Home' acuity : Acuity Sept 14 Contents Broader tax base
Successive New Zealand governments
have sought to maintain a broad-base
low rate (BBLR) approach to the tax
base. They have done so in the belief
that such an approach promotes
fairness, economic efficiency
and revenue integrity, and keeps
administration and compliance
"It is hard to argue with such an
approach or to ignore its success.
However, governments also need to
focus on the sustainability of the tax
base," says White.
Tax makes up a relatively large
proportion of New Zealand's GDP. In
2012, personal income tax was 12.4%
of GDP (considerably higher than
the OECD average of 8.7% and the
Australian figure of 10.4%). In the same
year corporate tax was 4.4% of New
Zealand's GDP, nearly one and a half
times the OECD average of 3%.
In the 2014--2015 year, nearly 60% of
New Zealand's tax base is forecast to
come from personal and corporate tax.
"In our view, New Zealand needs to
rely less heavily on personal income
tax and corporate tax in the medium to
longer term," White says.
The 2010 tax reform package shifted
the New Zealand tax base further
toward consumption by increasing the
goods and services tax rate from 12.5%
to 15% and reducing personal marginal
However, the extent of the country's
continued reliance on the essentially
mobile personal income tax and
corporate tax bases raises questions
about the sustainability of the system.
"Pressure on the tax base will
increase as the number of retirees grows
and as government spending increases,"
says White. "An ageing population
places more demands on the tax base
and greater pressure on a smaller
proportion of the population to fund
"If these issues are not addressed it is
inevitable that the tax base will need to
be broadened or the rates increased."
Base broadening options that have
been mooted include the introduction
of a capital gains tax, a low-rate
land tax or property tax, a wealth
tax, financial transactions tax, and
measures targeted at specific activities
such as residential rental property.
"The tyranny of distance, didn't stop
the cavalier. So why should it stop me,"
sang Split Enz in Six Months in a Leaky
Boat. The song has been described as
an alternative national anthem because
of the way it captures distance as a key
part of the New Zealand psyche.
But the distance is a lot less
tyrannical than it used to be.
"As New Zealand increasingly looks
to Asian markets, over its traditional
Western markets, the distance to
markets is shrinking rapidly. Over the
past 50 years the distance travelled
by New Zealand's top 10 exports has
halved," says White.
According to the McKinsey Global
Institute, China will be the centre of
the world's economy by 2025 -- a centre
surrounded by the highly developed
economies of a resurgent Asia.
"As China and South East Asia
urbanise and become larger consumer
economies, there will be greater
opportunities for New Zealand. Exports
and tourism will increasingly refocus
to these newly emerging economic
powerhouses. They are hungry for
commodities and experiences. They
will also want to invest in businesses.
"If New Zealand is to capitalise on
this shift, governments will need to
prioritise diplomatic and trade efforts
to the East."
The paper highlights the potential
of direct trade agreements with Asian
partners to deliver market access.
It notes that large and complex
multilateral agreements (such as WTO
rounds) are proving very difficult
to agree on, and even harder to
implement, while bilateral and smaller
groups of negotiating parties are
"New Zealand may need to give
a lower priority to multilateral
institutions and work at bringing
something useful to the table in
smaller negotiations. We advocate the
government maintain a nimble and
Business owners and managers will
also need to focus on reaching Asian
markets if the strategy is to succeed.
"If this strategy is to work, we must
learn how to do business better in
Asia," says White.
New Zealand's stability gives our new
government -- however constituted --
the opportunity to invest now for the
future, according to White.
"Politicians should take advantage
of New Zealand's current economic
stability to invest in critical
preventative measures for the future.
"Investment in infrastructure
to mitigate the potential effects
of natural disasters will cost less
than recovery efforts. Likewise,
investment to support disadvantaged
children will reduce potential future
expenditure on social assistance
and increase social inclusion. Early
investment to address this issue is
money well spent.
"There are also tough decisions to
be made about compulsory saving and
how to manage the ageing population
-- decisions that will help to create a
sustainable and resilient economy." •
acuity | SEPTEMBER
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