ACT’s tax cuts

August 4th, 2014 at 11:00 am by David Farrar

Stuff reports:

says it can boost economic growth by a third with a policy to cut the company tax rate to 12.5 per cent.

Leader Jamie Whyte says this will increase investment, and job and GDP by one third, leading to higher wages.

He would fund the tax cut by slashing “corporate welfare,” worth about $1.5bn a year, and carbon trading, worth $164m.

Excellent. That would attract investment.

European and American studies suggest cutting the rate by 10 percentage points will make economies grow by between 1 and 2 per cent extra a year. Each 1 per cent reduction in the rate boosts wages by between 0.3 and 0.5 per cent, he said.

“No single policy proposal from any party in this election can do more to increase economic growth, create jobs and lift wages,” he added,

Company tax is a “terrible drag” on growth and wages while raising “relatively little” revenue, he argued.

Treasury estimates that every 1% reduction in the company tax rate has a fiscal loss to the Government of $220 million which is relatively modest.

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29 Responses to “ACT’s tax cuts”

  1. Redbaiter (8,267 comments) says:

    “Excellent. That would attract investment.”

    Yep, true.

    Why then is National increasing taxes?

    It doesn’t take a genius to know that the more money govt takes from an economy, the less effectively that money is used.

    Yet the Nats are expecting govt revenue to grow to close to $90 billion in a few years. Taking all this revenue at the expense of the productive sector.

    When is this looting going to stop??

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  2. Than (448 comments) says:

    I like the sound of this policy, but the question is exactly what is included in the $1.5bn cut to “corporate welfare”? My concern is it could be up there with phrases like “cracking down on tax avoidance” and”reducing government waste” as empty feel-good promises that are claimed to balance the books while not actually being implementable.

    Has ACT listed specific programs that would be cut?

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  3. Sir Cullen's Sidekick (868 comments) says:

    While I am a strong supporter of tax cuts – personal or company (political death to the parties that propose tax and spend policies), the problem with this is as follows:

    1. Nobody in NZ appreciates tax cuts. Kiwis are mentally tuned to pay more taxes hoping they would get everything free from Government

    2. I bet there will be 90% support if a moron like Cunliffe or Norman suggest that by paying higher taxes you will get better education or free healthcare. Remember, this is the country which voted for a tax rise to 39% on income over 60K in 1999 based on the communist dictator’s promise of better healthcare and education

    3. In this case a company tax reduction will achieve nothing. Companies will simply add the savings to their profit margin. None of them will pass on the benefit to their employees or customers.

    So it is better to maintain status quo. Moving on fellows….tax cut is NOT a vote winner in this country.

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  4. Fentex (917 comments) says:

    Leader Jamie Whyte says this will increase investment, and job and GDP by one third, leading to higher wages

    Claiming an increase of a third in GDP is silly. It’s so obviously false the argument is undermined. Roughly halving company tax alone would not add a whole third to GDP through increased investment, not even after several years of giving it time to build (in which time GDP grows anyway, so remember to keep adjusting upwards).

    It would be more forceful if he kept to suggesting lowering taxes will increase investment – appending a claim of how much only distracts from the principle, and a clearly inaccurate claim makes him look foolish to the point of making one wonder is he really that silly, or attempting deception?

    Treasury estimates that every 1% reduction in the company tax rate has a fiscal loss to the Government of $220 million which is relatively modest.

    Just arguing that leaving those blocks of $220 Million per percent of tax reduced in the economy for further investment by people, who by virtue of being taxed on their investment, are proven to be investors is good enough to convince many.

    Over-stretching the claim invites ridicule for a perfectly rational (even if one disagrees with it) policy that ought be avoided.

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  5. Manolo (13,517 comments) says:

    Why hasn’t Labour Lite proposed this? What is stopping Key and minions?

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  6. KiwiGreg (3,246 comments) says:

    @than I went to their website and can’t find what they mean either.

    At SCS – your point 3 can only hold if markets are uncompetitive. Lower corporate taxes increase after-tax returns, driving investment into that area.

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  7. Cunningham (836 comments) says:

    It’s never going to happen in this country. I guarantee any tax cuts will be directed towards workers because the main parties are scared of being labelled as in the pocket of big business. the anti business rhetoric has been going on for so long in New Zealand now that people actually believe it. Sad but true.

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  8. Redbaiter (8,267 comments) says:

    “the anti business rhetoric has been going on for so long in New Zealand now that people actually believe it.”

    So what’s your solution to this situation?

    Continue to enable it?

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  9. mattyman1010 (35 comments) says:

    I was very impressed by ACT’s ambitious budget, although its disheartening to see they’re the only party willing to cut expenditure and taxes. I’ll be honest I’ll probably PV for ACT, I’d much rather a strong support partner that is committed to reducing the involvement in individuals lives rather than a party committed to government control of industry and bizarre hatred of certain races. I’d be happier to see some of the top act candidates (whyte, wang, nicolson) than many at the bottom of National’s party list. And I’m sure NZF’s list will be an absolute joke.

