Taxation (Annual Rates, GST, Trans-Tasman Imputation and Miscellaneous Provisions) Bill

I move, That the Taxation (Annual Rates, GST, Trans-Tasman Imputation and Miscellaneous Provisions) Bill be now read a second time. The Finance and Expenditure Committee has considered the bill and reported it back to Parliament, making a number of recommendations on the proposed legislation to ensure it works as intended.

One of the major features of the bill is the introduction of GST reforms resulting from the Government’s extensive review of the legislation. The bill introduces a reverse charge mechanism to remove a distortion in favour of imported services, which at present do not attract GST. New Zealand service providers who must charge GST on services supplied in New Zealand face, therefore, a competitive disadvantage as a result.

The committee has recommended a change to improve the consistency of treatment for branches and subsidiary companies. This will ensure that the reverse charge applies in all cases where imported services are consumed within New Zealand. It has recommended narrowing the scope of the reverse charge, so that the supplies of an imported service that would be zero-rated had it been made in New Zealand and consumed overseas will likewise be zero-rated. This will ensure that the reverse charge does not tax consumption overseas.

The committee has also recommended changes to make it simpler for recipients of imported services to claim import tax credits and to ease the introduction of the new measure. Another major reform introduced by the bill is the alignment of the GST treatment of the financial services sector with that of other sectors. When GST was introduced, financial services were exempt because of the difficulty of including them within the rules. This means that the finance sector cannot recover GST on purchases relating to the supply of services to other businesses, which is a distinct advantage for the sector. The proposed solution is to make financial services supplied to the registered businesses subject to GST, but to zero-rate them. This means that financial services will still not attract GST, but providers of those services to other businesses can recover GST on related purchases. To reduce compliance costs, the committee has recommended that providers of financial services be required to elect into the new arrangement, rather than elect out, as originally proposed. This means that participation will be voluntary rather than mandatory, which will save time and money for those providers who do not wish to take advantage of the change.

Further GST remedial amendments have also been incorporated into the bill since its introduction. One clarifies that the financial contributions made to local authorities under the Resource Management Act and the Local Government Act are subject to GST. The second amendment clarifies that late payment penalties imposed on unpaid rates under the Local Government (Rating) Act are exempt from GST. Another clarifies that the transportation services supplied to non-residents for the movement of household goods into New Zealand are zero-rated for GST purposes.

To turn briefly to the administration of GST, a further late addition is a common-sense amendment to simplify the process for businesses to deregister for GST. Another feature is an anti-avoidance measure—the deferred deduction rule—intended to target aggressive tax arrangements that offer investors more in tax deduction than they invest. The arrangements typically involve loans, and investors are not at any real risk of having to repay. The solution proposed in the bill is to defer tax deductions on loans that meet certain criteria. The Finance and Expenditure Committee has recommended changes to the proposed legislation to target this better. It has recommended narrowing the definition of “promoter”, thereby removing some of the uncertainties associated with a wider definition, and further limiting the types of arrangements that it might apply to. The committee also recommended clarifying a number of points relating to the consolidated approach to measuring the total cost of property held by investors and associated persons.

The bill introduces legislation enabling employer contributions to superannuation funds on behalf of people earning less than $38,000 a year to be taxed at a lower 21 percent rate—the marginal rate that applies to tax on incomes below that level. The measure was designed to reduce the overtaxation of the retirement savings of lower-income employees, and to remove a disincentive to saving for retirement. I shall introduce a Supplementary Order Paper to the Committee of the whole House to address concerns expressed by the select committee about the overtaxation of contributions, when the employer contribution plus the employee’s salary are more than $38,000 a year. In such circumstances, all the contribution is taxed at 33 percent in the bill as reported back. To deal with this concern, I propose to legislate so that specified superannuation contribution withholding tax is calculated only on an employee’s salary or wages, thereby eliminating the potential for overtaxation. This approach will lead to some under-taxation, which may also be a concern. Therefore, I have asked officials to monitor whether the option is abused when it comes into force, and, if so, whether the Government will need to reconsider its position in that respect.

