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Tax reform: Kiwis 3, Aussies NIL

Luke Malpass | 04 June 2010
Imagine the unimaginable. The Australian and New Zealand football teams play off in the World Cup final in Johannesburg in August. Who would emerge the victor? Well, as a Kiwi, I hope ‘my’ team would emulate the performance of the New Zealand’s government, which is outstripping its Australian counterpart in tax reform. On lower tax, simplicity and efficiency, it’s 3-nil to the Kiwis.

The Key government’s first budget has cut all income tax rates and reduced corporate tax by increasing GST by 15% and tightened tax rules, especially those regarding real estate.

The cuts to the personal tax rates went deeper than expected and are designed to restore integrity to the tax system. The reductions also reflect the government’s conviction that growth and efficiency, not redistribution, are the basis of good tax policy.

New Zealand’s budget tax reforms may seem a bit tame for some locals, but it is radical compared with what the Rudd government is doing with its proposed resource super profits tax. Aussies are inexplicably averse to increasing their GST and getting rid of frivolous exemptions. This is surprising given that by raising the GST to 12.5% and cutting exemptions, the government would have a highly effective revenue-raiser and could do away with most of the 115 economically damaging taxes, which raise only 10% of government revenue in any case.

In New Zealand, the top income tax rate (for earnings greater than $70,000) and trust tax rate will be aligned at 33% from next year to help minimise tax avoidance. This still means a 5% gap between the company and top personal income tax rates. More cuts in the income tax and trust rates are needed to level off avoidance incentives.

Nevertheless, the Key government has been quietly creating a tax system conducive to growth and foreign investment without penalising higher earnings. By contrast, the Rudd government has tended to make inflated claims about weak and higher taxing ‘reform.’

Luke Malpass is a Policy Analyst with the Centre’s New Zealand Policy Unit.