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

I remind members that there is a veto on Rod Donald’s amendment set out on Supplementary Order Paper 171.

I will take the first call on this part, as I will have to go in a short period of time, I am afraid, to another meeting, but my able colleague the Hon David Cunliffe will take over again.

I want to comment briefly on the reasons why I have vetoed the amendment in the name of Mr Donald. The amendment has two problems—one relatively minor, because it could perhaps be fixed, with further conversation, and one relatively major. The relatively minor one is that we cannot just create a $5,000 tax-free zone, and just shift the 19.5 percent boundary and keep it at $38,000, and not address the structure of the tax system within that range. There is a whole set of issues around low-income earner rebates, etc. In fact, the veto certificate says between $1.7 billion and $2 billion cost because it is not quite clear what the amendment means in terms of some of the consequentials that would need to be moved to make the system actually work. On the face of it, the amendment actually makes a nonsense of the current income tax rates.

The second, and more substantive—because we could try to work out the first one over some period of time—reason is that I feel it is fundamentally wrong to do as the member suggests. It is commonly suggested by people that if one makes a certain area free from income tax at the start, somehow or other one is helping people on low incomes and people living in poor circumstances. There are a number of things wrong with that. The first might not appear, on the face of it, to be a sensible comment, but it is true. Many people with low taxable incomes are not necessarily poor, for a number of reasons. Some people are very good at reducing their actual income to a low taxable income. They tend to be called accountants and lawyers.

Secondly, many people who are on low incomes are second, third, fourth, or fifth income earners within a family where the total structure of the family income is quite high, so one is giving a tax break to, perhaps, the third income earner in a household with income of $200,000 a year. That is particularly so because, as we found when we had those kinds of exemptions at the front end, it is remarkable how many children in better-off families manage to earn $5,000 a year, if $5,000 a year is tax-free. The effort that goes into those young people at that point is quite remarkable. A cynic might suggest it has something to do with rearrangement of income within the family, as opposed to actually representing a valid approach to the income tax system.

So the proposal introduces a layer of unnecessary complexity in the tax system with very, very little social benefit. For those on pensions and those on benefits, in effect, their levels are set in relation to net incomes in any case. New Zealand superannuation is related to the net average wage, so if one changes the tax rates, there is an automatic benefit to superannuitants. The gross simply changes to reflect the same net, at the end of the day, so all of that group of people, who dominate people with low household incomes, actually are not affected by this sort of change in any case. It is far better, in fact, as the Government proposes, to deal with this issue through mechanisms such as family support, which is targeted to people on low incomes with family responsibilities, as opposed to, perhaps, a 17-year-old person with an income of $15,000 or $20,000 a year, who is an awful lot better off than a household on $30,000 a year and supporting three or four kids.

So the amendment would not address social equity issues terribly well, it would create tax compliance issues and avoidance opportunities, and, as cast, it would actually create a nonsense of the current scales in any case.

On those comments, we agree with the Minister of Revenue. I want to address Part 1, which National strongly opposes. It sets the annual tax rates in train for a further year. When the Government raised the top personal tax rate to 39c in the dollar, it told the people that it would affect only 5 percent of all taxpayers. Well, that is not correct at all. In fact, one in five full-time taxpayers now pay the top personal tax rate—one in five.

💬 Lindsay Tisch: That is 20 percent.

Yes, a touch under 20 percent—one in five full-time taxpayers. One in two full-time taxpayers pay the next rate down—between 33c and 39c.

💬 Hon Dr Michael Cullen: Not quite—

Well, in totality. There is no logic in a top personal tax rate being raised from 33c to 39c. It creates a huge number of costs for the industry and a huge number of compliance issues. It was simply, as we know it to be, an envy tax—a disincentive for hard-working New Zealanders to go the extra mile, to work hard, and to create incentives.

💬 Mark Peck: Oh!

The member for Invercargill does not seem to think that entrepreneurs and risk takers are worth supporting, but on this side of the Committee we applaud those people.

💬 Hon Dr Michael Cullen: It costs me $190 per week.

Well, the Minister should look at his own tax plan, then. I want to raise that issue for a second, because the Inland Revenue Department actually tracks individual sector groups, and it looks at the total amount of average tax paid by those groups.

💬 Mark Peck: What’s the member’s income?

Reasonable. If the Minister would like to refer to those particular sector groups, he would find that architects’ average income has gone up and average tax has gone up, and plumbers’ average income has gone up and average tax has gone up, but that is not so for accountants or lawyers, because they have re-arranged their financial affairs to allow themselves to be earning more income and to be paying less tax. So what is the logic behind the increase? It does not work for hard-working New Zealanders who work for companies, because they cannot pay themselves in that manner. It works for certain groups, it is an envy tax, and it is a particularly poor piece of legislation that this Government has saddled New Zealand with. It is one of the reasons why this Government is not a pro-growth Government.