The bill also repeals the income tax exemption for the investment earnings of sickness, accident, or death benefit funds, because it is inconsistent with Government policy for the taxation of savings and insurance. There have also been concerns that the exemption has been exploited in schemes marketed to high-income people, to reduce the tax that they pay. The select committee has recommended a separate exemption for those funds that have the required mutual characteristics of friendly societies, which are exempt from income tax, provided they meet certain criteria.

The select committee has recommended including in the bill a remedy to a potential problem in relation to qualifying trusts. It has recommended a change to the definition of qualifying trusts to enable a non-qualifying trust to become a qualifying trust retrospectively. It will ensure that income tax obligations, including use-of-money interest and penalties, are satisfied. This will prevent beneficiaries of trusts from becoming subject to disproportionate penalties as a result of a proposed Inland Revenue Department interpretation on the tax treatment of trusts.

This is an omnibus bill covering a wide range of often highly technical topics, so I cannot cover, in the time available, all the bill’s contents and all the changes recommended by the select committee. I have concentrated on the latter, and have not described other important reforms proposed in the bill. One of these is the legislation bringing into effect New Zealand’s part in the landmark agreement with Australia to remove a tax impediment to trans-Tasman investment. The bill makes it possible for Australian companies to enjoy New Zealand’s imputation credit rules, while corresponding legislation has been enacted in Australia. Submissions on the bill made small technical suggestions, but the reform was welcomed by all. Many would like to see it go further to full streaming, and I am sympathetic to that position, but the Australian Government is not prepared to proceed that far at this point.

To conclude, I thank the select committee for its careful consideration of this often difficult bill, and I commend its report to the House. I apologise to the member following me, but I have people waiting in my office for a meeting that has now been adjourned for some 20 minutes.

I rise on behalf of the National Party to support the Taxation (Annual Rates, GST, Trans-Tasman Imputation and Miscellaneous Provisions) Bill, which, as the Minister quite correctly pointed out, is an omnibus bill covering no less than five important parts of tax legislation that govern the New Zealand tax scene. In particular, they are the Income Tax Act, the Tax Administration Act, the Goods and Services Tax Act, the Student Loan Scheme Act, and the Personal Property Securities Act. In the time available today, I want to address four of the key elements of this legislation, in particular, the trans-Tasman imputation situation—or the triangular tax treatment undertaken by this bill—the reverse charge on imported services as they relate to GST, the zero rating of supplies of financial services, and the specified superannuation contribution withholding tax.

Before I do so, I turn to Part 1, which is the only part that National vigorously opposes. This is the part that sets annual rates of income tax. I draw attention to the fact that this part confirms the move undertaken by the Labour Government when it first came into office to, regrettably, lift the top personal rate of taxation to 39c in the dollar. When that move was taken, the Crown argued that it would affect just 5 percent of New Zealand taxpayers. The Crown will now note—as we note—that it affects no less than 19 percent of all full-time taxpayers. One in five of all full-time taxpayers is caught by this top personal rate.

What an anti-growth policy that is! It is not something fiscally required by a Government that is babysitting one of the largest surpluses we have had in some time. This Government is not using this wonderful opportunity—which it describes as cyclical, not structural—to do anything to grow our economy. This is simply a Government with no fiscal requirement that has used this bill to reaffirm what we all know is an envy tax. Were the Government to come to its senses and drop this despicable envy tax, it would cost no more than $95 million per 1c. It could rapidly move down to a rate of 33c in the dollar—the rate that the fine National Government from 1990 to 1999 had in place—and that would cost the Crown no more than $570 million. What a wonderful incentive it would be to entrepreneurs and risk-takers and hard-working families up and down the country to see their efforts rewarded by that.

While the Government was at it, it could take a moment to also lower the company tax rate, which it is affirming in this bill at 33c in the dollar—a rate no less than 3c higher than the Australian tax rate. It makes us uncompetitive with Australia, our major trading partner, and for just $420 million we could have the same tax rate as Australia. So for $1 billion—only one-fifth of its cash operating balance of $4.8 billion, or about a fifth of the operating balance excluding revaluations and accounting changes at $5.6 billion—the Government could deliver some very fine tax measures to this country. But, alas, I fear we will have to wait for the introduction of a National Government in 2005 before that takes place.

