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Dr Muriel Newman

Tax Competition

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Finance Minister Bill English says tax cuts will begin taking effect from 2017 – conditions allowing – by which time a National Government will have $1.5 billion a year free cash to allocate both to those cuts and also to debt repayment… Of the $1.5 billion set aside by 2017, Prime Minister John Key said about $1 billion would go to tax cuts, while the rest would go towards debt reduction.”
– New Zealand Herald, September 8, 2014

What will be in Thursday’s Budget, is a question that is on the minds of many New Zealanders.

National has long promised tax cuts once the books return to a surplus – as a pathway to stronger economic growth and higher living standards. With the Government on track to achieve a full-year surplus of at least $1.8 billion in the Budget, the time is right for them to keep their promise.

The current rates of income tax were set in 2010. At that time, rates were reduced from 12.5 percent to 10.5 percent for income up to $14,000; from 21 percent to 17.5 percent for income between $14,001 and $48,000; from 33 percent to 30 percent for income between $48,001 and $70,000; and from 38 percent to 33 percent for income over $70,000.

Contrary to opposition claims that higher income New Zealanders don’t pay their ‘fair share’ of tax, Treasury figures show that the 17 percent of Kiwis in the top tax bracket pay 60 percent of all of the country’s income tax.

The problem, however, is that over the years wage growth and inflation have pushed many families, who aren’t any better off in real terms, into higher tax brackets.

‘Bracket creep’ or ‘fiscal drag’, as this is called, is responsible for adding over $1 billion to government income tax revenues this year. With just over 2 million New Zealanders in paid employment, that amounts to a cost for the average Kiwi worker of over $500 more in tax a year than when the rates were first set.

When Labour was in Government, the National Party complained about bracket creep, but even though they have now been in Government for eight years, they still haven’t fixed the problem.

It’s time they did so, by automatically linking income tax bracket adjustments to inflation.

Last year’s Budget documents showed that Core Crown expenses were forecast to fall to 29.7 percent of all economic activity (GDP) in New Zealand this year and stay under 30 percent thereafter.

This is a commendable turnaround. While in 2004 under Labour, core government spending amounted to 28.9 percent of GDP, as a result of a spending spree during their last term in office, along with the impact of the global financial crisis and the earthquakes, core government spending ballooned out to over 34 percent of GDP in 2011.

While National’s spending constraint is paying dividends, they should not lose sight of the bigger picture. In 2009, the Government’s 2025 Taskforce, which was convened to recommend ways of closing the income gap with Australia, reported that if core Crown expenses were reduced to 29 percent of GDP, then the higher personal, company and trust tax rates could all to be reduced to 20 percent, with no-one paying more tax. What a boost that would give to families and to the economy! 

However, the long-term goal of Government should be more ambitious, namely to cap public spending at 25 percent of GDP. That was the level of spending that for decades underpinned the strength of the Australian economy, resulting in wage growth that outstripped New Zealand’s by over 35 percent – that is, until the global financial crisis led to the collapse of the once-buoyant mining sector, resulting in a blowout in spending and a major economic downturn.

The point is that since governments don’t create wealth but consume it, they need to be constrained. If the government is too big, it crowds out the private sector and squeezes economic activity. That’s why some prosperous nations like Hong Kong, have capped government spending – in their case at 20 percent – to ensure that it is wealth creators, not the government, that dominates their economy.

Taxes on wealth creators here in New Zealand, have been reduced over the years. In the 1980s, company tax was lowered from 48 percent to 33 percent, giving the country a distinct competitive advantage by ranking us well below the OECD average of 40 percent.

Other countries however, followed our lead, and around the world, corporate taxes started to fall.

In 2007, the Labour Government reduced company tax from 33 percent to 30 percent, with the current 28 percent rate set by National in 2010.

At that time, then Finance Minister Bill English, said, “The government believes that in a world of mobile capital, business income is particularly sensitive to tax rates”. He noted that “company tax rates show strong downward momentum around the globe”.

In fact, even though our rate had just been reduced to 28 percent, it was still higher than the OECD average of 26.3 percent.

