Tax Policy Debate 1999 National Tax ConferenceAssociate Minister of Revenue
Institute of Chartered Accountants of New Zealand
Good morning ladies and gentlemen.
Let me start by sounding a warning.
If there is a change of government, the tax avoidance industry will boom again.
And as this audience knows only too well, you will be the beneficiaries.
We all remember the eighties.
The avoidance industry was on a roll.
Accountants had more work than they could handle.
You would all have had clients; high earners and businesses, who paid you well so they could minimise their tax liabilities.
Avoidance was common and the Government of the day collected far less tax than they expected.
The costs incurred by businesses and individuals in avoidance were substantial, to the advantage of the accounting and legal professions.
In summary, Labour's high tax regime, and that of the National Government pre 1984, were spectacularly unsuccessful.
Labour's plan to return this country to those days are bad news.
Tax has clearly emerged as a defining issue this election.
New Zealanders I talk to want less tax.
National's market research, our polling and my own canvassing in Christchurch and throughout New Zealand, all confirm New Zealanders want to pay less tax.
Many people have heard about Ireland's economic success, which has been influenced by a radical lowering of taxes in some areas.
New Zealanders want a similar economic direction. They want growth and they want jobs.
They want to know what they would pay for under a Labour-led Government and they are concerned at the prospect of:
an increased taxation burden
and more complicated tax laws.
For some time now Government has been asking the Labour Party to front up with its spending plans.
We were promised Labour's spending figures after Dr Cullen had seen the Treasury's pre-election update.
Well - that was two weeks ago and there is still no sign of anything from the Labour Party.
Voters have a right to know.
We are told we would be paying $800 million more in tax than we would under a National Government, but it's clear Labour's promises don't stop there.
The list of spending promises Labour has committed to is starting to mount up.
It's time Labour came out and fairly costed all of its spending promises.
So far Labour's spending promises - that is the promises which they have costed - add up to $1.6 billion in new spending by the third year.
That includes their credit card commitments at about $750m in the third year plus a range of other policies like lump sums for ACC, industry training, and early childhood education.
But this doesn't take into account Labour's "B" list of uncosted or longer term commitments.
This includes the 176 uncosted commitments Labour has made in areas such as research and development, paid parental leave, and establishing Community Employment Organisations.
Commitments like removing asset testing for geriatric care and changing ACC so that sickness is treated the same as accidents are listed as well, although Labour says it may take them a while to deliver on these.
Dr Cullen needs to tell the voters which of these 176 commitments will be delivered and how much it will all cost.
And this is all without taking any account of the extraordinary policy proposals of their mates, the Alliance Party.
In contrast to the high taxing, high spending promises, let's look at this Government's positive revenue platform.
Currently the economic position is positive, and solid growth is predicted over the next three years.
The unemployment figures released yesterday - a decline to 6.8% - show a job-rich recovery that would lead to higher GDP, and be of benefit to ALL New Zealanders.
In this region, the Canterbury Manufacturers Association, recently reported that total turnover increased 38 percent in September this year, compared to the same month last year.
Export turnover has increased by a staggering 58 percent comparing September 1998, to September this year.
There is no reason if this type of growth continues into the next term, that a National-led Government will not be able to deliver on our tax reduction programme.
Let's start however by clarifying National's position on tax, so there is no ambiguity.
The first job of a re-elected National Government will be to lower the middle tax rate to 20 cents for income between $9,500 and $40,000.
National believes that people on middle incomes need to see better rewards for the effort they put in. The Government can help increase what people take home each week by reducing the amount of tax they pay.
National's policy is to bring the company rate and top personal rate down to 30c in our next term.
But we will NOT go into deficit to achieve it. If we can only afford one tax reduction in our next term, we will move on the company rate first because it is critically important we retain competitiveness with Australia.
We are simply covering ourselves as one cannot predict the occurrence of a drought or any other international factors which could impact significantly.
Ideally National considers the two tax rates should be aligned.
However, making the company rate competitive with our Trans-Tasman neighbour is our first priority.
If a gap is necessary it will be temporary, and it will not be large.
It will not be worthwhile for people to re-arrange their affairs to take advantage of the gap, because of the short time frame.
There is no confusion in this policy.
National's first tax cuts come into effect next April, then we will work to bring about these two additional tax reductions.
We are all aware that what is dominating current political debate is whether tax goes up or down. I'd like to talk in a bit more detail about the avoidance industry that will develop under Labour's plans.
In 1990 the then Labour Government carefully aligned the top individual rate with the company tax rate, at 33%.
This, along with the introduction of imputation, significantly reduced the incentive for high-income earners to seek ways of paying less tax.
The key point about Labour's plans is that it is now proposing a permanent and significant split between the top personal rate and the corporate rate.
Raising individuals' top marginal rate above the company tax rate will once again provide an "opportunity" for taxpayers to avoid paying their legitimate tax liabilities.
It has happened in the past, and it will happen again if the top individual rate exceeds the company rate.
If you do raise the top marginal tax rate you'll have to take into consideration the consequences on other taxes -- taxes such as fringe benefit tax and the taxation of superannuation and life insurance, as well as for trusts.
This is another situation where Labour's tax policy is fundamentally flawed.
Dr Cullen initially said that Labour would make no change to Fringe Benefit Tax. Now in August he is reported as saying Labour will look at a multi tiered FBT system.