💬 Hon Dr Michael Cullen: We’re doing all right!

During 1983 and 1993 New Zealand grew at about 1.8 percent, and between 1993 and 2003 it grew at about 3.3 percent. For every year of the last two decades, our growth was under Australia’s by about 1 percent. New Zealand will have to perform better if it wants to outperform Australia, and if it wants to narrow the gap between what New Zealand families are earning and what Australian families are earning.

Dr the Hon Lockwood Smith: We could pay our rugby players more!

That is right. Anti-growth policies like progressive tax rates are not an incentive for hard-working New Zealanders to go forward.

This part also sets company tax rates in New Zealand. Company tax rates here will be set 10 percent higher than company tax rates in Australia, as a result of this bill. The Minister could have sent a very strong message to companies all across New Zealand that he wanted them to compete head-on with Australia, that he wanted them to be successful, and that for $420 million the Government was prepared to let them do that. The Government could have pre-funded it, because part of this legislation attacks aggressive tax planning, and it is estimated that the Inland Revenue Department will net between $400 million and $450 million as a result of those schemes being closed down. The Government could have self-funded a wonderful bonus, a wonderful Christmas present, and a wonderful incentive for the businesses of New Zealand, but, no, it does not want to do that. It wants to rely on its good luck and its good fortune, and what has been a competitive exchange rate—and the Minister, with his open-mouth policies, is trying unsuccessfully to get it back to being competitive. That is what the Government is relying on. It is not sending a hard and fast message, and we think that is a complete sham and a complete disgrace.

We believe that a progressive tax system, such as the one we have here, is not creating efficiency in the economy, is not driving economic growth, and will not take New Zealand back into the top half of the OECD.

Unlike National, the Green Party does support progressive taxation, but we would like it to be more progressive than it currently is, and combined with a suite of eco-taxes. I am disappointed that the Minister of Revenue has exercised his financial veto on my amendment, but I do thank him for engaging in the debate on how to help those people who are struggling on low incomes in our community. I hope he will find the heart to offer them something generous before Christmas, so that the tag of “Scrooge” no longer applies to him. Perhaps he is trying to model himself after Arnold Nordmeyer—as a famous person once said to me after a Budget a couple of years ago. Although he has pointed out some flaws in the amendment we have put up, what we are trying to achieve is an outcome that will benefit all New Zealanders, particularly those at the bottom, on middle and low incomes, who genuinely are struggling, and particularly the children of those people.

In case anyone was thinking the Greens were being fiscally imprudent, can I say we would recover the cost of our proposed tax cuts, as referred to on our Supplementary Order Paper, from a suite of eco-taxes. The first would be a carbon tax. We would also want to end the exemption from taxation that diesel currently enjoys, to bring it into line with petrol, and we would bring in other eco-taxes on a range of areas such as Crown resource rentals, toxics, and waste. Our whole philosophy is to cut tax on work and enterprise, and also to use tax to discourage waste and pollution. I do not have the resources that Dr Cullen has to calculate that the cost would be between $1.7 billion and $2 billion; our own estimates are around $1 billion. Be that as it may, we think making the first $5,000 of income tax-free would be a step in the right direction, and we note and appreciate the support from Grey Power, in a press release from its National President, Graham Stairmand, for our proposal.

My challenge to Dr Cullen is that if he does not like it, I would like him to offer something better—something that at least matches what we are putting up. Our amendment would put $18.70 into the pockets of most New Zealanders—that is what it would work out as, on a weekly basis—and $18.70 a week for a struggling family would make a real difference. Imagine the difference it would make to a one-income family with two children, on the average wage! It would certainly help to address the level of child poverty in this country, which is something the Minister should not be smiling about. Child poverty is one of the indictments on this Labour Government. I thank the Minister; that is much better. The Minister is now praying that we can solve child poverty. I hope he uses the power that is in his hands, through the taxation system and the benefit system, to address that very real concern. Any surplus is not real if it is built on the backs of children living in poverty.

The ACT party will oppose this bill, but I should point out that we certainly disagree with Mr Rod Donald’s analysis of the issue. I fear—

💬 Hon Harry Duynhoven: Rod’s feeling better already!

Well, the National Party, ACT, and New Zealand First are feeling pretty good because we like the thought of Dr Cullen campaigning at the next election on what Rod Donald is proposing for tax and economic policy in this country.

However, let me cut to the chase on the issue of annual rates. Why did this Government put the tax rate up to 39c in the dollar? The National Party, ACT, and New Zealand First opposed it. Why? Because we said it was not necessary. Can anyone remember that Dr Cullen said he needed the money, said how much he was going to get, and said he would spent it—$400 million?

💬 Hon Dr Michael Cullen: We got $500 million.

He got $500 million. Does he need it? No. It was a cheap election ploy that he felt honour-bound to implement. We should ask ourselves this: was putting the top tax rate up to 39c good for the economy or bad for it?