In 2015, the downward trend for company tax rates accelerated as governments around the world emerged from the aftermath of the 2008 global financial crisis and began using tax policies to aggressively chase GDP growth. Japan, Spain, Israel, Norway, Estonia, Italy and the UK were amongst the countries that reduced their corporate tax rates. 

As a result of global tax competition, company tax rates around the world continue to fall, with New Zealand’s 28 percent rate now one of the highest in the OECD. Only six other countries – the US, France, Belgium, Mexico, Australia and Greece – have corporate tax rates that are higher than ours, and almost all of these are planning reductions.

Both Belgium and Greece are considering lowering their rates – in Belgium from 34 percent to 20 percent, and in Greece, from 30 percent to 24 percent.

France’s new President Emmanuel Macron has promised a reduction in corporate income tax from 33.3 percent down to the European average of 25 percent.

In this month’s Australian Budget, Treasurer Scott Morrison announced a reduction in their company tax rate from 30 percent to 25 percent. 

And in the US, President Trump has signalled an aggressive cut to the company tax rate from 35 percent to 15 percent. This measure is part of an overall package designed to simplify the US tax code, as this week’s NZCPR Guest Commentator Professor Richard Epstein of the New York University Law School explains:

“The Trump administration has revealed a one-page tax plan that, if implemented, could have vast consequences for the economy of the United States. The high points of that plan are simplification and repeal. 

“The brackets go down from seven to three – 10%, 15%, 35%. Corporate tax rates are slashed from 35% to 15%. The standard deduction is doubled to about $24,000, removing large numbers of low-income people from the rolls. The plan has drawn enthusiastic support from conservative commentators and withering criticism from Democrats. Where does the truth lie?

“Any successful system of taxation must juggle three separate ends. The first is to impose as little drag as possible on economic productivity. The second is to minimize compliance costs for both the government and taxpayers. The third is to introduce some measure of distributional equity among taxpayers in light of the diminishing marginal utility of wealth – an additional dollar of wealth produces more satisfaction for the poor than the rich.”

Through these tax changes, President Trump is hoping to become “the greatest job-producing president in American history”. He expects the dramatic cut in company tax will “unleash American ingenuity here at home and make us more globally competitive”. This would put the US rate “at 10 percentage points below China and 20 points below the current burdensome rate that pushes companies and jobs offshore”.

The President’s changes will also put the US rate a full 13 points below the tax rate that Kiwi businesses have to pay – adding to the barriers that already face New Zealand exporters as a result of our small size and isolation.

Along with the US and Australia, the UK too has signalled its intention to further cut company tax rates from 19 percent to 17 percent, exacerbating the trade disadvantage our exporters will face.

With New Zealand’s high tax burden a potential barrier to investment and company growth, it’s time National stepped up and replaced words with actions by lowering company tax to proactively attract business and investment to this country – we simply cannot afford to risk losing investment to Australia, the US, the UK, or other lower-tax jurisdictions.

The case for reducing company taxes is being made in countries around the world: by reducing the costs of doing business, lower company taxes are increasing international competitiveness, encouraging economic growth, raising living standards and increasing job opportunities. Lower company tax incentivises investment, workforce participation and entrepreneurship.

With the global movement of capital increasing exponentially, and the governments of most other countries lowering company tax rates to attract international investment and ensure their business sectors remain competitive, New Zealand is now falling badly behind.

Reducing the company tax rate for businesses in next week’s Budget would deliver a huge boost to jobs and investment by sending a much-needed green light to investors at home and abroad that New Zealand is competitive and open for businesses.

And for the critics, reducing company tax does not result in a loss of revenue in the long term, as the incentive effects of lower taxes broadens the tax base by boosting economic growth and creating jobs – resulting in increasing tax receipts for the government.

This stimulus effect has been shown in Canada, where the federal corporate tax rate has fallen from a high of 38 percent in the mid-1980s to 15 percent in 2012. Tax revenues today are higher than when the rate was more than double.