This would keep members of this audience so busy, you would not have time to attend conferences such as this to hear the Minister of Revenue.
Let me give you two examples of flawed Labour tax policy, using Fringe Benefit Tax.
How will Dr Cullen's policy handle a situation where a car shared by two sales commission employees who work in a caryard, has one employee earning $35,000 and the other over $60,000.
What Fringe Benefit Tax rate does the employer nominate for the car, and how will they know their judgement is right?
How about another situation where a person has two jobs?
How are each of the two employers, under a multi tiered FBT system, expected to work out what FBT rate applies to this employee, when the employers have no idea what their total income is?
We have to ask also what is Labour's rationale for leaving the corporate rate at 33%, while having an individual rate at 39%, so that all those businesses who do not use the corporate form will corporatise or use trusts.
Increase the margin of the top tax rate, and it's inevitable that people will change their affairs around to avoid paying additional income tax.
Behavioural changes will mean that Dr Cullen WILL NOT get his $400 million.
The Labour Party underestimates the intelligence of New Zealand business people if it thinks they haven't the ability to make some simple changes to their tax arrangements, so that the 39c tax rate is somebody else's responsibility - and not theirs.
It's easily done.
We all remember that 1980s and the avoidance industry out in full force.
Well -- welcome it back if Dr Cullen ever gets his way.
Experience has shown that it's not economically productive to raise tax rates.
It is far more productive to have a broad-based, low rate system that encourages achievement, growth, and jobs - as demonstrated by yesterday's unemployment figures.
Complications deciding on a FBT rate is not the only flaw in Labour's onerous tax plans.
There are a number of opportunities where taxpayers will be able to avoid the increased tax rates.
Employees will be easily able to avoid this tax by switching their excess income over $60,000 to receiving benefits by way of employer contributions to superannuation schemes.
This is because these benefits are effectively taxed at 33 percent under the Specified Superannuation Contribution Withholding Tax.
What would Labour do about this superannuation tax?
There is nothing mentioned in Labour's policy about raising or modifying this tax, because I suspect they haven't thought of it.
It's an ideal escape route New Zealanders would flock to in order to avoid paying extra tax if Labour was elected Government.
The only way Labour could stop this would be through the creation of complicated anti avoidance provisions which would be unproductive, and would create more work for the tax planning community.
I see little value in tying up our accounting, legal and business communities - not to mention the policy division of IRD - with complicated tax laws that will burden the country.
A change of government will un-do much of the simplification of the tax system National has encouraged - creating unnecessary costs and complexity for businesses.
Continuing this theme, one of Government's recent initiatives - a set of proposals on interest deductibility for tax purposes - will remove the uncertainty for companies.
There is a very real risk that this initiative could be deferred if a change of government occurs.
National is running on a platform of cutting compliance costs.
The aim of these proposals - to help companies by clarifying and simplifying the law on interest deductions, is critical.
We want to make it much simpler for businesses, especially small businesses, to meet their tax obligations. National has already got rid of tax returns for 1.2 million wage and salary earners. We want to achieve simplification on a similar scale for small business.
Work is underway to develop ways of calculating and paying tax to achieve:
less exposure to interest and penalties
taxes that are easier to calculate and understand
better alignment of taxes and cash flow
more streamlined payment of different tax obligations (eg GST, provisional tax) and
less contact with IRD.
In a similar vein, Government recognises that investment in research and development is a key factor in New Zealand's international competitiveness.
A key question is whether we under-invest in research and development in New Zealand.
And, if we do under-invest, why do we do so, and what can we do about it?
For this reason we are conducting an in-depth review of investment in R and D in New Zealand.
We're in the process of setting up a working group made up of people from the private and public sectors, and its brief is to report to Government by the end of March.
We need certainty in this area. But we need to be mindful of potential avoidance opportunities that could be created.
From a technical perspective, care would need to be taken to ensure deductibility provisions are not overly generous so as to be exploited.
I've been asked to comment briefly on the recent report of the select committee inquiry into the Inland Revenue Department.
My view is that the report was necessary, is constructive and now requires detailed consideration.
Inland Revenue has already taken action on many of the recommendations.
Obviously the culture and operation of the department are capable of improvement, as are those of many large organisations.
In the time that I've been associated with the revenue portfolio, Inland Revenue has shown that it is capable of making major improvements -- as demonstrated, for example, in the vast improvement it has made to its management of student loan repayments.
To conclude, I am looking forward to being part of the Government for the next three years.
We have been a government of practical achievement in the tax area.
We have reduced tax rates.
We have introduced measures to simplify the tax system.
We have focused on improving the performance of Inland Revenue.
In the next three years we will continue to focus on reducing the tax burden, reducing compliance costs and improving the tax administration.
These are promises backed by past achievements.
The recommendations of the committee of experts has already concluded that the Government should continue to restrict the conditions that make tax avoidance possible by continuing its broad base, low rate policy.
Another committee to substantially review our tax system will be a waste of money.
It will tie up officials from undertaking any further reform initiatives, when we need to just get on with improving the current base by making it simpler and fairer.
And the most important component of this is lower tax rates.
Finally, I want to thank ICANZ.
In my fifteen months as Associate Minister of Revenue, and prior to that as the chair of the Finance and Expenditure Select Committee, I have very much appreciated the enormous contributions the Institute makes to improving the tax system.
I can assure you that your continued contribution will be welcomed by the next National Government.