After yet another big budget surplus, Finance Minister Dr. Michael Cullen announced at the end of last week a long-awaited business tax review. If the planned legislation goes ahead we will see the current 33 per cent business rate drop to 30 per cent. The proposed cut is a major step in the right direction for a government operating on economic ideas older than many of its MPs, and will provide a necessary boost to the small New Zealand owned firms that make up the bulk of our employers.
Nor does the good news end there. With the proposed tax cuts providing the private sector with a little more short run flexibility, National Party leader John Key has announced the Party’s intentions to restructure income tax if National is elected in 2008.
Currently middle and low income earners continue to face a heavy tax burden while they receive cash payments from the government in the form of family assistance and other benefits. Sociologist Peter Saunders has coined the process ‘churning’, and considers it to pose a major sociological and economic problem. By playing middleman on welfare issues, the Government creates state dependency and damages earning incentives.
”The original welfare state operated like Robin Hood,” he says, “taking money from the rich and using it to help the poor. But the modern welfare state operates more like a giant piggy bank, taking money from ordinary people and then giving it back again.”
As New Zealand struggles to compete with Australia on wages and salaries across the income spectrum, it is becoming increasingly clear that we’ll have to compete on tax instead. With our high dollar and over-sized current account deficit revealing the strains of nearly eight years of high Government and private expenditure, Key’s announcements can be seen as a potentially welcome relief, particularly for middle and low income earners.
Cullen’s announcement is also a big step in the right direction, though in light of his new-found wisdom I still have a question for the honourable minister.
Why only a three cent company tax deduction? Countries throughout Asia have realised the benefits to new business and employment growth of keeping the corporate rate low, Ireland is now joining them to lead the way for the EU with its low business rates of between just 12 and 16 per cent. Ireland has steadily outperformed its trading partners, moving from a conflict torn backwater to a world class economic performer at a remarkable pace. New Zealand too, with some more inspired thinking from the top, and a more responsible approach to state spending, could reap the rewards of low rates, regenerating lost income and tackling our current account deficit with a requisite rise in GST.
Many students already pay tax on their earnings, and all of us will in the future, so it is important that we factor the Government’s fiscal responsibilities into our political thinking. The recent series of announcements mean good news for now, and with the prospect of a new National Government next year, even better news is to come.