💬 Hon Dr Michael Cullen: Look at the growth.

Michael Cullen thinks it was good for the economy. My goodness, no wonder he is not rated in the business world, or around the world. Everyone knows that to put up taxes is bad for the economy—except Michael Cullen. He has spent too long in Parliament, because he stands up and says: “But I pay the 39c rate.” But the Government pays his pay; the taxpayer pays his pay—

💬 Hon Member: And yours!

Yes, and mine. But I do not get up here and pretend that I am somehow equivalent to a person who is a wealth creator—who is investing, risking, and in business. Michael Cullen says that it makes no difference to him whether he pays tax at a rate of 39c or 33c. That is true. Why? Because we are paid by the taxpayer. Those in business, those working, and those who invest actually have to create the wealth. We put taxes up, and we reduce the return on their working hard, we reduce the return on their investing, and we reduce the return on their being entrepreneurial. I know that Dr Cullen is shaking his head, trying to get his head around that, because he has never been any one of those three. But that is what provides the wealth for this country, which this Government is grabbing through this tax take and distributing willy-nilly.

We say, as we said in 1999, that the tax increase to 39c in the dollar was wrong. We should be going to a low flat tax, not to a more disproportionate tax. I say “Shame on Dr Cullen!”. He did not need the 39c rate. I think he knows that that is bad for the economy. He shakes his head and does not agree. Why does he not put the rate up to 99c? He cannot work that out. If a rate of 39c is such a good thing for the economy, what about a rate of 40c? I had better not give the Minister of Finance ideas. If putting up taxes is not bad, how come it is bad to have the rate at 66c or 75c, as Jim Anderton and Rod Donald would have? Dr Cullen is not that silly; a rate of 39c does not do anything, but a rate of 45c or 99c would be silly. The lower we can have taxes, the better it is in terms of the productivity of our nation. Of course we need a Government, and of course we have to fund it, but we certainly do not need taxes at 39c in the dollar—especially when we see how this Government wastes and spends the hard-earned money produced by working New Zealand.

💬 Hon David Cunliffe: What rot!

💬 David Benson-Pope: Yes, what rot!

It is clear that those members are out of touch. They do not know where taxpayers’ money comes from. I doubt whether David Benson-Pope has ever worked in his life. If he did, he would be cheerful instead of a miserable old grump sitting here in Parliament. If we look at David Cunliffe, we can see that he has never worked in his life. We can tell. I say to this Government: remember where the money comes from.

I want to respond by saying that David Cunliffe spent a lot more time in the private sector than Mr Hide ever did. Mr Hide started off as some kind of scientist, then pretended to become an economist, who taught, I think, part-time at Lincoln University, where nobody could tell the difference between whether he was teaching science or economics.

However, let me respond to him. We heard all this garbage back in 1999—that is: “If we put the top tax rate up to 39c everybody will go overseas, nobody will work, and economic growth will stop.” But what have we seen? Firstly, net migration has reduced every year under the Labour-led Government. It is now much lower than it was under the National Government. Secondly, economic growth has been above the OECD average in all but one of those years. Indeed, this year we will be above the OECD average again. For the first time that I can remember for a very long time, we will be above the OECD average for at least 3 years in a row. Thirdly, there is no demonstrated connection at all between average tax rates, or marginal tax rates, and productivity.

If we had had German productivity growth—because the member confuses gross domestic product growth with productivity growth—for the last 20 years now we would have been at least as rich as Australia. Australia’s problem is its sclerotic labour market; it is nothing to do with productivity growth, which has been averaging 2 percent, or so, per annum. We have averaged about 1 percent, or so, growth per annum. If we could double that we would be doing fine as a country. President Clinton put up tax rates at the top end in his first year, and had the longest successful boom in United States post-war history. It took a Republican president to manage to turn that around and generate massive federal deficits.

I want to talk about the logic, because Mr Hide really thinks that the well-off are really, really stupid.

💬 Hon David Cunliffe: Do they vote ACT?

Some of them do vote ACT, and they are really, really stupid if they do that. But members should listen to what Mr Hide says: if one’s tax rate goes up so that one’s net income goes down, one will work less hard so one’s net income will go down even further. That is Mr Hide’s logic. We are supposed to believe that someone sitting up there in Paratai Drive is saying: “Oh, goodness me, they have just put my tax rate up, so my income’s come down, so I think I’ll do a lot less work so that my income drops even further.” That argument is really, really stupid, but it is put up almost every time by people in favour of somehow lowering that top tax rate. Equally, we could argue that if people’s net income goes down, they need to work harder to get their net income back up to where it was. The only survey I have ever seen on these matters—done years ago in the UK—asked: “If the top rate went up, would you work less hard, work the same, or work harder?”. One third said “less hard”, one-third said “the same”, and one-third said “harder.” Nobody actually knew.