In fact, in 2015, Canada’s 15 percent federal corporate tax raised 3.1 percent of GDP, while in the US, their 35 percent federal corporate tax raised just 2.2 percent of GDP. Thus, Canadian corporate taxes raised relatively more than in the US – even though their rate is less than half the US rate.

Similar evidence comes from Britain.  In the 1980s when their rate was 52 percent, corporate tax receipts yielded revenues equivalent to 2 percent of GDP. Yet with the corporate tax rate reduced to 19 percent, in 2015 over 2.4 percent of GDP was raised.

The blunt truth is that the company tax rate in New Zealand is too high. In 2014, while the average ratio of company tax to GDP in the OECD was 2.8 percent, in New Zealand, the rate was 4.3 percent. This was the fourth highest behind Chile on 6.6 percent, Australia on 4.7 percent and Norway on 4.4 percent.

Looking at the OECD figures in a different way, in 2014, 13.2 percent of the total tax revenue raised by our government was company tax, streets ahead of the OECD average of 8.8 percent, ranking New Zealand as the fifth highest, behind Chile on 21.3 percent, Norway on 17.1 percent, Mexico on 16.9 percent, and Australia on 16.8 percent.

With our major trading partners such as Australia, the UK and the US all planning cuts to corporate taxes – and countries like Ireland taxing corporate trading profits at only 12.5 percent, and Singapore taxing businesses with an income of up to S$300,000 at only 8.5 percent, with 17 percent thereafter – many companies are now proactively shopping around for jurisdictions that will enable them to maximises their trading returns.

As an export based economy, it is imperative that we remain internationally competitive. That includes having a tax system that is at least as accommodating as our trading partners.  


Should National reduce taxes in the Budget? 


*Poll comments are posted below.


*All NZCPR poll results can be seen in the Archive.

