Taxation (Annual Rates, Business Taxation, KiwiSaver, and Remedial Matters) Bill

I will use this debate on clauses 1 and 2 to re-establish exactly why National is opposing this legislation, because there are some matters in here that we support, as members listening to this debate will have heard. We support, for example, the reduction in the corporate tax rate. We support a number of the different measures in the bill. But the fundamental issue in respect of this bill is that this bill is what is colloquially called “the May tax bill”. It is an annual tax bill. What the annual tax bill does every year is set the income tax rates for New Zealanders. The Government had the opportunity with this bill to cut tax rates for ordinary wage and salary earning New Zealanders. This was a fantastic opportunity given that the Government now says that cutting taxes for ordinary wage and salary earning New Zealanders is a priority on its agenda and is something it now considers important. It could have done that with this legislation because this is the bill that sets those income tax rates. But the Government has not. It has not had the slightest interest in reducing income taxes for New Zealanders. Sure, the corporate tax rate is reduced, but there are not that many corporates in New Zealand. Most New Zealanders pay personal income tax. This bill, the annual tax bill, is the vehicle for dealing with that. It is spelt out in the title of the bill. Clause 1, “Title”, spells it out. It has those words “annual rates”.

This is a bill that sets the annual income tax rates, and the Labour members could have used this bill if they genuinely believed in lower income tax rates for wage and salary earning New Zealanders. They could have done it with this bill that we have been debating for these last few hours, which has been in front of this Parliament since May this year. But the Government has not done so. That is why the Opposition is opposed to this bill. We believe in reducing personal income taxes on all New Zealanders. That is what we totally support. We are committed to it. The ACT party is committed with us, but certainly none of the Government parties are committed to income tax reductions for New Zealanders. I know that the Minister in the chair, the Hon Peter Dunne, has taken exception to that comment, and I accept that United Future believes in personal income tax reduction. But does that not show the paradox? He is the Minister of Revenue. Does he not feel something like a neuter? What an extraordinary situation we have in this country today—the Minister of Revenue can say he personally thinks that income taxes should come down, and everyone knows his views are irrelevant. His views do not matter a damn. This Labour Government is not about to bring down income taxes, regardless of what the Hon Peter Dunne personally believes. It is staggering. I was at a conference with the Hon Peter Dunne the other day and as the Opposition spokesperson I dared not say what I believed, because it would have set the hares running, whereas Peter Dunne, the Minister of Revenue, could say what he thought should happen to personal income taxes, because everyone knows it does not matter what he thinks. Everyone knows that Labour takes no notice of what he thinks.

What we all know in this Parliament, and I think what New Zealanders are coming to see, is that Labour might, in election years, talk about tax cuts. It did last time; Labour talked about tax cuts prior to the last election, and once it got back into office it changed its mind. Labour promised to shift the income tax thresholds—a very minimal move but it would have helped. It would have helped avoid the need to deal with redundancy payments in this legislation as an ad hoc measure brought in at the last minute. If the Government had shifted those tax thresholds as promised at the last election, we would not need the ad hoc measures that are being brought in by this legislation. So that is what the people of New Zealand have to be very sceptical about. Labour promised personal income tax cuts prior to the last election and then backed down. It broke its promise on it. We know that Labour will promise income tax cuts again as we head towards this election. We know that Labour thinks about personal income tax cuts only in election years, and all New Zealanders should be very suspicious. Last time, Labour promised tax cuts and reneged after the election. New Zealanders should be very suspicious because everyone knows that Dr Cullen does not believe in lower personal taxes.

I am speaking to the title of the Taxation (Annual Rates, Business Taxation, KiwiSaver, and Remedial Matters Bill. As I keep noting, this debate incorporates many, many Supplementary Order Papers, some of which are very, very fresh off the press.

I think this bill should actually be renamed the “Sorry, the Government Spending Has Dragged You Into a Higher Tax Bracket Bill”. Because, as Dr the Hon Lockwood Smith just noted, with Government spending New Zealand workers are being dragged into higher and higher tax brackets. In fact, the infamous “chewing gum tax cuts” announced in the 2005 Budget were dragged off the table and are now no more than a piece of dodgy, disgusting chutty on the bottom of some school desk somewhere. They are long forgotten. But, as Dr Smith just noted, election year is coming up and, funnily enough, tax cuts are being talked about.