We do know that when we have the kinds of stupid tax rates National used to have—at 66c in the dollar—then it is worth our while spending a dollar to avoid more than a dollar’s worth of tax. That rate is such that people can actually make money by spending money under that tax system. At a rate of 39c, people cannot do that. Indeed, even all of these famous schemes people use, at best, may defer their tax liability, because at the end of the day the money has to come out, go back into their own hands, and be taxed at their individual rates.

What they are really saying now is that, given $1 billion, $2 billion, or $700 million to spend—and this is Dr Brash’s argument—we put it at the top end, with nothing for the bottom. Why? Because those at the top end are the only people who create wealth. In other words, according to the National Party and the ACT party, only those people on high incomes create wealth. That is utter garbage and an insult to every ordinary Kiwi out there who is battling away, working for this country, creating wealth, and producing goods and services. Wealth is not created in Paratai Drive alone, I tell Mr Hide. When that member wakes up to that fact, his party might get more than 4.5 percent in the polls, and perhaps something a bit more approaching the 45 percent that this party gets—this party that recognises who creates wealth in this country. And that is everybody who contributes in terms of working.

What a bitter tirade from the Minister! The Minister said that the tax burden does not affect the economy and that putting up tax rates improves the performance of the economy. He said that Clinton put up tax rates, and the economy went better. That shows the appalling economic ignorance of Dr Michael Cullen. He might have been a good academic historian, but he sure ain’t an economist. All the research shows us that an economy carrying the total tax burden that New Zealand is currently carrying, which is in the order of 40 percent of GDP, has never succeeded in sustaining 4 percent GDP growth. Nowhere in the world has a developed economy carrying that tax burden ever succeeded in sustaining 4 percent growth, which we must achieve if we are to close the gap with Australia. Dr Cullen thinks that he knows better than all the history of the last 50 years of the world. He thinks he knows better in saying that putting up tax rates improves the economy.

First, I endorse the comments made by my good colleague John Key about how there is a critical need to get down our corporate tax rate to make us competitive with Australia. The tax burden our economy is carrying is too high, and the best research I have seen covering the last 50 years across the developed world shows an almost linear relationship between tax burden and economic growth.

However, I shall focus on another issue. Dr Cullen talks about the needs of the lower-income people of this country. I challenge him to do something about that, instead of just blathering on about it. I want Dr Cullen to do that, or his ministerial helper, who I note is wearing an identical tie, shirt, and suit to Dr Cullen. I note that the Hon David Cunliffe so admires Dr Cullen that he is wearing an identical tie, shirt, and suit. I guess that crawling around the Minister like that may help with promotion, but he has to wait a little bit of time yet.

However, the issue of substance I want to raise is this. If Dr Cullen and the Hon David Cunliffe are concerned about lower-income people, what will they do about this issue? At the moment in New Zealand, people with limited skills trying to get off benefits and improve their lives, earning, say, $10 an hour as they seek to work, under David Cunliffe’s taxation scheme in this country, once those people have worked 8 hours a week at $10 an hour, they earn a certain amount of money for their family. Does David Cunliffe know how many hours more than 8 they have to work to earn another dollar for their family? I want the Minister to indicate whether he knows the answer.

💬 Jill Pettis: He’s working on it.

Dr the Hon LOCKWOOD SMITH: I shall help him. I would not mind betting that not one Government member knows. Does one think that if those people doubled their hours of work they might be a dollar better off? If they worked 16 hours a week, instead of 8, might they be better off? Does any member know? I can tell members that they will not be better off. What if those people trebled their hours of work and went from 8 hours to 24 hours a week? Surely, they would be better off. But I tell the Minister in the chair that they will not be. Under his taxation regime, that family, after trebling their hours of work, will not have a dollar more in the pocket. Does that Minister know how many hours that family would have to work to be a dollar better off? They would have to work 50 hours a week to be a dollar better off in the pocket than they would be after they worked 8 hours a week.

That is because of the way the benefit abatement system, the tax credit system, and the progressive tax system work that Rod Donald and the Greens like so much. If the Minister bothered to do the work, instead of parroting nonsense, he would see the way the poverty trap in this country works. I want the Minister in the chair to acknowledge that Labour is presiding over a huge poverty trap for our low-income, lesser-skilled people. It is an indictment on this Government that after 4 years it has done nothing for the family I described—that is, mum, dad, and two kids—trying to get off the benefit system, working 8 hours a week to get a certain amount of income, and as they seek to gain more income through work, to try to improve their livelihoods, they will have to work 50 hours a week before they get another dollar in their pocket. The Minister should be ashamed of what they are doing to our low-income people.