💬 Hon Chris Carter: More likely 2065.

No, 2005 will be the date when the National Government will introduce those kinds of changes, if not more sweeping pro-growth policies.

I want to take a moment now to talk about the trans-Tasman imputation situation addressed in the bill. This provides changes to the law that address what is known as triangular taxation, where New Zealand residents investing in an Australian company—a company that pays fully franked dividends—do not enjoy the full franking of those dividends and have to declare them on their New Zealand tax return and pay tax on them. The bill allows, on a proportional basis, for that situation to be addressed. It also allows companies in a group structure to move imputation credits around that structure, again to the benefit of shareholders. These are positive moves that were undertaken by a National Government and completed with the good work of our friend Peter Costello in Australia.

As the Minister quite correctly pointed out, those moves simply do not go far enough, and when back in Government, we will be pushing for another step forward in that process. Australia is clearly a very important market to New Zealand, and harmonisation of tax treatment between the two countries is vital to allow New Zealand companies to enjoy greater access to the far deeper capital market in Australia. I might add that one of the important aspects of this triangular tax treatment will be in respect of private venture capital, or private equity, where previously people have been quite badly caught.

I want to talk about the reverse charge on imported services. This is the situation where previously imported services were not subject to goods and services tax, because at the time of implementing GST it was deemed that that was too small an amount. It has really been undertaken for two reasons—first, to align New Zealand with other OECD countries, and second, for reasons of competitiveness. It was seen to be unfair to New Zealand companies to be competing with offshore suppliers who were not subject to GST.

I might note though that this presents quite an interesting situation for a New Zealand individual, who will have to pay GST—even if he or she is GST-unregistered as an individual—for income or imported services over $40,000. It will require that person to send that cheque off to the Inland Revenue Department. I hope this important element of the bill gets the media attention it deserves; otherwise I fear that New Zealanders who, for instance, employ a foreign architect to build a new home for them, pay over $40,000 and do not recognise the GST proportion of that, will be caught.

I want to move to the zero rating of financial services. Again, when financial services were introduced, they were exempt from GST. It is an industry I know something about and have very fond memories of. The problem with exempting those services is that when they are in the supply chain, they have a thing called “the cascade effect”, where, by being essentially exempted, the GST on inputs can no longer be recovered. The problem then is that cost can only be passed on through prices, and, rightly so, the bill addresses that by zero rating them as opposed to exempting them.

Before I close I want to look at the deferred deduction rate, which is the point the Minister raised about targeting aggressive tax arrangements that offer investors more tax deductions than they would have invested. I simply note that closing this loophole could again have a positive impact on the Crown—estimated at anywhere up to $450 million. As members may recall, $450 million is very close to the amount that New Zealand companies are overtaxed compared with their Australian counterparts. I would like to think that with this windfall that they might enjoy the spoils of $450 million, that they will look wisely on the companies of New Zealand, and therefore pass that benefit on post-haste to flow through the community.

Very finally, I want to talk about the specified superannuation contributions. Previously, these were being held at a rate of 33 percent, which was a 6 percent deduction or discount for those on the top personal rate, but it overtaxed others and deterred them from saving. New Zealand has a significant savings problem, which is well recognised. The superannuation fund created by Dr Cullen is one of the great con jobs of all time. It will pre-fund superannuation only $1 in every $7. It will not fix the problem. It is one of the wonderful signs that the spin-machine works, but the reality does not, so anything we can do to fix savings in this country is appreciated. That is why National will be supporting this important legislation.

In speaking on behalf of the New Zealand First Party and my New Zealand First colleagues on this bill, I first speak in relation to the part that confirms the annual income tax rates for the 2003-04 year. New Zealand First wants to convey its disappointment in this Government for not taking more initiative in the area of taxation. New Zealand First’s long-term objective is that New Zealanders should pay less tax, and everybody knows that is our view. But having said that, we believe that the Government’s No. 1 priority should not be to reduce taxation but to reprioritise its social spending, so as to place greater focus on the real needs of New Zealanders. The Government should do that, rather than spending the income it receives from taxpayers on its politically correct agenda—such as legalising prostitution, abolishing the Privy Council, and so on.