If the Prime Minister wrote the bill, perhaps it would be entitled the “Oops, Sorry, Treasury Got It Wrong Bill”. Apparently the Prime Minister’s road to Damascus conversion on tax cuts has come about and previous lack of tax cuts are all Treasury’s fault because its forecast was so wrong over so long. In fact—I tell members just as an aside—Treasury produced some papers recently that point out its forecast has not been wrong. It has been predicting surpluses for quite some time, and it has just projected a structural forecast further out.

Perhaps this bill should be the “We Just Thought of Something About Redundancy (We Have Had a Chat to the CTU) Bill”. I would like to talk about the redundancy clauses of this bill. The redundancy provisions were picked up in the Supplementary Order Papers, and there were public relations statements from both Ministers Dunne and Cullen. But I raise the point again about the redundancy rebate clauses in this bill. They have never been aired. They have never been aired in this forum. They have never been aired in a select committee. They have never been discussed by this Parliament. We have not received advice from officials on this—absolutely never. These provisions have never been debated in this Chamber up until the last 15-odd hours. They have never been debated in Committee with cross-party buy-in to try to make some decent legislation. Even if philosophically National might disagree with it, we would try to contribute and help.

The redundancy rebate has never been challenged out in the public by those taxpayers who, at the end of the day, will have to be funding this. It has never been challenged by those who perhaps want some of this tax revenue spent somewhere else—be it on hip operations, education, student loans, or whatever. It has never been challenged other than in a dodgy discussion in a backroom in some Minister’s office up in the Beehive.

The redundancy rebate has never been quantified or qualified. How much is it? What will it cost? What is the fiscal impact? National has Supplementary Order Papers pushed aside because of the supposed fiscal impact of them, some of which is quite minimal. What is the fiscal cost of the redundancy rebates of 6c in every dollar up to $3,600? What is the cost? What is the study historically? How does that rewrite the accounts? How does that rewrite the forecast accounts?

This bill is part of a suite of bills that fell out of Budget 2007, which is a good reminder of the confidence and supply issue. I guess the confidence and supply issue is why the Greens over there are abstaining on this bill and, of course, why National is voting against it. We do not have any confidence in the supply of funds to the current Government.

The title of the bill, I think, is quite misleading. There are some absolutely classic quotes that came from Dr Cullen’s and Minister Dunne’s press releases that I think will come back to haunt them. This is their road to Damascus. Dr Cullen has essentially said that he likes a flat tax rate of 6c in the dollar for any redundancy payments. That is actually what he says. I will read to members, perhaps with a minor change or two, what he said, and this could be the title of the bill. Dr Cullen and Mr Dunne said yesterday, when talking about redundancy, that taxation payments should be fairer to people who are pushed into a higher tax bracket when they receive redundancy payments—and they extended it to lump-sum payments. Well, income is income. If one tries to argue that this income should be treated differently by the Inland Revenue Department than one’s own income, then one is in trouble. The department will go after that person. If one keeps it simple—“keep it simple, stupid”; give the department a big kiss, if you like—one sees income as income. The complexity that this starts to bring into the tax system is not welcome.

Another point is that the redundancy rebate is not quite as generous as the Ministers have announced, because it has to be claimed. It is not a rebate. A person does not suddenly get a cheque when he or she receives redundancy pay. It has to be claimed.

As with my other colleagues, I think it is really important to go back to first principles when we look at this massive complex bill and see the giant central piece of the jigsaw puzzle is simply not there—a coherent and strategic approach to tax reform, which is the very purpose of this massive undertaking, and which this Government has singly failed to address. The reason it is the central issue, and the reason it will be one of the central stories next year as the political competition heats up, is because fundamentally we are a market driven economy. That means that people move themselves and their resources in accordance with economic incentives, which are vitally influenced by tax policy structures. Therefore, the absence of any coherence in the life of this Labour Government since 2000 towards a strategic approach to tax is a massive, missing central piece of the political jigsaw puzzle.

