Taxation (Annual Rates for 202324, Multinational Tax, and Remedial Matters) Bill

Members, the House is in committee on the Taxation (Annual Rates for 2023-24, Multinational Tax, and Remedial Matters) Bill. For your information, in accordance with a determination of the Business Committee, the committee will suspend at 4.55 p.m. for the special debate on the report on the petition of Claire Dale.

Members, we come first to Part 1. This is the debate on clause 3, “Annual rates of income tax”. This is where the debate on the tax rates should take place, but the vote on any proposed amendments to the tax rates will take place in Part 2, which amends the Income Tax Act of 2007. Standing Order 352 requires that the annual taxing provision be considered separately. The question is that Part 1 stand part.

Well, thank you very much, Madam Chair. I’m looking forward to the opportunity to have a good, free-flowing dialogue and debate in regards to the tax bill. So Part 1 of this bill deals with the annual rates of income tax for the 2023-24 tax year in reference to Schedule 1, Part A, table 1 of the Income Tax Act, which outlines the rates of tax. It’s reasonably narrow in that regard, but I’m looking forward to dialogue in this area.

This is always an interesting debate, the annual rates debate, and although the Minister of Revenue has said that it’s a relatively narrow part of the bill, of course, by tradition, the debate on the annual rates clause is actually quite an important constitutional debate. It’s a free-flowing debate in which a large number of tax issues in relation to the levels that we set our tax at in this country may be raised. So, even though it looks like it’s a very small clause and a very small part of this bill, we anticipate a number of speeches on it from all sides of the committee. It’s actually a constitutional requirement, not just a technical nicety. So I’m looking forward to hearing what members on the other side of the committee have to say about our tax system in general and, in particular, our income tax system.

So let me begin, and let me begin by asking—well, actually, I’m going to begin with something that’s quite important to the annual rates, and it’s something that has been discussed in this House in the last day or so, and that is the IMF’s recent report on New Zealand. I wish to draw the Minister’s attention, in particular, to the discussion of the tax system. I’ll read out the paragraph so that the Minister doesn’t have to go and hunt it out for himself. It’s headlined in bold: “New Zealand would benefit from a more efficient, equitable, and sustainable tax system. New Zealand already has one of the most efficient goods and services tax systems globally. However, tax policy reforms are needed to promote investment, and productivity growth, increase the progressivity of income tax, and mobilize additional revenue in response to long-term fiscal challenges. To achieve these objectives, reforms should combine comprehensive capital gains tax, land value tax, and changes to corporate income tax.”

Now, that is quite a challenge that has been issued to the Government of this country, and quite a challenge that has been issued to the Minister of Revenue. In fact, it will rest on the Minister of Revenue’s shoulders to respond to some of the issues raised by the OECD. So, in the context of this debate, where we actually really do need to engage in discussion about how our tax system works overall, where we do need to engage in discussion about the progressivity of the income tax scale, where we do need to engage in discussion about what is taxed and what is not, where we do need to think about the sustainability of our tax system—and these are things we ought to consider anyway, but especially in the context of the IMF; that well-known left-wing organisation the IMF telling us that we need a more progressive tax scale—I’d like to hear from the Minister how he thinks that our income tax scale responds to that. Now, I’d just invite the Minister to perhaps give us a little bit of a kōrero on that.

Kia ora, Madam Chair. Thank you very much for the opportunity to take a call on the Taxation (Annual Rates for 2023-24, Multinational Tax, and Remedial Matters) Bill. I do want to acknowledge the Minister of Revenue for his work on this bill, because, as I said in a previous reading to the House, this bill has had two fathers and one mother, and so I accept now that you’ve adopted this bill and I acknowledge as well the work that you did to accept the Amendment Paper that we had introduced in relation to the North Island floods.

I do want to ask the Minister around his comfort levels in relation to the annual rates—I know we are confirming the 2023-24 tax share—and whether the Minister had actually considered, because I know that very soon in the Budget, they will be tabling their own particular annual rates or changes of tax rates because of the work that they’re doing as part of the Budget. I’m not going to ask the Minister to divulge any Budget secrets, given we still have a couple of months to go, but I do want to ask the Minister around very similar lines to what the Hon Dr Deborah Russell had just questioned around parts of the IMF report.