What an extraordinary speech from a man who was a Minister in a Government that cut benefits, increased State house rentals, presided over exactly that particular marginal tax rate, and did nothing about it! When those members get into Opposition they become the job delegates for the low paid. I tell them that I saw that back in the 1980s up to 1990 before they were re-elected. However, I have to say that they are hardly likely to get re-elected at the moment with the sort of shambles that they are in. I saw that then, and I recognise it for what it was. It is so much cant. The only people who would be better off under a National Government and its tax policy would be the people on $70,000-plus. If members know anything, that is the only place they are polling any better, and who are they getting the votes from? Rodney Hide!

I tell the Committee that nobody is fooled by the protestations of the National Party—not a person. They know that Dr Brash will take something. He will take their holidays. That is what he will do. Dr Brash will take their pension. This is what he will do. Dr Brash will take their schools and hospitals. He will make them pay for them. Even worse than that, Dr Brash will make sure that prisoners have to pay to go to jail. There will be private jails, and prisoners will have to pay for the pleasure of going there. That is what they will do. That particular party should grow up and start to learn about economics.

I raise a point of order, Madam Chairperson. I have no problem with what the member is saying—it is so ridiculous—apart from the fact that it has nothing whatsoever to do with the bill. There is nothing in Part 1 about pensions, schools, holidays, or whatever he was rabbiting on about.

The member is correct. Obviously, the bill is about revenue income tax, and I would ask members to keep to that.

I shall speak briefly to Part 1 to state New Zealand First’s view. New Zealand’s First’s view on this very important part is clearly that the money collected from taxpayers as stated in this bill should be reprioritised by this Government with regard to social spending, so as to place greater focus on the real needs of New Zealanders. The Government should do that, rather than spend its income on the different social policy that it is spending it on.

New Zealand First calls on this Government—and I call on the Minister as well, to speak to this if he can—to provide more economic leadership with regard to this part of the bill, and to focus less on other legislation like the Smoke-free Environments Bill. I believe that the lack of an export policy, providing tax incentives for exporters, research and development, and so on, and the continued running down of the country’s infrastructure, is very unfortunate.

💬 Jill Pettis: For goodness’ sake! Where have you been for the last 5 years?

New Zealand First believes that the Government should be working on an economic vision that will help to lift living standards and provide some sort of future for our young people—and I just had to throw in the “young people”, since I am spokesperson on youth affairs for the party.

💬 Jill Pettis: We can work that out.

I thank the member. But, on a positive note, I want to say that providing income tax exemptions for community trusts is a very positive move, and that move is set out in clauses 5 and 17. There are provisions giving community trusts that are established under the Trustee Banks Restructuring Act of 1988 an exemption from income tax. So New Zealand First does support the other parts of this bill, but we feel we have to oppose this part for the reasons I have just given. This Government is showing a lack of vision in the area of taxation, not so much for income tax but for—

💬 Jill Pettis: That’s a very profound reason.

It is a very, very profound reason. This Government needs to provide vision for exporters, because it will be exports that will grow our economy.

This debate reminds me a little of the ghosts of Christmases past; although perhaps we should call it the ghosts of decades past. This debate is all about tax rates and it reminds one of the early days of the 1990s. Let us recall some of the myths that have been, sadly, trotted out again today.

💬 John Key: What was the average growth rate in 1990?

Let us start with that member—that newly ebullient deputy, deputy, deputy spokesperson on finance, the man whom Merrill built, the man who says that 20 percent of taxpayers are currently earning over $60,000.

💬 John Key: They are.

No, I am afraid they are not. At the time this Government took office we upheld our promise. It was 5 percent. Now, as a result of the growth in the economy and incomes, that might have crept up a percentage or two, but I would eat my hat if it were more than 7 percent.

💬 Rodney Hide: I raise a point of order, Madam Chairperson. I am pushing it a little bit here, but it is for the benefit of the new Minister. It was 7.2 percent at the time that this Government came in. Official records show that. It was not 5 percent.

The CHAIRPERSON (Ann Hartley): That is not a point of order.

💬 Rodney Hide: I am trying to save the Minster from his own ignorance.

The CHAIRPERSON (Ann Hartley): Please be seated. That is not a point of order. It is a debating point.

It is good that the honourable member has become so self-aware. Mr Key also said that company tax rates were now 10 percent higher than in Australia. Well, pinch me, I must be dreaming, because I just cannot calculate how that could be true. Our basic company tax rate is 33c; theirs is reduced to 30c. Let us look at some of the associated costs. In Australia they abolished accelerated depreciation rates when they reduced their company tax rate. We still have them. In Australia there is a payroll tax of 6 percent for large employers. In New Zealand we have none. The top personal rate in Australia is 47 percent. In New Zealand it is 39 percent. As far as paying for one’s health is concerned, in Australia there is a compulsory Medicare charge of 1.5 percent. We have none. They have a compulsory superannuation charge of 9 percent of one’s salary. We have none. They have a house-purchase stamp duty, which is 6.5 percent of the house price. We have none. They have a land tax, which is set at 1.5 percent of land value. We have none. And here is the biggie—they have a capital gains tax, and we have none. So when I hear people say they want to pack up their business and jump across the ditch to the land of milk, honey, and wallabies because they want lower tax rates, I say: “Mate, good on you! Go for it, cos you could be just a bit disappointed when you get there.”