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  10. virtualmark (1,528 comments) says:

    Fentex,

    Claiming an increase of a third in GDP is silly. It’s so obviously false the argument is undermined

    Absolutely agree. Personally, I haven’t been impressed by Jamie Whyte. To me he comes across as an academic with little common sense and little ability to engage in pragmatic politics rather than esoteric debate.

    I’d been hoping fresh faces at ACT would breathe life into the party, and see me return to putting my party vote to ACT. But that isn’t happening for me.

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  11. iMP (2,350 comments) says:

    I guess the most interesting of ACt’s “cuts” is whether it gets cut by the voters of Epsom in favour of the Conservatives polling 3x higher and therefore getting more party votes over the line for the C-Right. C. Rankin would also be a better MP than 20-something david Seymour.

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  12. Jack5 (5,005 comments) says:

    Zero company tax has certainly boosted Ngai Tahu companies and the Seventh Day Adventists’ Sanitarium.

    Still is lowering tax rates sufficient? Didn’t seem to save the Irish Republic from near economic doom.

    And what is the worth of such a policy from a party that would at best be a tiny partner in a coalition?

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  13. Redbaiter (8,267 comments) says:

    “Still is lowering tax rates sufficient? Didn’t seem to save the Irish Republic from near economic doom.”

    If we don’t watch it, the increasing size and expense of government is going to plunge the whole of the western world into one of the most severe depressions ever seen.

    These people working in govt and those who vote for bigger and more expensive govt every election will be the death of us, and they are too stupid and selfish and short sighted to even appreciate the simple fact that an overloading of parasites will eventually kill off even the strongest of hosts.

    And once that host starts to die, there is no reviving it.

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  14. Nigel (517 comments) says:

    Corporate & the top tax rate should never get to far apart or tax accountants will just transfer the earnings.

    I agree with lower taxes, ideally around 40% top rate ( direct & indirect combined ), but 12.5 is madness.

    The concept of 12.5% inducing huge investment is fanciful short term & unknown longer term, just look at Kansas, which has similar GDP to NZ ( http://www.nytimes.com/2014/07/14/opinion/kansas-ruinous-tax-cuts.html & http://www.forbes.com/sites/taxanalysts/2014/07/16/what-went-wrong-in-kansas-maybe-nothing/ )

    What most annoys me is people who say NZ’s universal GST is a bad idea because it’s regressive, seriously, how else are they going to tax tourism & non residents. It’s only regressive if you take NZ tax payers as the basis, but if you add non residents in then the overall effect is more balanced because it increases the tax base allowing lower direct taxation.

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  15. Fentex (917 comments) says:

    And what is the worth of such a policy from a party that would at best be a tiny partner in a coalition?

    That is easy politics – if ACT has a couple of seats and is part of a government with a narrow majority then a partner like National can lower company tax claiming it as the price it has to pay for ACTs support – so National gets something it’d like with less risk to it’s re-election ambitions than completely owning the policy would represent.

    It’s a tactic that’s been used before and should work again.

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  16. virtualmark (1,528 comments) says:

    Personally, I favour completely abolishing company tax altogether.

    Tax all dividends (which would all become unimputed if there were no company tax), and introduce a capital gains tax so people can’t just run a company for a period, build up assets, and then sell or shut down. But no company taxes.

    First, you’d remove a massive dead weight cost to the economy from tax filings. Second, you’d encourage a lot of entrepreneurial activity. Third, you’d encourage a lot of offshore companies to base themselves here, which in itself would generate more jobs, economic growth and probably quite a good uptick in GST receipts (to counter-act the company tax situation).

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  17. OTGO (536 comments) says:

    I quite like the ACT policy of having the government inform taxpayers how much policies cost in tax percentages. An example being interest free student loans. Your tax would be 30% and not the current 33% if it wasn’t for these free loans.
    http://www.act.org.nz/posts/honesty-for-taxpayers
    Next time you get door knocked by a politician offering you an election bribe you should ask them what your income tax would be without it.

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  18. nickb (3,686 comments) says:

    A really bold move would be to abolish company tax altogether and remove the imputation system.

    Given the incidence of company tax falls mainly on employees (in the form of lower wages) or customers (in the form of increased prices) it it economically harmful.

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  19. Yogibear (360 comments) says:

    What Whyte missed, which is another strong reason for a tax cut, is that the corporate tax take is cyclical. Namely the $220m per 1% is an average.

    In bad times this reduces heavily, and in good times is increases substantially.

    Now here is the kicker. If a good Minister of Finance operated a decent countercyclical fiscal policy (Note the GFC has meant English hasn’t had the chance yet, hopefully he will next term), then we’d get some wider economic stimulus value out of the corporate tax take, through the Minister banking it in the good times and using it as a fiscal buffer in the downturn.

    Instead, all we see is is Ministers spending the windfall at the top of the economic cycle, adding more heat, and causing a bigger total dip.