New Zealand First does not believe that taxation cuts, as advocated by National and ACT, are the immediate answer for New Zealand. There are very important issues in this country that need to be addressed first—such as poverty up in Northland and elsewhere. Dr Brash’s 1980s policy of taxation cuts for the rich is worse than having no solution at all for our problems at this point. The real solution does not lie in just keeping the annual taxation rates as they are in this bill but in providing taxation incentives for research and development, and also for exporters, for example. National and ACT members, when speaking about this legislation, including the National member who has just resumed his seat, have said that a reduction in income tax rates will improve the economy. Whereas Labour believes that keeping the status quo is satisfactory, New Zealand First says that as a country we must think outside the square and look at taxation incentives for exporters, and for research and development, and so on. We should not always be talking about either keeping the annual income tax rates as stated in this bill or reducing income tax; rather, we should be thinking outside the box. We all know that exporters are most affected by a rise in the value of the New Zealand dollar, and therefore we believe, as a party, that taxation incentives for that group are one way of stimulating growth in this country.

Although New Zealand First has concerns about the annual income tax rates, we applaud other parts of this bill and commend the Government in respect of them. We commend the taxation advisers and others for their hard work and advice, and thank them personally. We thank the officials from the Inland Revenue Department and Treasury for their advice. We especially thank Terese Turner, specialist taxation adviser to the Finance and Expenditure Committee, because she was informative and is very knowledgeable on the subject. As I said, we applaud other parts of the bill—such as those allowing the zero rating of business-to-business supplies of financial services, and reforming the imputation laws to reduce the double-taxation of trans-Tasman investments, as part of an agreement with Australia. That is the main thing. The bill changes the imputation laws to address the problem of triangular taxation, which John Key was talking about. That involves the double-taxation of certain trans-Tasman investments. It allows Australian companies to allocate imputation credits—for New Zealand tax paid—to their shareholders, in proportion to their ownership of the company. I note that that arrangement is reciprocal and requires both countries to pass the relevant legislation. It is a very positive move overall, as far as trans-Tasman imputation is concerned.

The introduction of a deferred deduction rule in order to combat aggressive taxation arrangements is a positive move, and so are the progressive rates of specified superannuation contribution withholding tax on an employer’s contribution, to match the employee’s marginal taxation rate. New Zealand First also applauds measures that provide community trusts with an income tax exemption. Clauses 5 and 17 contain provisions giving the community trusts that were established under the now-repealed Trustee Banks Restructuring Act an exemption from income tax. That exemption will apply from the 2004-05 tax year. Any distributions made by those community trusts will still attract income tax when appropriate. Submitters generally supported that proposal, which was something that New Zealand First was looking for. It is intended to reduce compliance costs for those community trusts, and we are in favour of anything that can reduce compliance costs.

I thank you, Mr Speaker, for allowing me the opportunity to speak on this bill. As I said, New Zealand First supports most parts of the bill but we are disappointed in the Government’s lack of vision with regard to taxation.

The Green Party will be supporting this bill through to the Committee stage, and indeed, to the third reading. We have been pleased to support this bill from the outset. As I said in my second reading speech, the bill includes a significant victory for the Green Party—a hard-won, long-fought victory. Dr Cullen is not known for his generosity, but in the end he had to concede that the change to the top marginal taxation rate that he introduced in the year 2000 had led to an incentive being made available to top-income earners in this country—those people earning above $60,000 a year—to save for their retirement. That incentive was that the taxation rate for superannuation savings remained at 33 percent. That automatically gave those who are most well off a real incentive to encourage their employers to offer superannuation, rather than salary, as a way of boosting their total remuneration package, because at the same time it increased by 6 percent the amount of money that those people were able to keep from their employer’s subsidy.