Mr Hide talks about 20 percent tax rates. That is really a blast from the past, is it not? He said that if we reduce tax rates we will always get increases in productivity. “Reduce them how far?”, I ask. Should we reduce them to zero? How good would productivity look?

💬 Hon Maurice Williamson: Very good idea!

That has Maurice Williamson excited. That got two thumbs up from him. But how would we go with no education system? How would we go with no police? How would we go with no judges to enforce contracts? The proposition is patently absurd. I could go on and on, but I think that tells us that what we are encountering is simply the ghosts of decades past.

If that is the type of reply speech we get from the Minister in the chair, Mr Cunliffe, I think we should be spared. That was a very tiring speech—one that is always being trotted out. Without the 1990s the Government would not have got the gains it is getting in 2003. The National Party is definitely voting against Part 1, and the reason is very simple. I am an accountant by qualification. When we have a company that reports and says: “Wonderful! We have had a great year. We have sales and profits exceeding our budget.”, everybody is overjoyed because the company earns its way and provides employment. The minority Labour Government announced that it has a bigger surplus than it had last year. Maybe that Minister can take a call and explain how the minority Labour Government earned a surplus that was bigger than budgeted for last year. It was achieved largely through taxation. Tax is not something that individuals and companies can volunteer and say: “Well, because I think this Government provides a better service so we volunteer to pay more.”

No, it was compulsory. It is as my honourable colleague Dr Lockwood Smith said. It was statutory—it was achieved by legislation. People had no choice. They had to pay that tax. So in effect the minority Labour Government overtaxed people. Largely, that surplus has come from business. Some people may argue that they are happy to pay more tax if the Government provides more services, and they may say that the extra services are a justification.

I want to come back to a tragic incident that the public can relate to. Miss Trish Grant, who wrote the report on the latest tragedy from the Office of the Commissioner for Children—the tragic deaths of the two girls—asked why the priority for Government spending is on setting up a database for dogs and not a database for children at risk. That is a very sad reflection on this minority Labour Government. It is actually celebrating the overtaxing of our very hardworking small-business owners, and it is upsetting the public in terms of how it is spending that money.

So before that Minister gives us a lecture on how we are doing better than Australia, he should reflect on the fact that the average income for an Australian is $200 per week more than it is for a New Zealander. He has given misleading quotations about the taxation rates of Australia. He has not told the New Zealand public the full story, which is that although the top personal income tax rate in Australia may be higher, they have a higher threshold.

I think everybody owes it to the public to tell the truth. Members should give the public the whole picture and not mislead them. If anybody would buy into that argument of the Minster of Finance and say that higher taxation is good for the economy, I wonder why he has stopped at 39 percent.

The truth is that when this minority Labour Government put up the taxation rate, it sent a very clear message to New Zealanders: “The more you earn, the more you will be taxed.” The underlying assumption is to say that if people earn more and become well-off, if they become high-income earners, somehow they are doing something wrong, and because they are doing something wrong, the Government—[Interruption] Rod Donald says that people who are hard-working are not contributing to society. When people earn more they can discretionally spend more, and thus contribute to society.

What a woeful bunch of speeches from the Minister, the mini-Minister, and whatever Mark Peck calls himself! They need a good economic speaker. If I were any of those three, I would go over to Treasury, I would sit down, and I would say: “Help! Shut the door, don’t tell anyone we’re over here, we don’t know anything, we’re totally clueless. Could you possibly give us a hand?”. There are some very intelligent people in Treasury who will help and will keep it confidential. Those members have spent 15 minutes of our day in the Chamber today declaring to the people of New Zealand in their speeches that they are absolutely clueless. They do not know what drives the economy, what takes things forward, or how to build a growth economy. Why do we know that? It is because this is a Government that will not declare to the people whether its surpluses are structural or cyclical.

Why will it not do that? It is because the Government knows they are not structural. It knows it has not done anything since it has been in power that has been pro-growth. It will not tell people when we are to go back into the top half of the OECD, because it cannot work that out, and every time Government members go over to Treasury, the boys and girls there tell them that their policy and planning systems are so anti-growth that we will not get back into the top half of the OECD any time in our lifetime.

The Minister in the chair, David Cunliffe, stood up—and misquoted me, might I say: he said that I said that the top rate would affect 5 percent. What I said was that one in five—19 percent—full-time taxpayers now pay the top tax rate in New Zealand. That is a statement of fact.