Click to view x 120


Tax thresholds should be aligned with inflation. Brian
Shift those tax margins out and take the tax off our basic food purchases – oh no, that’s too hard – funny how other countries are able to do so….. GST on rates are another example of how we are being ripped off – tax on tax – oh no, rates are a levy, not a tax….. Carolyn
Your Article shows that reducing company tax increases the Counrty’s GDP Go for it National. Lloyd
Of course not! Its simply another layer of indoctrination, leading to racial division in our country. Hugh
If you earned it you deserve more of it, you ae going to spend it anyway. Clark
Only if the budget allows, how about more spending reform. Simon
Sure they should reduce taxes but as everybody should be aware of is the fact that promises to reduce taxes are a worn out tool to catch votes on the day ( and the ordinary Kiwi is stepping into the same trap every time). And a fact is that – once tax reductions have been put in place we can be sure as hell that Govt is always finding little ways to claw back these reductions and we are all back at square one. Besides I am a bit surprised that Muriel has not mentioned that Maori owned companies ( called Maori authorities in IRD language) are paying only 17,5 % company tax and often enough claim Charitable Trust status for commercial enterprises ( I e Ngai Tahu and their Shotover River jet boat operations is a prime example for this ) meaning that they pay no taxes whatsoever. So again we have a well established Apartheid system even in the IRD .Which is nothing else a part of redistributing wealth from the many to the few. Michael
Yes, and I’m pretty sure they will. At the same time I would like to see them start getting our overseas dept down too. Eric
The national govt. has promised to lower taxes for years, it’s time they acted instead of their usual promises & talk but NO action. Cindy
National Party continuing to lie and manipulate maori cunning attack on our laws and takeover for racist control.Wake up NZ. Lance
Our governments have for years have practised the wait and see attitude. It is about time they started thinking about us first. Dennis
They should abolish taxation and finance their dreams by commercial activity. K
There needs to be one form of tax and one form of citizenship ie: New Zealander. Monica
Its nice to be able to control where my money goes, instead of it being wasted on the socialist whims of politicians. Sal
Let them follow Donald Trump’s lead if they hane any fortitude. Craig
We pay enough gst, the taxes should be reduced, low incomes should be tax free. Carolyn
The only way we can compete with the rest of the world. Bryan
As the older generation we are finding it hard to cope so a reduction in tax would be good. Richard
Yes we need to be competitive on an International basis. Steve
Lower taxes mean more money in people’s pockets, which in turn means more spending – money goes round and round. Sheila
NZ Herald over 20 years ago published a brilliant editorial about how high taxation stifles innovation. Get rid of disincentives Now! Anon
Work needs doing to make tax takes fairer. eg huge multinationals seem to pay little NZ tax. Ross
No objection to tax cuts but would like to see debt levels reduced also. John
Reduce the taxes and compensate the monetary take by saving payouts in other areas , ie../ eg [ one of many ] make it compulsory for all people to have personal health insurance , and if all subscribe to this it will be affordable, and release the burden to the tax payer. Roy
The more revenue the government gets the more it can spend on jog creation and nessesary humanytarian programmes like hospitals, infrastructures eldercare &education etc etc Theodorus
Yes, definitely. The bigger the cut the more wealth is produced that can be taxed to pay off the debt. To do the job properly and completely, government spending must be cut as well – and keep doing it. More wealth creation leads to more jobs and there is everything right with that. Don
Your article says it all Muriel. Company tax needs to be reduced. 15% would transform this country. If however the Nats try to buy votes after their disaterous recent legislative efforts and reduce mainly income taxes this would be a real opportunity missed and a dead give away that they are scared of Winston. Ronmac
Remember 50% of govt spending is wasted, they like nothing better than unproductive spending…..here there and everywhere have you noticed, to the conservative thinker…never where it should go!!!!! Wayne
Lower taxes for under 25000net income. John
More money is needed from Govt for social housing, health & for conservation to name just a few. Philip
Far more productive for New Zealand than unemployment benefits and some ‘settlement’ payments. Stuart
Certainly makes sense to at least reduce the company tax rate, to stay competitive. Although if they do that the voters would want some tax break as well. Andrew
The vacuum caused by the tax cuts will soon be filled with increasing prices.The tax cut will solve nothing. Dave
Yes. And stop giving chunks away in yet more “full and final” settlements. Mark
It’s time. Martin
Yes but not at the expense of other sectors such as health. A lot of smart people have tried to make the government imposed budgets work but it is clear that insufficient money is available as people needing surgery are unable to get it and figures are fudged to meet budget targets. These DHB’s aren’t able to concentrate on the service area because their energy is being focused on meeting budgets. If there are cuts it should be company tax cuts first as they drive the economy. Mike
I see no point in reducing taxes when our hospital service is limping along. George