At the same time that he made that taxation change, Dr Cullen refused to bring in a variable rate for the superannuation withholding tax. In other words, he kept it at 33 percent. So not only did that mean there was an incentive for those people who earn above $60,000 a year, but it meant that a penalty remained in place on the savings of those people who earn less than $38,000. [Interruption] I can understand the member’s concerns. It is rather distracting to be almost placed in the position of being Her Majesty’s loyal Opposition. However, I think at least New Zealand First is present to wear that mantle. Anyway, I will go back to the topic at hand. I am sorry, listeners. We are speculating about whether a coup is taking place at the moment, but I am not meant to comment on the absence of members from the House, so I shall not do so. As there are no members from the party here to question me, in their absence—

💬 Hon Paul Swain: Not allowed to comment on them, but every National Opposition seat is vacant.

That is a point well made. The chief Opposition whip has leapt to fill the breach, as it were. I am glad that he is here, because I am about to praise the National Party for its support during the Finance and Expenditure Committee’s consideration of this bill. However, before I get there I shall finish outlining the landscape, as it were.

We were very pleased when this bill did come to the House. While it did not go as far as we wanted and extend the 6 percent incentive that wealthy employees get across the board, it did at least remove the disincentive that middle and low income employees have faced for years. The superannuation contribution of their employers has been taxed at 33 percent, whether or not the employee is paying a marginal tax rate on his or her income of 21 percent, or even 15 percent. We were pleased that the Government at least agreed to bring in a variable rate of specified superannuation contribution withholding tax, although it is not as progressive as we would have liked it to be.

During the consideration of the bill we were pleased to persuade the Minister of Finance to make the taxation rates truly progressive, by introducing a 9 percent rate for the savings of people who were earning less than $9,500 a year. One may say that there are very few of those people, or that somebody who earns that amount of money would not be in a position to save for his or her retirement. However, some people who are second-income earners in a home are members of a superannuation scheme, and they were being penalised by the old taxation rate. Dr Cullen has very generously conceded that he will lose about a million dollars in taxation revenue a year in order to bring in some equity in that regard.

In looking at this bill I need to say that we believe that it is a case of the cup being half full. We really think that a little bit of Christmas cheer from Dr Cullen would fill the cup right to the top, if he extended that 6 percent taxation incentive right across the board and delivered it to the very people who voted for the Labour Party at the last election. I think the most extraordinary thing about the bill that is being reported back today is that it does not offer the same incentive to middle and low income New Zealanders that it offers to high-income New Zealanders. Maybe that is an example of where the Labour Party is currently trying to position itself. It thinks it has middle and low income New Zealanders in the bag, so it is now concentrating on looking after those who are well off.

Perhaps an equally significant positioning statement is that the National Party was the only party to support us in proposing an amendment at the select committee to bring in the 6 percent concession right across the board. Perhaps National saw the advantage of appealing to middle-income New Zealand by giving those people a serious incentive to save for their retirement. Whatever National’s motive was, John Key does deserve my appreciation for supporting that amendment, and I would like to acknowledge National for voting with me on it. I observe, obviously, that other parties that I thought might have supported such a move, such as the United Future family-friendly party, did not back that particular proposal. However, I remain optimistic about that amendment, and I will be moving a Supplementary Order Paper during the Committee stage in this House to introduce a proper taxation incentive for New Zealanders to save for their retirement, and particularly for employers to provide subsidised superannuation for their employees.

Employer-subsidised superannuation is, I believe, the next and best step forward in New Zealand. We have to reduce the decline in the number of working people who are members of superannuation savings schemes. The Government Actuary reported for the year to June last year that only 243,000 people were members of employer-subsidised schemes. That is 65,000 workers fewer than 12 years ago. I hope that the new Government move to introduce subsidised superannuation for public service employees will help to reverse that decline, but it is not a very generous start. The subsidy is only 1.5 percent in the first year and 3 percent in the second, although I gather that the Government is talking about staging it up to 6 percent over time. I guess that is all dependent on the Government being re-elected at the next election, and perhaps even beyond that.

