NZ needs tax reform, including capital gains tax, Whitehead says

Wednesday 3rd June 2009

Tax reform should be an urgent government policy priority, and include consideration of a tax on capital gains from investment property and a higher rate of GST or other consumption taxes, says the country's top economic adviser, Treasury Secretary John Whitehead.

"At the risk of being chased down by an angry crowd with pitchforks and flaming torches, yes (tax reform) should include consideration of moving the boundaries to tax more capital gains – for example on investment property - and shifting more of the tax base towards consumption," said Whitehead in a speech on steps New Zealand will need to take to improve its relatively low earning capacity.

Finance Bill English was aware that Whitehead planned to make te remarks in what has traditionally been a highly contentious area because of fears that any capital gains regime could extend to the family home. New Zealand's recent past has seen over-investment in residential property, including investment properties, at the expense of more wealth-creating, but riskier capital investment in productive, tradeable sector activity.

Whitehead concentrated on the importance of improving the share of economic resources available to the tradeable sector, particularly export and import-substitution activity.

High personal tax rates compared to other countries was a particular disadvantage for New Zealand because of the country's highly mobile labour force, with the second highest propensity to migrate in response to economic conditions in the OECD.

"Our tax system should be encouraging investment to keep coming here and skilled people to keep staying here,” Whitehead said. "Unfortunately that doesn’t appear to be the case at the moment. A key priority has to be reducing effective marginal tax rates and increasing the rewards for effort.

“There is a growing view that the high mobility of our skills base means high personal income taxes are especially harmful for New Zealand’s growth and productivity," Whitehead said. Greater reliance on consumption tax – aligned with reduced income and corporate tax rates – should help strengthen incentives for savings.

There was also growing evidence that productivity is being held back by high corporate tax rates, New Zealand’s company tax rates and pressure would grow if the current review of Australia’s tax system brought company tax cuts there.

"An hour worked in New Zealand still produces approximately 30% less output than an hour worked in Australia and indeed 40% less than an hour worked in the United States,” he said. "If we aspire to the same standards of living, healthcare and education, we will need a significant increase in our productivity to close the gap between us and the Australians and Americans," he said.

Businesswire.co.nz

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