The idea that perhaps we could have looked at this in a closed economy setting 30 or 40 years ago is completely out of date in light of the rise of the global economy. The often quoted facts about this massive exodus of New Zealanders—not simply to Australia, but elsewhere—is perhaps the clearest illustration that members of the public can fully understand the need to have a competitive tax structure. Even when we look at the bits in this curate’s egg that we like, such as the reduction of the corporate tax rate, we see that we are lacking coherence there. This is not an overall strategic approach, and I will just mention two or three of the obvious reasons why it is not. Firstly, it is not a comprehensive approach to business tax reform. What we know is that there were—from memory—75,000 individual proprietorships and 44,000 partnerships in New Zealand in the year to December 2006. If we were to have had a comprehensive approach to business tax reform, we would have had some solution for those people.

The second obvious point is that we all know the issue of disintermediation in tax and banking policy—we are about to discuss that in a bill coming up shortly, the Reserve Bank of New Zealand Amendment Bill (No 3). What the Government has now done by failing to have a strategic approach is open up a massive wedge of 9c in the dollar in relation to the top marginal rate. I find it laughable to use the phrase “top marginal rate” when I know it cuts in at $60,000 gross tax, but nevertheless that is the decision the Government has made. To me $60,000 a year does not sound like an enormous amount of money—and we could ask any nurse, doctor, or teacher earning that salary whether he or she feels “rich”—but that is meant to be the threshold for cutting in at this tax rate. So this gap has been opened up and the lack of a coherent, strategic approach now creates this problem. So, yes, bits of this legislation make sense, but overall, when we look at this massive document, we have to say it is a lack of strategy and a lack of coherence.

More recently we have heard the Prime Minister in particular rabbit on about the tax being consistently made in respect of the surplus. She said: “Well, nobody told us. Treasury got it wrong. Treasury didn’t tell us.” What a load of cobblers—I do not think that is unparliamentary language, Mr Chairperson. Let me quote directly from the Treasury advice to the incoming Government in 2005. Members will recollect the Prime Minister’s spin that nobody told the Government it had a surplus and nobody told it about income tax reform. Let us reflect on the following statement to the incoming Government 2 years ago: “high marginal tax rates on personal and company income are more likely to have a negative impact on growth than others, by inhibiting the decisions that drive investment and enabling people to make the most of their economic opportunities.” There are a dozen other such statements from Treasury contained in documents that even we have public access to, going back years, that indicated to the Government, if it had been of a mind to listen, the need to address the problem of growing surpluses, the need to address the growing competition in tax policy, and the need to advance a coherent and strategic approach to these issues. The reduction in corporate tax to 30 percent might have been a pretty hot policy position to take 15 years ago, but not so today.

It is my pleasure to speak on the title of this bill. In the debate on this bill I have spoken about KiwiSaver and research and development tax credits, but I have not yet spoken about corporate tax rates, and I want to address them for a little bit. However, the one theme that is coming through as we read this bill, digest it, and understand it is the theme of how complex it is. Where is the long-term strategy for tax in New Zealand? There does not seem to be a long-term strategy. It all seems to be very piecemeal, and I have a problem with that.

I talked about research and development tax credits. We can talk about how there are now vehicles to try to get research and development tax credits. The perfect example was that the policy for research tax credits came from Australia. In Australia, banks tried to take advantage of these research and development tax credits by saying that development of their software was research and development, when actually it was redevelopment of software they already had. And that is what we will see. We will see people coming in and trying to take advantage of situations. Obviously there are loopholes in this legislation that enable people to do that, and I do not think they have been addressed as they should be.

When we talk about research and development it is just one tiny portion of this legislation. There are gaps in the legislation where people will try to take advantage of tax credits. Once again we have created a little tax pocket for a limited number of businesses. When we talk about KiwiSaver tax credits we are talking about exactly the same thing. We are taking about applying a specific tax advantage to a small portion of our population—to those going into KiwiSaver. I get confused as to where the strategy is. Should we not have one tax structure—structure, not rate—for everybody that is the same, so that everybody progresses through the tax structure, instead of “You belong in this silo, you belong in this silo, and you belong in this silo.”, and making it very piecemeal?

