nz reserve bank wants tax cuts + 1% land tax

smart man...


http://www.stuff.co.nz/business/51070

Grimes floats tax regime rejig
The Dominion Post Last updated 00:00 02/11/2007

Reserve Bank chairman and economist Arthur Grimes is proposing a $12 billion land tax, higher gst and slashing personal tax rates, but says the idea is "a personal one".

A 1 per cent a year land tax to raise more than $12 billion and raising gst to 15 per cent would allow for a cut in personal income tax to just 20 per cent, with low-income earners paying no tax.

Dr Grimes raised the idea at the Business Budget summit in Wellington yesterday.

Finance Minister Michael Cullen, also at the meeting, questioned how people would pay the land tax if they owned property that was not earning an income, but he would not comment further.

The idea to reduce the top tax rate from 39 per cent to just 20 per cent for people as well as companies comes less than a week after Reserve Bank governor Alan Bollard warned the Government against tax cuts.

Last week, Dr Bollard held official interest rates steady but targeted Dr Cullen for adding to inflation and risking more through tax cuts.

Dr Grimes said his idea would allow for zero tax on incomes up to $9500, 10per cent tax on incomes between $9500 and $38,000 and 20 per cent on all income above $38,000.

"This sort of tax structure would raise enough revenue for the Government to provide funds for existing social services, while encouraging people and firms to add extra value," he said.

A land tax combined with lower income tax and higher gst rates is a very appealing package, says former Reserve Bank governor Don Brash. "If the trade-off were a substantial reduction in income tax rates there would be a lot to commend it," said Dr Brash, the former National Party leader. "It doesn't surprise me, because Arthur Grimes is a very smart economist."

Westpac chief economist Brendan O'Donovan said: "Anything that helps flatten the tax system is going to be good to motivate people."

High tax rates were a disincentive to work and investment, and a drag on productivity. He favoured a flatter personal tax system with a higher gst rate to encourage savings and discourage consumption.

The downside of rates or land taxes was that there could be cases of elderly people being forced out of their homes in wealthy suburbs, he said. It could be a dampener on house prices, depending on how much of the tax could be passed through in higher rents.

A land tax could make life difficult for older people on low fixed incomes or for some farmers and Maori making small returns but sitting on valuable properties.

Dr Brash said if people were "asset-rich and cash-poor" they could sell some of their assets or borrow against them to pay the tax.

Dr Cullen confirmed yesterday that personal tax would be "addressed" in next year's Budget, and stressed he was not "ideologically opposed to tax cuts".

He ruled out borrowing or cuts in government services to pay for tax cuts. Taxes would not be cut in such a way to make inflation worse or lead to greater "inequalities".

Dr Grimes said his idea would encourage investment in human capital, new plant and equipment, and research and development. It would also encourage high-value activities to locate in New Zealand.

Reserve Bank officials had no comment on Dr Grimes' proposal.

The summit was attended by 80 senior executives and observers.