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Medium Term Tax Policy Challenges and Opportunities Background Paper Prepared by the Treasury for the New Zealand Tax Reform - Where To Next? Conference

Issue date: 
Wednesday, 25 February 2009
Corporate author: 

The Treasury has released a background paper prepared by the Treasury for the February 2009 tax conference "New Zealand Tax Reform - Where To Next?" run by the Centre for Accounting, Governance and Taxation Research (CAGTR) and the Institute for the Study of Competition and Regulation (ISCR) at Victoria University of Wellington.

The conference was run with the support of the Treasury and Inland Revenue and was held at Rutherford House, Wellington, 11 to 13 February. Other papers and abstracts from the conference are available on the CAGTR website's Tax Policy Conference page.



This document is available in Adobe PDF format only. An HTML version can be supplied on request by Information Services. The Executive Summary is reproduced in HTML below. Using PDF Files

Executive Summary

  • Our tax system is basically sound and generally performs well by international standards. However our increasing integration into the global economy, especially Australia, is putting greater pressure on the NZ tax system.
  • These pressures are best addressed through a strategy of incremental reform towards a clear long-term vision for the NZ tax system.  This would have a number of advantages including: guiding each step in a series of tax reductions, introducing more certainty and clearer expectation around the direction and motivation for change, and establishing a debate focussed around medium-term strategy rather than immediate issues.
  • The international dimension is crucial: our tax bases are becoming more internationally mobile.  New Zealand probably has the most internationally mobile labour force in the OECD, and we have very high levels of inward investment.
  • Two emerging concerns are:
    • Relatively high effective personal marginal tax rates including abatement of tax credits (exceeding 50% for many households).
    • Very different marginal tax rates applicable to different investment types, distorting investment into tax-favoured vehicles and generating tax-motivated incorporation.
  • We consider that, from an efficiency and productivity growth perspective, the highest priority is to reduce this disparity, first by cutting the current top personal tax rates.
  • A broader programme of rationalisation of income tax rates and base broadening (including taxing capital gains) would likely offer greater productivity gains than rate reductions alone.
  • Aggregate measures of the distribution of income are relatively insensitive to changes in tax scale design. Transfers have a far bigger impact on these aggregate measures.  Net taxes (taxes less transfers) are negligible or negative for the bottom half of households ranked by income.  Therefore suitably targeted transfers (and base broadening measures such as capital gains taxation) are more direct means of delivering equity objectives.
  • Average corporate tax rates in the OECD continue to trend down, and NZ’s 30% rate is relatively high, with small OECD countries having an average company tax rate of 26% in 2008.
  • International pressures to reduce our corporate tax rate further are likely to intensify. Finding a suitable balance between (lower) corporate rates and a compatible set of personal tax rates in the medium-term will be crucial for revenue-raising and economic efficiency.
  • Demographic factors - in the form of population ageing - will become more important over the next 20-50 years with more taxpayers relying on (untaxed) pensions and consuming a greater fraction of their incomes.
  • The above factors suggest longer-term gains from moving towards a tax system more heavily weighted towards consumption taxes and examining the feasibility (over a longer horizon) of a greater contribution from property taxes.

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Last updated: 
Wednesday, 25 February 2009