One of the problems we face with this Government is that it rammed through the New Zealand Superannuation Fund, which is putting aside about $1 billion of our taxes a year, most of which will end up in the very volatile and fragile overseas sharemarket, but at the same time Dr Cullen cannot find a few more millions of dollars to increase the subsidy that is to be provided to public servants. Instead, he is planning to offer only $19 million in the first year and $32 million in the second year. That is a very small fraction of the $1 billion that he is sending off shore. Dr Cullen could easily afford a 6 percent subsidy straight off, and equally, if he had accepted our amendment to bring in the 6 percent concession right across the board, it would have cost him only about $77 million a year for current employees—hardly a big cost. But I guess Dr Cullen has to preserve his reputation for being rather Scrooge-like. We hope that we can persuade other parties in the House to be more generous to working New Zealanders, and to recognise the value of encouraging them to save for their retirement.

We also hope to tempt other parties in this House to support an amendment that we will be putting up with regard to the annual taxation rates. We have long had the policy that the first $5,000 of income should be tax-free in New Zealand. That would have most benefit for people on low incomes, by putting more money automatically into their pockets rather than making them have to go through the process of claiming for a rebate. And it would help to alleviate much of the child poverty that exists in this country, by assisting low-income families to get a better level of income, which would enable them to cope in today’s society. But it is not just low-income people who would benefit from that amendment. Of course, making the first $5,000 of a person’s income tax-free would carry across all income brackets, including that of the likes of my colleague Mr Shirley who, I know, will support me when he speaks following my speech. So the amendment is fair to that extent. But it is also, of course, more progressive than the provision we have now, and it would mean that, proportionally, those on a low income would end up being far better off than they are at present.

That contrasts with what the United Future members proposed at the select committee—or, I should say, they did not propose it at the select committee because it was not in the form of an amendment, but they wanted to state it in the form of a minority report. It was a bit like having a bob each way, by saying what they would like but not being prepared to actually put it up to the House. The United Future members wanted to deal with the taxation-creep issue. We seriously looked at putting up an amendment to see whether United Future would support its own policy, but we decided on balance that it was far better to put the focus on those right at the bottom and bring a provision that the first $5,000 of income be tax-free, rather than to deal with taxation creep. But perhaps, again, Mr Shirley may like to help United Future out, by putting up an amendment to see whether United Future is prepared to vote for its own policy.

For now, we look forward to the Committee stage of this bill, and look forward to support for our amendments from right across the House. We hope, in particular, that National will maintain the support it gave us at the select committee.

I feel that Mr Donald was trying to give my speech for me. He was certainly trying to anticipate what I might be about to say. ACT will be supporting this bill at the second reading. I note, in particular, that it confirms annual income tax rates for the 2003-04 year. I would just like to comment on that; other speakers, particularly Mr Key, have already done so.

We must remind ourselves that one of the first things this Labour-led Government did upon coming to power was to increase the top tax rate in this country. It created a massive distortion in doing so. The tax rate went from 33c to 39c. Do members remember Labour’s promise? It promised that no increase in tax would affect more than 5 percent of the population. Its calculation at the time was that, indeed, 5 percent of the population was affected by that increase—that is, the 5 percent earning over $60,000. But we now know that, through fiscal drag, 19 percent of the population is in that category. Labour has broken its promise—19 percent is now affected by that top tax rate, not the 5 percent that it promised. That is one of its most basic breaches of promise. What is almost worse is the way that it has done it. It has done it through fiscal drag—that old fiscal drag. One does not see it; it is out of sight, sneaky, and very, very bad indeed.

What is also extraordinary is Labour’s lack of understanding. It does not understand the difference between taxation and revenue. What we certainly appreciate in ACT, and certainly what most enlightened economists and economies around the world now appreciate, is that once one’s taxation rates are up above 20 percent, one is actually damaging the economy. A Government does not have any money. The only money that a Government has is the money it takes off people, off families, out of communities, and out of business. What is the assumption behind a Government taking that money? That it needs it because it can spend it more wisely and do more good for the community and the population than would be done if it were left in the pockets of families and communities. Who really believes that bureaucrats and big government spenders like the Labour Government here in Wellington are better stewards of one’s money than one would be? Does anyone actually believe that, when we look at the appalling waste of expenditure that Governments get involved with?