What a hopeless situation we have, when somehow people think it is OK to increase the top rate because it affects 5 percent only—people earning NZ$60,000. We think it is OK to increase the top rate to penalise those people, and to tell them not to go out there and work harder. We do not want to give them incentives, because they are rich by virtue of earning $60,000! Do members know what the top tax rate in America is? People who pay that tax rate are earning US$500,000. If we want to create incentives in this country and get people going, they will have to have some real incentives.

I refer to the Minister trying to tell us that the Paritai Drive sector were not the only people creating wealth. Members should think about this for just a moment. Maybe the Minister can pay some serious attention, because clearly Labour Party members need an economics lesson. If the average growth rate can grow by just 1 percent more than Treasury’s long-term forecast, which is currently set at about 2 percent—and we will be lucky if we can achieve that with this Government in action—the average income of all New Zealanders would double in 30 years. If we do not grow by 1 percent more, it will double in 50 years.

What do New Zealanders want? Do they want to double their income in 30 years or in 50 years? The Government thinks that putting in a progressive tax system that discourages entrepreneurs, risk-taking, and making the economy go faster is a really good thing to do. Why do we not put up the top tax rate to 95c in the dollar and, while we are doing that, why do we not bring in 4 weeks’ holiday in a couple of weeks’ time, because that sounds like a really good idea, as well. If we really get the boat rocking and rolling, we will see how many people leave and get on those 747s. The Minister cannot tell us that we have positive migration that is a result of the Government’s pro-growth economy either, because we all know that what is actually happening is that natural New Zealanders are leaving and going to Australia, America, and the United Kingdom, and that we are letting a whole load of other people come down here.

Frankly, the whole population of the country could leave if it wanted to and we could still replace it with net migration. The Government may not have noticed, but there are a billion people living in China. If China wanted to send 10 million of them down here, we could have a population that is 2.5 times the size of the current one. No one should be fooled by thinking that we have positive net migration so that somehow this is a pro-growth economy. There is nothing pro-growth about this Government. If we can get growth out of the economy, it will be superannuitants who will benefit. The people who will benefit are the very people Rod Donald was talking about.

If Mark Peck does not know that—which he does not—maybe he should go up to Auckland and ask the average plumber what he or she is earning. The answer will be that it is double what he or she was earning before the growth rate happened in Auckland. That is what growth does. Growth needs economic incentives. Let people work hard, enjoy those rewards, and be investors and entrepreneurs. That is what we have to do if we want to get the country going forward. We will not get it by putting up an envy tax for no good reason.

I take a very brief call to attempt to insert a few facts into this increasingly rhetorical discussion. Both Ms Wong and Mr Key—deputy deputy Dawg—have argued about the level of the surpluses. Let us strip it down.

The CHAIRPERSON (Ann Hartley): The member cannot use that term. He will withdraw and apologise.

I withdraw and apologise. The operating balance excluding revaluations and accounting changes is $5.6 billion. From that, we must subtract $800 million for retained earnings, after dividends, of trading activities.

💬 Rodney Hide: I raise a point of order, Madam Chairperson. This debate is actually on part of this bill. I ask the Chair to reflect on what the hell the definition of the operating balance excluding revaluations and accounting changes etc. etc. has to do with this bill.

The CHAIRPERSON (Ann Hartley): I remind the member that clause 3 is about rates of income tax. I ask the Minister to keep to the rates of income tax, as I have reminded others.

Very briefly, other members have referred to the level of surpluses that have been generated by those rates, and I am simply trying to explain the composition of those surpluses.

💬 Rodney Hide: I raise a point of order, Madam Chairperson. That was a direct challenge by the Minister to the Chair after you had ruled.

💬 Jill Pettis: Oh, sit down.

💬 Rodney Hide: Now I have the fishwife complaining and interjecting while I am on my feet on a point of order, and the Chair does not seem to mind.

The CHAIRPERSON (Ann Hartley): That is not a point of order. Please be seated. The member will continue, and stick to the rates of income tax.

💬 Rodney Hide: I raise a point of order, Madam Chairperson.

The CHAIRPERSON (Ann Hartley): I have ruled on the point of order, Mr Hide.

💬 Rodney Hide: This is a new one.

Madam Chair, I fully accept your ruling.

The CHAIRPERSON (Ann Hartley): Mr Hide has another point of order.

💬 Rodney Hide: Speakers have instantly thrown members out of this Chamber for interjecting on a point of order—I think I myself may have suffered that indignity—but I notice that when the member opposite interjected, you clearly heard her. You refused to comment and discipline that member. She should be gone. She is the whip—she should know better.

The CHAIRPERSON (Ann Hartley): Several members have interrupted this afternoon. I have not given a warning, but I will certainly give a warning now.

Very briefly, to conclude the point at issue—

💬 Hon Judith Tizard: I raise a point of order, Madam Chairperson. In that exchange, an extremely unparliamentary term was used about a respected colleague. All members are honourable members, and I ask that the offending member withdraw and apologise for that expression.