    If we left firms to their profits, there is no doubt some would piss it away just like a Minister, but I’m willing to bet a hell of alot more will reinvest in capital that will increase their productivity, providing them with resilience to better cope with economic cycles and competitiveness – meaning such firms are more sustainable and therefore better for their employees.

    Just a shame we’ll never get to find out

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  20. Paryphanta (6 comments) says:

    What seems to be missing from the debate is the effect of the tax imputation credit system on any cut in company tax. Remember that any dividend is taxed at the recipient’s tax rate with an offset for imputation credits. So a 33% taxpayer might receive a dividend with 28% imputation credit and pay the 5% extra. If the company tax rate is lower, the dividend receiver just pays more tax and gets a lower imputation credit. This explains why the reduction in tax is modest.

    So, taxes are lowered only if the company retains profits and does not pay dividends. So, this is an incentive to invest more in growth through retained earnings.

    The assumed growth in GDP from this seems fanciful – like the US Republican Party tax cuts in the 1980s – voodoo economics.

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  21. deadrightkev (402 comments) says:

    “Has ACT listed specific programs that would be cut?”

    Yes, they itemised and costed the saving from each as I recall.

    Corporate welfare is a scam and if we stop the treaty claims as well which Act has not costed into the equation the economy would be wheel spinning.

    National could reform NZ but they wont because they are progressives.

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  22. chris (615 comments) says:

    virtualmark & Paryphanta make very good points, but it’s seldom understood by the great unwashed. They think that it’s the evil companies that pay tax on their nasty old profits, when in reality it’s either less money that can be reinvested or effectively works like a withholding tax when paid as dividends with the imputation credits. I favour zero tax on companies for the same reasons as virtualmark.

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  23. Ed Snack (1,833 comments) says:

    People are right about the imputation effect, indeed I doubt the $220M per 1% because of the clawback through reduced imputation; although overseas ownership might get a boost. Lower corporate taxes ultimately should increase activity as long as other taxes aren’t increased to compensate. Tax incidence is not well enough acknowledged.

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  24. DJP6-25 (1,355 comments) says:

    deadrightkev 12:43 pm. I guessed they’d have costed it in detail. All their other economic stuff has been.

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  25. Tauhei Notts (1,677 comments) says:

    12.5% company tax.
    I walked through my town and thought, yeah.
    Commonwealth Bank of Australia, Westpac, National Australia Bank, ANZ Bank and Woolworths (through the Countdown chain) would all end up charging their New Zealand subsidiaries much less in “Head Office Administration” charges, so that they could take advantage of a low tax country.
    It would result in a much bigger tax take for our I.R.D.

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  26. chris (615 comments) says:

    You make a good argument for some % of tax (rather than zero). I was forgetting the offshore owners charge “admin fees” and the like instead of taking dividends on profit.

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  27. JC (942 comments) says:

    Back in the day my mum was a fantastic cook and there was no-one better at cakes and cookies.

    We’d often beg her to make more stuff and she’d simply say “No. you’ll just eat it”.

    We all knew exactly what she meant.. baking fancy stuff was a treat not a necessity, it was an unproductive use of her time and there was no good to come from fat slobs sitting around gutsing cake when we could be doing homework, chores or just running around outside.

    I wish our Govts were more like that.. pull out the good stuff when there’s an earthquake, an emergency or something of genuine national importance and the rest of the time should be devoted to telling everyone.. “No, you’ll just spend it”.

    By an accident of time and circumstance we here have come through a stupendous period of history of a few decades of stupendous wealth and spent it freely on scratching every itch in the community. This period is not the norm of human history and sooner rather than later we will revert to the mean as our NGOs and authorities overreach in trying to be loved by the fat slobs they’ve created just sitting round scoffing Govt cookies.

    You know.. I think thats why you get young people from the West heading off to join the Jihad. They know they are of no use and see that there’s nothing for them.. better to join Islam, fight and die for a cause.. any cause that works out their frustrations and inadequacies.

    Its better than dying by inches in a welfare cocoon.

    JC

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  28. masterman (19 comments) says:

    Corporation: A miniature totalitarian fascist state governed by a hierarchy of unelected officials who take a dim view of individualism, free thought, criticism, egalitarianism and intellectual integrity – an abstract human construct that has more legal rights than humans.

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  29. Harriet (4,761 comments) says:

    “….leading to higher wages….”

    LOL…….Whyte making a motherhood statement. Just like Ruth Richardson was known for.

    Bosses never paid like Richardson said they would “those that do the work will get paid more” — bosses went straight from unionism to a ‘team enviroment’. And if you questioned your level of work against your co workers you were simply told “wages are paid according to several factors, budgets, sales, profits, economic outlook….” I was never paid for ‘being someone who done the work’ like Richardson said I would be, I got paid about 20-30% more than those I worked with – who done no more than 50% of what I did. Fact: I got fucken ripped off!

    I left the country in less than two yrs.

    Whyte wants to stop leading people to believe what he knows he cannot deliver.

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