I’m just going to indulge the committee: the reason why we’re here for the annual rates bills—and it happens once a year; sometimes twice if there’s a Budget—is that in order for the Government to actually collect taxes, to be able to impose taxes, it has to be done through this House. It has to be done through an Act of Parliament. There are regulations and sub-schedules for other areas, but, actually, for individual income tax rates, it needs to be done through Parliament. And it’s really important that that particular process is allowed to have a select committee process, and I do want to acknowledge both the Hon David Parker and the new Minister in relation to ensuring that there was a select committee process on this.

We did get a couple of submissions in relation to the questioning around, actually, whether these rates were correct or not. And some people had provided out of scope because they actually said that we should just have no taxation. As Madam Chair will know, that is out of the scope for this particular part of the bill. But what I really wanted to just give the Minister time to digest is really the question that the Hon Dr Deborah Russell had around the IMF findings and whether he had given any consideration to whether we needed to change Part 1, clause 3, of this particular bill in relation to that new IMF report. I know it’s only been done in the last week, so I understand if he has not yet come to a position on it.

The other thing that I wanted to ask the Minister was: was there any consideration, given that we’re going to have the Budget in a few months’ time—had he actually considered whether this was an appropriate vehicle in order to bring in some of that tax relief, as they would like to say; you know, whether this was an opportunity to have a bit more time for the public of New Zealand to be able to see what sort of tax relief that they’re going to get?

But my question, really, is: how does the Minister respond to the IMF report that has come out quite recently around the progressivity of the rates which the Hon Dr Russell referred to? And just a question as to whether he had actively considered whether the relief changes that they’re going to do as part of Budget, whether they had thought about bringing them a little bit earlier as part of this bill.

I’m happy to answer a few of those questions. The first question from the Hon Dr Deborah Russell in regards to the IMF report, which the Hon Barbara Edmonds also referenced in terms of her report—if I look at the IMF report, what it actually says as well is it informs and suggests to Government to ensure that it gets its spending under control. What I can say is that this coalition Government is very focused in order to remove wastage of spending, and that was in the IMF report. We’ve got a large-scale programme in order to do that and ensure that we have fiscal sustainability in order to fund our programme of changes that we will be undertaking.

The reduction in spending that the IMF report indicates will, obviously, help us to get inflation under control and other economic factors, and so we’re working through that in a very careful and diligent manner, but also at a degree of pace, because this has a big impact.

The second question in regards to the annual rates in any Budget changes will, obviously, as the Hon Barbara Edmonds has noted—I’m not going to be talking about any aspects in regards to that. The practicality of considering or using this bill to actually put in place any of those personal income tax changes which will really benefit middle-income New Zealand will be an announcement that we will be doing as part of the Budget process, and it wasn’t timely or appropriate for us to put it into this bill, because it’s already a very, very comprehensive bill. It’s got a lot of elements to it, and I do acknowledge its source of where it’s come from. I think, in this case, we have been reasonably considerate around the fact that the elements within this bill are areas that we believe will bring more certainty to the overall tax system, and hence why we’ve incorporated many of the changes that we did inherit. That’s pretty much all I want to say around the IMF report.

I thought the member might have asked—and I’m not wanting to probe any questions—why we didn’t have any capital gains tax included in the tax bill. And then I remember that this is actually a bill that was put on the Table by the Labour Party, and I didn’t see anything about capital gains in here, which is an interesting signal itself. Of course, we don’t support capital gains tax, but I thought that was also something that the IMF referred to.

I’m just very grateful that the Minister himself raised the issue of a capital gains tax. So it gives us a wee bit of space to talk about that now, too. I really appreciate it, Mr Watts, good on you. Well played.

We are laughing, but it’s a serious matter. And it’s a serious matter because many people in the tax community and working in tax have been inclined to say that we have a broad based - low rate tax system in this country. Looking at our income tax rates alone, perhaps one might conclude that. In fact, the top tax rate—and it only cuts in at a threshold of $180,000—is 39 percent and, other than that, our tax scale is actually comparatively low. In fact, our tax take overall sits below the OECD average.

But there are some issues along this. You see, there is quite a serious issue—and this is an issue that was raised in the Treasury briefing to the incoming Minister of Finance. I’m sure you will all have the slide pack right there in front of you. If you turn to page 9 of that slide pack, there was quite a serious concern about the forecast gap between core Crown expenses and core Crown revenue—so a gap of 1 to 2 percent over the forecast period.