I believe that the Minister Peter Dunne, who has put this big bit of legislation together—and it is a big bit of legislation—supported Working for Families when it went through this House, and it is another form of tax credit. The Labour Government would say that it is a tax cut but, in effect, it is a tax credit. For years this Minister has campaigned on income splitting, but nowhere in this bill have I seen income splitting come through. He has campaigned and campaigned on income splitting for the last 24 years. One would think that the Minister of Revenue would be able to get it into this tax bill, but it has not made it. So how does what he has here line up with his long-term strategy for where he wants to see tax in New Zealand? It is quite interesting because obviously he is passionate about that matter, but this legislation does not support what he believes. It will be interesting to see what the long-term strategy is for this legislation.

I would like to touch on the corporate tax rates in this legislation because I believe that they add another level of complexity. We now have a corporate tax rate at 30 percent, a personal tax rate at 33 percent, a personal tax rate at 39 percent, and then there are not-for-profits, which are still sitting on 33 percent. We have a range of tax rates now that people can use, depending on the legal entity vehicle they are using. So we have silos again. People will really have to think about how they will structure their organisation to get the best tax benefits they can. This creates another vehicle for people to get into the 30 percent rate. We do not want to encourage avoidance, which I think this legislation does by widening the gaps between all the different tax rates. We have to be careful when we generate new legislation that we do not allow this to happen, but I believe that is what we are doing in many areas in this legislation. We are creating silos where people can apply, do a bit of manipulation, and move their businesses around. Accountants and lawyers must be extremely happy with this.

I rise to speak to the title of this bill and to bring another strain of thought to the research and development tax credit side of this debate. I want to speak specifically on that matter and, more generally, on the wider tax base.

National will not be voting for this legislation. We believe that the tax position put forward under clause 3 is not the direction in which this country should be heading. This bill is not going down the track of setting the vision that we need as a country and, as a result, we will not be voting for it.

I want to focus on the research and development tax credits and why we do not believe they will specifically achieve what we need in this country. Under the Labour Government we have seen a supposed agenda of economic transformation. But the reality is that although the New Zealand economy has changed over the last 6 to 8 years, there is no way that it has transformed. Other countries have changed rapidly. The export composition of many countries—of many small nations like Finland, Ireland, and Singapore—has transformed their economies significantly, to the point where their exports as a percentage of GDP are significantly higher than those of New Zealand. We still wallow at the 20 percent level of exports to GDP while other countries like Ireland have a significantly higher rate than that. Those countries saw 10 years ago, 8 years ago, 6 years ago, the need to transform their economies away from specifically agricultural-based industries into more of a weightless economy, and they transformed their economies rapidly.

The legislation before us gave us the opportunity to leapfrog, to go forward, and to focus specifically on the industries that will transform our economy. I think the bill has lacked focus in that regard and that New Zealand has lacked focus in terms of its economic transformation agenda. New Zealand needs to act quickly to take its exports forward. The area where I think we can do that significantly is in the weightless economy. In 1996 our total exports were $20 billion and in 2006 they were $32 billion—a growth rate of some 51 percent. That is a significant contribution. If we look at the weightless economy, which are services that New Zealand provides to economies overseas—such as 24-hour telecommunications services and helpdesk services—we see that they have grown from $792 million to $2.3 billion over the same period of time. That is a 193 percent increase in exports generated out of this nation. To me that is the focus that we should have had with this bill.

I see that the research and development tax credits in this bill are across all industries, such as my own businesses—my real estate business, my travel business, and development companies in Hawke’s Bay. I fail to see how an investment in research and development tax credits for those businesses will take this nation forward, or encourage export growth, or improve our balance of payments deficit. Quite frankly, it will not. Companies that are not in that market will use all manner of means to get a tax credit they would not otherwise get. I think that is the wrong approach. The research and development tax credit was an opportunity to focus on the weightless economy and to focus on our export markets to drive our exports as a percentage of GDP forward and upward. In that regard, I am disappointed.

I do not think there has ever been a precedent for an Opposition party to vote for another party’s tax bill, and National will not be changing that tradition. National is against this bill and will not be voting for it.

I move, That the Committee divide the bill into the Taxation (Annual Rates of Income Tax 2007-08) Bill, the Taxation (Business Taxation and Remedial Matters) Bill, and the Taxation (KiwiSaver) Bill, pursuant to Supplementary Order Paper 169.