on the table
The Coalition Government tasked the working group with “examin[ing] further improvements in the structure, fairness and balance of the [tax] system” after it was elected last year.
It was given a wide scope but was told no changes could be made to inheritance tax, increasing income tax or GST rates. A capital gains tax that would apply to the family home, or the land under it, is also off the table.
But a broader capital gains tax not including the family home has not been ruled out.
Cullen says New Zealand has a narrow range of taxes by international standards, the most obvious example of this is the very limited scope of the current capital gains tax regime.
“That reflects a long New Zealand tradition, the basis of which is hard to discern.”
Other taxing initiatives which will be considered include a wealth tax, a tax on financial transactions, a land tax and environmental taxes.
On the latter point, he argues the effects of global warming are “already with us,” and New Zealand faces environmental challenges such as water pollution, plastic pollution and congestion, especially in Auckland.
“All this means that the possible use of the system to change people’s behaviour in ways which increase the wellbeing of all of us is very much on the agenda at the present time. I have no doubt there will be a significant number of submissions in that respect.”
The working group will present an interim report to the Minister of Finance and the Minister of Revenue in September – “this is a very tight timetable.”
“We anticipate there will be further public, political, and professional feedback on that interim report which will feed into the final report due by the end of February 2019.”