In relation to this bill, the point is this: one can actually reduce taxation, and, because one then has a more efficient economy, have more people working and, therefore, more people paying tax. A Government can get more revenue off a lower tax rate than will happen under the ideology of this Government, which increasingly just wants to put up taxes. That is why ACT has consistently campaigned for lower taxes for all workers: because it provides the incentive for able-bodied people to get off benefits and work. It provides the incentive for them to earn, and they then spend, and pay more GST and income tax. Lower income tax can actually give Governments more revenue.

But, no, this Government just wants more control; it puts up taxation because it believes that it can spend the money more wisely, and, demonstrably, it cannot. It wastes so much money. This Government is a big-spending Government and a big waster. All of that waste carries an opportunity cost that reduces the prosperity and wealth of this country. It is not Governments that generate wealth; it is business people, through their own initiative, running businesses, earning income, producing goods, and providing services. That is what produces wealth. [Interruption] Mr Benson-Pope from Dunedin who is trying to interject does not understand that. He has been a bureaucrat all his life. All he knows is tax and spend. All he understands is tax and spend. Certainly, the people of Dunedin have very little respect for that member.

We had an extraordinary speech from Rod Donald of the Greens. I would like to remind the House of the lack of logic in his speech. He said it is very good that the top marginal tax rate is 39c, and that the rate that the superannuation funds pay is only 33c, because that actually provides an incentive to save and to put money in superannuation. But what he is really saying is that people make those decisions only when they are forced by the State. Surely, if we left the tax rate at 33c, people would make those decisions of their own accord. The biggest problem for people saving in this country is that they are paying too much money in tax to this Labour-led Government, which wastes their money and throws it away on all manner of spurious, appalling expenditures that are not properly audited or accounted for. The Government just throws away taxpayer’s hard-earned money, when that money could be generating wealth, creating more jobs, and creating prosperity for the country.

Mr Donald totally contradicted himself. He thought it was great that we should have lower taxes to enable people to pay into superannuation funds. I agree with him, but the same principle applies, and that is why we should have tax rates at about 20c in the dollar. That is why ACT says we should have a tax cut for every worker; the workers will then be able to save more, afford health-care, and afford all manner of other things, instead of the Government taking the money, taking the choice away from them, and promising that the Government will provide, only to have the Government fail to provide, or provide a very inferior service.

We actually experienced something quite significant here. I think Mr Donald revealed today that he is almost at the level of Economics 101. He is almost on that first step of understanding. That has to be tremendous. Instead of his voodoo economics of tax and spend, of the more one taxes people, the better it is, and of the more control the State has, the better it is, through his speech today he has finally revealed that he is beginning to understand that it is not Governments that create wealth, but individuals through their own efforts, and communities creating services, providing services, and creating goods and products. That is what creates wealth, not Government spending.

Let us hope that this Labour-led Government in the limited time it has left in office will come to that realisation and will finally reduce the top tax rate from 39c in the dollar. There is no reason for it. It has destroyed the New Zealand economy, it destroys proper incentives, and even the Government’s own policies are revealing that it cannot sustain it.

I have pleasure in rising to speak to the second reading of this bill. There are many things in this bill that will be to the overall benefit of New Zealand taxpayers, and as a centrist, moderate, and business-friendly party, United Future has been happy to lend its support to new rules surrounding the GST zero rating for supplies of financial services, the trans-Tasman imputation rules, the closure of loopholes relating to aggressive tax arrangements that offer investors more tax reduction than the money invested, the income tax exemption for community trusts, the alignment of taxation on employer contributions to superannuation funds with the marginal tax rate of the employee, clarification of GST relative to local bodies, and the lowering of compliance costs. All these are worthwhile initiatives, and for that reason we will support this bill through all its remaining stages.

However, it is also true that United Future has expressed a minority view to the effect that the income tax bands confirmed in this bill should have been relaxed to take into account the effects of cumulative inflation since the rates were richly established on 1 April 2000. Inflation in New Zealand is measured by the movement in the consumer price index. Accordingly, when inflation moves up all New Zealanders recognise that this signals a corresponding movement in the average level of prices for goods and services in our economy. It is perhaps not quite so widely understood, however, that the increase in the consumer price index is also a measure of the reduced purchasing power of the New Zealand dollar over the same period.