Should National reduce taxes in the Budget? I have voted No on the grounds that any surplus from this budget should be used to reduce the Government total fiscal deficit. Not I grant a popular concept, in a New Zealand society committed to spending and with a poor savings record. There is of course the valid argument that unless Government it self reduces its own spending then our total debt will continue to grow and become an albatross around our descendants. Even to the extent of sending this country down the debt ridden pathway which now envelopes Greece! The main problem lies squarely with the largest business in this country namely our ever expanding bureaucracy. Any budget should incorporate at least a commitment to reduce our bureaucracy by 10% yearly. The trouble with any Government decision in an election year is that the budget is the mainroad to power, paved and loaded with promises of more and more goodies. It is a doctrine of success that spin doctors use for any Political Party; and the Party which ignores this advice will end up on the opposition benches.  Brian
Yes particularly mum and dad bank investors who are being taxed twice. Peter
Any help to a superannuitant such as myself would be most welcome. John
The middle and lower income group are paying too much income tax and when this is added to by GST this group are very heavily taxed. many of the so called charities which don’t pay tax should now be taxed. Many such as Ng Tahu and Sanitarium are commercial enterprises.. Graeme
The international figures speak for themselves. If we want to remain competitive in a global environment, company taxes must be reduced for the sake of our economy. Laurence
Not only should they reduce tax rates, they should also cap the percentage of tax they can suck out of the economy. I would suggest 20% should be the maximum the government can extract in order to maintain essential services. They should also start getting rid of all these unnecessary Ministries, such as Womens Affairs, Childrens Commission, Race Relations Comission etc,etc,etc. Get rid of the blood sucking wastage that is rampant throughout Government. A more Singaporean structure would see New Zealand thriving beyond anyones imagination. Dianna
Yes of course, as well as quitting ALL of the handouts to part maori grouosand all other social bludgers. James
Better idea would be to raise wages for the lower income earners. I am a well off person that would not benefit from this. Charlie
aus first $18000 tax free. John
A few suggestions; no tax paid on the first $14,000 earned. Increase GST to 20per-cent, so those who cannot afford to spend, pay even less tax. Not against lowering corporate tax, but a large proportion of our countries businesses are small family businesses who provide important services to their local communities, yet always seem to be stuck in the middle when it comes to tax relief, & are the ones hit hardest by increasing government imposed compliance costs etc. This is why corporations are becoming stronger at the expense of small business.. A.G.R.
NZ taxes should be simple, easily understood and the multipicity of benefits and tax layoffs abolished. Introduce a ‘turnover’ tax with the only deduction being wages and salaries. No loopholes, nowhere to hide. Maureen 
Perhaps tax brackets could be adjusted but existing tax rates generally look fair and reasonable. ROB
Yes, so long as it stops wasting our tax money on race-based policies & practices! Cyril
They should also get rid of provisional tax. Tax should only be paid after the money has been earned. Don
Taxes should definitely be reduced by National, it would help cover the cost of living. Nancye
Of course it should. We are one of the highest taxed countries in the world. Graham
Start looking at tax cheats, we know who they are. Ian
Of course, obviously !! It is required to kick-start the NZ Economy for the betterment of all New Zealanders!! Pierre
Really annoys me when I hear about plans to curb the incomes and profits that landlords and “speculators” earn. Surely they are providing a service and helping to increase the rental housing market out there? Also, they take all the risks of what could happen to their rental house/s. So they are running a business, and as for any business, they are not there to make a loss!!! So yes they should reduce taxes, but I believe they are also looking at reducing business tax levels? We will see if that happens. But also, they are looking at ways to reduce income from rents by landlords? Surely owners of rental properties should be treated like any other business, and encouraged. Neil
The overseas evidence speaks for itself. So just do it and don’t pussy foot with the cuts either. Kevin
Reduce taxes and cut spending, rather simple I think. John
And completely restructure the total taxation system. Peter
And they should make sure the tax brackets are adjusted each year for inflation. No special tax breaks for Maori corporations – that is separatism. Nigel
The 17.5% should be extended to $60000, a new rate of 22.5% from $60001 to $90000 and the top rate reduced to 28% from $900001 Robert
Be pro-active. David
Of course! Bryan
yes Owen
In the international market, it makes a great deal of sense to do like other successful countries. Paul
With taxation, it is not a question of how much the govt will get but rather when it will get it and from whom. With higher taxation the govt receives more quickly but less later (and less GST) because people have less to spend so businesses have less turnover and hence pay less tax. A lower tax rate allows people to spend more in the private sector and hence businesses make more profit and pay more tax (and GST), or are able to employ more people and pay their employees more so they pay more tax. The more hands the money passes through before it is claimed by the tax man the more benefit there is to people and communities. Alan
We need to drain the the swamp as it is now almost become a river. the welfare budget just keeps on rising there will be a day of reckoning when this will have to stop. Les