Now, clearly we disagree about how that should be met. That side is going to cut spending on critical front-line services, amongst other things; this side would have a different proposal. But, and here’s the real problem, it says the gap between Crown revenue and Crown expenses is predicted to go to about 5 percent of GDP by 2061, and that was based on current fiscal settings. Sitting in that Treasury briefing to the incoming Minister was a proposal that the Government needed to consider capital gains taxes. Now, interestingly, we do have a capital gains tax of sorts in New Zealand already. We’ve got various sittings in the—all sorts of reasons, but introduced by that that Government, of course, in the brightline test. Now, that is the starting of a capital gains tax. Of course, there’s other capital gains taxes sitting in the financial arrangements rules and so on. There are various times when capital gains are actually taxed—we don’t have a comprehensive capital gains tax.

Nevertheless, Treasury has suggested that we need a capital gains tax in order to meet this ongoing gap between Crown revenue and Crown expenses. The IMF has suggested that we need a capital gains tax in order to balance what we’re doing and, in our tax system, have a sustainable tax system. And the Minister here—

CHAIRPERSON (Maureen Pugh): Can I remind the member that this debate is around tax rates, not—

Hon Dr DEBORAH RUSSELL: Indeed. Indeed. But I would remind, also, Madam Chair, that this is the annual rates debate and, by tradition, it is supposed to be a free-ranging debate around tax, because it’s the one opportunity we have every year to have that free-ranging debate around tax—

CHAIRPERSON (Maureen Pugh): In Part 2.

Hon Dr DEBORAH RUSSELL: The free-ranging debate around tax.

Camilla Belich: Point of order, Madam Chair. Sorry to interrupt the member. I just wanted to clarify that, from my understanding, the member was referring to the capital gains tax as a result of comments made by the Minister, which I understand is permitted by Standing Orders in a committee stage.

CHAIRPERSON (Maureen Pugh): And I’m just reminding the members that this part is around tax rates.

Hon Dr DEBORAH RUSSELL: Madam Chair, I’m happy to—we’ll see how we go on that one because it is, as I said, one of the constitutional requirements: to have an annual debate on the setting of the tax rates. This is the annual taxing Act. It can be done as a separate Act altogether. In this case, it’s done as one clause within one part within this bill.

So, getting back to it, the second part of this bill does reverse out all the capital gains taxes. The first part of this bill sets the annual tax rates around the income tax scale, and we have an ongoing worry that the income taxes we collect will not collect enough revenue, over time, to sustain the types of goods and services, the infrastructure, the health system, the welfare system, and so on that we expect in this country. In fact, that was growing to a 5 percent gap in GDP by 2061.

So I’m going to ask the Minister as to how he thinks he will respond to that challenge. How is he going to meet that challenge that we have, that is now his responsibility? Part of what a good tax system needs to do is to deliver the tax revenue sufficient to meet the needs of the Government. And that, by Treasury’s prediction, is—

CHAIRPERSON (Maureen Pugh): The member’s time has expired.

Well, I could not but help myself to make some comments in regards to what I think was a question there around capital gains tax. It was interesting, I was reflecting on the Labour Party leader’s comments on 12 July 2023 when he said that with so many households struggling with the cost of living crisis, now is not the time for a shake-up of the tax system, and ruled out the implementation of a capital gains tax. But it seems that maybe that message hasn’t got through in regards to the question that I was being posed by the member, at that point.

The point raised in regards to the sufficiency of revenue that the tax system derives—well, as of 2022, the tax system collected just over $120 billion of tax. As many people will know, there’s two ways to close a gap: one is to increase revenue through taxation; the other way is to reduce expenditure. On this side of the House, this coalition Government is absolutely committed to reducing wasteful spending, cutting expenditure, and not taxing New Zealanders more. That’s the pure difference. You’ve seen this play out. The question just asked reinforces that not only is there fragmentation on that side of the House around what they’re planning to do but, actually, the ideological point around how we get ahead as a country is not through taxing more; it is through growing our economy and reducing wasteful spending.

Tēnā koe, Madam Chair. I’m happy to take my first call in this debate. In responding directly to the comments of the Minister of Revenue, I think he, right there, struck the very heart of it, which is that his Government has an ideological belief that people should pay less tax, and I think that that’s completely at odds with the outcomes that they say they want for New Zealand and that New Zealanders want.