This can easily be illustrated by an example. If goods cost $100 at the beginning of the year and the consumer price index, and thus inflation, is 4 percent during the year, then at the end of the year to purchase exactly the same quantity of goods the taxpayer will need to have $104 in his or her pocket. Accordingly, as all taxpayers know, if inflation goes up by 4 percent they will need to have a increase in their pay packet of at least 4 percent in order to maintain purchasing power parity and a consistent standard of living.

I set out these basic economic fundamentals so that people can clearly understand that if that goal is to be achieved, namely the mere maintenance of a consistent standard of living during a year, then it is also necessary to adjust the tax bands themselves for the effects of inflation. Unless this is done, the income retained by all taxpayers earning $9,500 or more, after they have settled their tax bill, will be worth less at the end of the year than the comparable figure was at the beginning, notwithstanding the fact that they have received a wage increase equal to the rate of inflation.

This is because, in a progressive tax system, the tax that people are paying has increased by a percentage greater than the rate of inflation—a situation that is typically referred to as “fiscal creep”. Fiscal creep has already been mentioned by my colleague Ken Shirley. It is not an honest, straightforward tax increase that has been brought to this House in an open manner and debated, but it is a tax increase nevertheless. It is these economic fundamentals that lead United Future to the strong conviction that the tax bands reaffirmed in this bill at their current 1 April 2000 levels should have been adjusted at 1 April 2003, as follows: the 15 percent low-income rebate level, from $9,500 to $10,000; the 19.5 percent rate, from $38,000 to $42,000; the 33 percent rate, from $60,000 to $65,000; and the 39 percent rate, from above $60,000 to above $65,000.

The Government’s failure to make these adjustments results in the overtaxation of New Zealanders, in the following amounts: for those earning between $9,500 and $38,000, $60 a year; for those earning between $38,000 and $42,000, $300 a year; for those earning between $42,000 and $60,000, $600 a year; and for those earning over $65,000, $900 a year.

Those figures may seem relatively modest, but with 2.7 million taxpayers in this country they represent, cumulatively, an overtaxation of $400 million a year.

💬 Hon Ken Shirley: How much?

The figure is $400 million a year. It represents funds that will be held back by this Government and that, in our view, properly belong in the pockets and purses of New Zealand taxpayers and their families. Even then, the Government might argue that those sums are relatively small, but we in United Future do not think one can honestly argue that $400 million is a small amount. Certainly, Dr Cullen in his recent announcements has regarded a figure of that size as being a massive amount—an amount that he would not dream of putting back into the hands of the taxpayer.

In any event, United Future believes that this is a point of principle. The Government itself has pledged not to increase tax rates. It did that on its pledge card. In reality, if it persists in its failure to adjust the tax bands for inflation, it is allowing such increases to occur simply through fiscal creep and its own inaction. This is wrong in principle, and United Future will continue to draw to the attention of the New Zealand electorate the Government’s inaction in that regard.

In my closing comments I want to respond to Craig McNair and to say why then we are not voting against the bill. I will give him the response I have given consistently to everybody else who has asked that question. It is as simple as this: during the last election we said that if we were elected and were in a position to do so, we would work with the largest party elected into this Parliament. That was the democratic wish of the people. That party was the Labour Party. We entered into a supply and confidence agreement with the Labour Party, and under that agreement, which we are not about to welsh on, we will give support to the Labour-led Government on confidence and supply until after the next election in 2005.

That is our pledge, and we are not about to go back on it. But it does not, under the same agreement, prevent United Future from bringing this kind of point to the attention of the electorate and also to the Government as a challenge. If the Government does not listen, then we will note very, very clearly to the electorate in 2005 that, on this point, we believe the Government is erring. It is failing New Zealanders, and it should act at the next opportunity, which I believe will be the 2004 Budget, to put this matter right. If it does not, then rest assured that I will be making exactly this same speech again next year, only then, instead of the figure being $400 million, it is likely that we will be talking about $500 million, or more.

Bill read a second time.

The House adjourned at 5.13 p.m.