There is sufficient evidence to support the introduction of a lower flat-tax rate, including a much reduced company tax rate. Such an action is shown to stimulate economic growth to the benefit of all. Michael
We should have a minimum income tax free level of $20k per individual to increase a larger level of expenditure in the market place. Ian
To encourage to economy to prosper. Linda
It has long been proven, that when companies are not taxed to death, the productivity of the country as a whole , increases. The surplus that National has , needs to be used to repay debt, ie Christchurch Earthquake. Neville
Share the wealth. Sheena
Time they did! Jim
More money is needed for infrastructure. David
And reduce considerably the handouts being made to those who shy away from work and the likes. Tom
On corporate and lower income levels only. Rates should be increased dramatically on those executives who are paid (often unearned and unmerited) salaries and other rewards of, say, $1.5. No one except those who create wealth by their own innovation and effort can truly be said to be capable of EARNING more than that in the time they have available to them. Alan
Maybe in a year or two – but this budget given small surplus. Graham
Basic economic common sense. They forget about other taxes stifling our economy. Eg: GST,ACC,ETS,FUEL etc Overall we have one of the highest tax rates in the world and we actually pay people to have babies and not to work. We need to bring in drug testing for beneficiaries and compulsory depro provera injections where women on the DPB have BABIES and then have them taken off them into state care because they are unfit mothers. Greg
…..tax is legalised robbery in anyone’s lifetime and continues after your passing…. Chris
Way back in the early 1960’s President Kennedy said if you want to increase the total tax take lower the tax rates people pay. While this may seem a contradiction the reason it works is that it is more worthwhile to work. So more people harder and keep more of their money they have earned them selves. In the 1980 when I worked as an accountant to give me a $1 a week extra they had to pay me $3 and the other $2 went to the Government to waste on anything they thought would gain them votes. Once Roger Douglas cut the top tax rates from 66% to 48% it was much more rewarding to work harder. New Zealand has slipped from 3rd richest country in the world per head of population to about 26th or even as low as 42nd. where as Singapore with low taxes, small government and tough laws has gone from having half our income per head of population in 1962 to double in 2015. Winston Churchill once said trying to tax your way to prosperity is like a man standing in a bucket trying to lift himself up by the handles. God help us if the Idiot Labour and Greens are elected as the government on September 23rd as they will spend like crazy on projects that will stuff the country. Colin
Particularly company tax – offset that with a boost to the minimum wage. Make it worthwhile working. Doug
Their are a lot of things that need to be run by our TAX’s. So just keep the tax were they are for now. The big thing is to keep the cost of living down. Big companies getting rich. Robert
No need to continue as high as the current levels. Kevin
Maybe we should follow Donald Trump and attempt to increase New Zealands work opportunities for all New Zealanders. Paul
And stop TOW payouts. Colin
There is a level of spending coupled with inflation that this govt. has to do so no. Graeme
As stated we are a small country with only 2mil in work. There are thousands of NZ citizens waiting for cataract surgery which is even now not done until they are almost blind. And waiting lists for all but urgent surgery is disgusting. With less tax money the situation would be worse. Kiwis would be going to Africa for eye surgery. Liz
We have far too many taxes in New Zealand. Brian
By all means shift the tax brackets and lower company taxes. Tim
If you get a tax cut will Guarantee they will get it back in my life time tax cuts have never been beneficial aways fish hooks. Russell
And retain other taxes such as energy/fuel tax the same. I would predict over a decade enterprize would ramp up and turn over and GST taxes would even out the changes. The best thing being the reduction in personal tax will greatly incentivize the workforce to work and as costs and charges even out to reflect teh new pattern, the community cost of welfare can be pushed down as full employment opportunities are dominant. The current system is just a long slow road to impoverishment and it not advancing anyone. Richard
Taxes are the biggest disincentive to investment and job creation. Frank
We have always been overtaxed, with many taxes on taxes. I think Bill English will be a disaster for National. I wanted Judith Collins. Who would ever want any finance person to be a PM or leader of anything. Boring Bill is living up to my expectation. I am underwhelmed!! I will vote for Winston this time. Rick
Fiscal creep should be liked to inflation. A flat tax introduced and company tax lowered to rival the best in the world. Willy
Cut but not at the expense of public facilities for the greater good of all citizens. Ray
Absolutely there should be tax cuts – they have promised them often enough. Andrew
National have become so weak that they are not even repared to make the case for tax cuts. Instead they are being cowed by their critics. Pathetic really.  Jenny
Of all parties, National should know the benefits that flow from tax cuts – especially company taxes. In fact, they should be reducing government spending to 25% as Muriel has suggested, and introducing a low flat 15% tax. Now that would really get the economy pumping!  Tony
The money we earn is better in our pockets than being wasted by the politicians in Wellington. Brian
Yes to tax cuts across the board – and about time!  Dan