The reality is that in most of the countries we aspire to be like that have excellent infrastructure and public services which support the wellbeing of people and, by the way, better economic outcomes, it is funded through taxes, and that’s why the kinds of countries that we aspire to be like almost universally have higher rates of Government expenditure as a percentage of GDP, because it makes sense for Government to invest in infrastructure and it makes sense for Government to invest in public services. But the problem—

Carl Bates: Roads of national significance—great infrastructure.

Hon JULIE ANNE GENTER: Yeah, interestingly enough, it makes sense for Governments to invest in public transport in our largest cities. Every person on the Government benches right now seems to be completely in denial about the actual numbers, and I think it’s because they don’t actually know what they are. The reality is that the rates that are laid out in this part of this bill—if we were to examine them and ask are they sufficient to invest in the things that New Zealanders aspire to have in their country, like first-class infrastructure that supports people to move around the country and that supports businesses to move their goods—[Chairperson gestures] So the question is—and I am responding directly to comments that the Minister just made, which just said, “Well, we think Government should spend less, and therefore we don’t need to have higher rates.”

Of course, the distributional question around how the rates affect people, so whether or not we have a capital gains tax, which would actually directly support a much more broad-based and productive economy, or whether the rates are more progressive so that those who earn more, contribute more—because if we pay it forward like that, we will have a more prosperous society. But I realise that members opposite are of a very—I just think that generosity is not something that they understand. The idea that manaaki, or being generous—if we have done well, we want to give back to our country and ensure that more people can do well—is something that those members just have no concept of. They are just stuck in a kind of religious zealotry around the idea that rich people should pay less tax and that we should spend money on roads, not on things that move more people and goods at lower cost, and that’s the heart of it.

The sad thing here is that I genuinely believe many of them want better outcomes for New Zealand, but the reality is that when you look at the evidence of what works and what will deliver the outcomes we want, which is good infrastructure, good public services, and good support for the disabled people and their whānau in our country, then we need to spend more money for public good, and the fair way to do that is to have higher rates for those who have more, because allowing incomes and wealth to be concentrated in a smaller and smaller group of people does not result in a country that does better overall. It is just simply not true and it has been refuted by all of the data of the last 30 years, globally, and that’s why we’re such an outlier.

They lament the lack of productivity in New Zealand? If we want to be productive, we should have more broader-based tax and we should have higher rates, like Australia does, for those who earn more. Australia has a capital gains tax. Australia has higher rates and a stamp duty. Australia has a much more progressive tax system with a tax-free threshold on the first, like, 10 or 20 grand of income, and they have higher rates for higher-income earners, and, universally, almost every country in the world that we would aspire to be like does exactly that.

But, instead, you just hear this empty rhetoric of absolutely meaningless soundbites saying “Our country and the world must tax itself to prosperity.” I call rubbish on that—you know, show us the numbers. Show us the numbers, because most countries that have flatter taxes and lower taxes than New Zealand have worse outcomes in terms of inequality, and that affects the wellbeing of everyone in the country. We end up spending more money on prisons, rather than investing in people to be the best they can be. We end up with a kind of weird, divided society of people living behind walls and being fearful for their security because they’re allowing their fellow countrymen to live in poverty.

Thank you, Madam Chair. I’m really just taking note, Madam Chair, of the interjections and the enthusiasm of the Government members to continue this debate—it’s great to see them so engaged in it, and I’m really looking forward to you allowing this to be free-range. I’d like to ask three questions, if I may; two of them have come from the Minister of Revenue’s own comments, actually. One is around capital gains. He has raised the issue of capital gains, and so I’m wondering how he can reconcile the fact that landlords would be able to get interest deductibility and get the interest deductibility off the interest, but then also not pay any tax on the capital gain—It would appear that it either has to be one scenario or the other—so I do hope the Minister can just tell us, when he’s been thinking about the fairness of the tax system, how he reconciles that.

My apologies for interrupting the member, but the time has come to report progress.

Progress to be reported.

House resumed.

Mr Speaker, the committee has considered the Taxation (Annual Rates for 2023-24, Multinational Tax, and Remedial Matters) Bill and reports progress. I move, That the report be adopted.

Motion agreed to.

Report adopted.