The CHAIRPERSON (Ann Hartley): I am sorry, I did not catch that. Did the member—

💬 Rodney Hide: I wasn’t offended.

💬 Hon Judith Tizard: In his purported points of order, Rodney Hide used an expression about the Government whip that is extremely unparliamentary. All members are honourable members, and I find that term deeply offensive.

The CHAIRPERSON (Ann Hartley): The member used an unparliamentary description of a member. He will withdraw and apologise.

💬 Rodney Hide: I withdraw and apologise.

Very briefly, to conclude the point—and I fully accept your ruling—the implication of the rates as they currently stand, with the economy growing as strongly as it is, is that a cash surplus of some $5.6 billion translates to an available surplus, after adjustments, of around $1 billion, which must be apportioned between debt repayment and new spending. The Opposition has called for tax cuts. That must be seen in the context of the available surplus of the day.

In addressing Part 1, I endorse what my colleague John Key has again said about it. I was recently overseas, and for the Minister to claim that these tax rates have not driven New Zealanders off shore is simply arrant nonsense. I met taxation refugees from New Zealand around the world, who were escaping from—

Sitting suspended from 6 p.m. to 7.30 p.m.

I move, That the question be now put.

We had an interesting debate prior to the dinner break. We saw the Government defending a high rate of taxation, even though other countries in the world have actually reduced their rates. The OECD group of countries has reduced taxation over the last few years, yet this Government has increased the tax rate from 33 percent to 39 percent for those earning over $60,000. The Government said, when it was planning to do that, that only 5 percent of the population would be affected by it. That was on the Government’s credit card pledge, which stated that only 5 percent of New Zealanders would be affected by an increase in the taxation rate. It was shown before the dinner break that, in fact, that rate has gone up to 19 percent. Nineteen percent of New Zealanders now fall into the category of paying the higher rate of tax. If we look at other countries around the world—

💬 Dail Jones: How many percent?

It is 19 percent. It has gone from 5 percent to 19 percent—20 percent or thereabouts—which is a fourfold increase.

When we look at other countries’ tax rates we see they are coming down, because it is a disincentive to have high tax rates. Any Government worth its salt will look very closely at investment, growth, and the incentive to invest. Where there are high tax rates, there is a disincentive. Even countries like Russia have moved to a flat tax. It states here that Russia’s flat tax works. Well, well!

💬 Hon Dr Michael Cullen: Zero!

No, no. Russia’s flat tax is 13 percent. What is our corporate tax rate? Our corporate rate is 33 percent, which is 10 percent higher than that of Australia. Why would anyone want to invest in New Zealand at a 33 percent corporate tax rate when Australia’s rate is 30 percent? We are seeing already that businesses are going off shore and putting their money in offshore investments, because there will be more incentive there.

In any country—[Interruption] I was in the Chamber before dinner and I heard the Minister’s comments then that tax rates do not matter. I can tell him that if he were in business and paying those high tax rates, he would be in for a big shock. Tax is the biggest compliance cost that businesses have to face. Numerous surveys have been done that state that the No. 1 compliance cost facing businesses is the higher tax rate.

As well, there are those on wages and salaries. Members may recall that it was National that reduced the tax figure and increased the threshold for tax. Back in the early 1990s, when we had the higher tax figure, the threshold was $30,875.

💬 Hon Dr Michael Cullen: You didn’t change the tax rates in 7 years.

It was $30,875, and National took it up to $38,000.

💬 Hon Dr Michael Cullen: Rubbish!

I tell the Minister that the threshold was $30,875, and National took the threshold for the 19.5c rate up to $38,000. The rate was 19.5c up to $60,000, when the rate changed to 33 percent. Under this Government, the rate above $60,000 has now gone up to 39 percent.

There is no incentive for sole trader businesses to pay those high taxes. What are they doing? I will tell members what they are doing. Those sole traders are forming companies, because as directors of companies they will be treated as employees of that company and will pay the personal tax rate on income up to $60,000. Those earning over and above a taxable income of $60,000 will pay a corporate rate of 33 percent only. That is a lot less, and that is where the incentive comes in. A lot of small businesses and sole traders are forming companies—a company needs only one person—in order to reduce their rate of taxation from that 39 percent rate, which is applied to income over $60,000, to 33 percent, which is the corporate rate.

💬 Hon Lianne Dalziel: Nonsense. What do you mean—

That is what is happening. I ask what the member knows about business. When businesses are being restructured, one of the things looked at is how to reduce liabilities and those huge compliance costs. The No. 1 problem that businesses are facing is high taxation rates. That is identified in compliance cost surveys.

I move, That the question be now put.

As I have advised, the amendment to Part 1 in the name of Rod Donald on Supplementary Order Paper 171 has been vetoed.