Reference: 20160433

1 February 2017

Thank you for your Official Information Act request, received on 14 December 2016. You requested:

“On the Tax Review 2001 1. All the external submissions, and any summary of, for the Tax Review 2001 both for producing the Issues Paper and the final report. (Unfortunately these are no longer online). 2. Can you provide me any correspondence or memos that states the rationale for starting this review by the Minister of Finance at the time, Michael Cullen. 3. Can you also please send me the terms of reference for the Review.

On the Tax Working Group 2009 A paper was published by The Centre for Accounting, Governance and Taxation Research - Victoria University of Wellington Tax Working Group in January 2010 titled A Tax System for New Zealand's Future. The report claims it was established with the support of the Treasury and Inland Revenue Department.

4. Can you please send me any correspondence or memos entered into with Victoria University of Wellington that states or explains the rationale for starting or supporting this Working Group. 5. Can you also please send me any subsequent references to the paper by the Government after its publication. The goal is to ascertain what the government's thoughts are on the report.”

On 16 December you sent through an additional request asking for the following:

“1. The final Tax Review 2001 document stated "We received 197 written submissions and heard oral submissions from five group submitters" in its first round of its consultations.

Can you please send me the minutes or transcript of the meetings where it identifies who they met with and the content of discussion with the "five group submitters".

2. The final Tax Review 2001 document also stated "We were pleased to receive 245 submissions and to meet with 20 group and individual submitters" in relation to the second round of consultations.

Similarly, can you please send me the minutes or transcript of the meetings where it identifies who they met with and the content of discussion with the "20 group and individual submitters".

3. Under the "Second Stage of Tax Review Program" it refers to further analysis and establishing a set of "workable proposals", it states:

"Our report completes the first stage of the government’s tax review program. As set out in the Terms of Reference, stage two will analyse the conclusions in our report to enable the government to establish a set of workable proposals to put before the New Zealand public leading up to the 2002 general election."

Can you please send me this set of "workable proposals", and the official response of the Government to both this report and these subsequent proposals.”

Information Being Released

Please find enclosed the following documents:

Item Date Document Description Decision

1. 17 July 2000 Cabinet paper: Establishing the tax Release in full inquiry

2. 10 September 2001 Tax Review 2001 Summary of Release in full Submissions

3. 12 October 2001 Cabinet paper: The Government’s Release in full Response to the Final Report of Tax Review 2001

4. 12 May 2009 Cabinet paper: Tax Working Group. Release in full Paper establishing the working group.

I have decided to release the documents listed above. Information Publicly Available

The following information is also covered by your request and is publicly available on the Treasury and Beehive websites:

2

Item Date Document Description Website Address

5. 12 October 2001 Tax Review 2001: Letter of http://www.google.co.nz/url?sa=t Transmittal. This includes the &rct=j&q=&esrc=s&source=web terms of reference (see annex H). &cd=1&cad=rja&uact=8&ved=0a hUKEwiUl9D6u6nRAhVCNJQK HUSGDekQFggbMAA&url=http %3A%2F%2Fwww.treasury.govt .nz%2Fpublications%2Freviews- consultation%2Ftaxreview2001 %2Ftaxreview2001- report.pdf&usg=AFQjCNGHhtyH QSo- 4BIo7kjMn0nCXAgK1A&sig2=1J c1xWvbTOVIjy9hyOxkkA

6. 5 October 2000 Media Statement: Tax Review https://www.beehive.govt.nz/feat Panel – the right team for the job ure/tax-review-panel-right-team- job

7. 2001 External submissions Tax Review http://www.treasury.govt.nz/dow 2001 nloads/zips/taxreview2001- submissions.zip

8. 19 January 2010 Options for tax reform for inclusion http://www.treasury.govt.nz/publi in Budget 2010 and other 2010 cations/informationreleases/bud Budget papers. get/2010/tax

9. 20 May 2010 Budget 2010: Reform of the Tax http://www.treasury.govt.nz/bud System get/2010/execsumm/10.htm

Accordingly, I have refused your request for the documents listed in the above table under section 18(d) of the Official Information Act – the information requested is publicly available.

This covers the information you requested. On 5 January 2017 you were emailed a link to submissions on the Tax Review 2001 – for completeness I have also included this link under ‘information publicly available’. I was unable to find the minutes or transcripts of the meetings with groups that made oral submissions to the Review, or documents relating to the second stage of the Review.

I have, however, included the Cabinet paper The Government’s Response to the Final Report of Tax Review 2001. This paper noted that many of the Review’s recommendations covered items already on the Government’s tax policy work programme and the second stage could most efficiently be carried out by the Government using the existing work programme.

3

In regard to the 2010 Tax Working Group, I was unable to find correspondence or memos entered into with Victoria University that states or explains the rationale for starting or supporting the Working Group. I have, however, included the Cabinet paper on establishing the Working Group, which discussed the rationale for establishing the Working Group. The Government’s response to the Working Group is already publicly available (see link under ‘information publicly available’) and some of the recommendations were adopted as part of the 2010 Budget.

You have the right to ask the Ombudsman to investigate and review my decision.

Yours sincerely

Suzy Morrissey Team Leader, Tax Strategy

4

Information for Release

1. Cabinet Paper: Establishing the Tax Inquiry 1 2. tax review submissions II summary 13 3. Cabinet Paper: The Government's Response to the Final Report of Tax Review 32 2001 4. EGI PAPER Tax Working Group 42

Doc 1 Page 1 of 45

IN CONFIDENCE

17 July 2000

MEMORANDUM FOR THE FINANCE, INFRASTRUCTURE AND ENVIRONMENT COMMITTEE

ESTABLISHING THE TAX INQUIRY

Executive Summary

1. This memorandum asks the Finance, Infrastructure and Environment Committee (FIN) to make decisions on the design of the Tax Inquiry. It also proposes the next steps in the establishment of the inquiry team.

2. The last fifteen years have seen an overhaul of New Zealand’s tax system. This has led many people to ask whether the current tax system meets New Zealand’s needs, both now and in the future. An inquiry into the tax system will help answer these questions. It will also play a significant role in helping the Government work towards our objectives, in particular developing an inclusive, innovative economy for the benefit of all, protecting and enhancing the environment and providing strong social services, which is a prerequisite for closing the gaps.

3. A successful Tax Inquiry would:

• reach high-quality, independent conclusions. The inquiry team will not be restricted in the options it can consider. I recommend that we emphasise this independence when the Government announces the Inquiry;

• be credible to stakeholders with differing viewpoints. An open and inclusive process will increase the credibility of the Inquiry’s conclusions; and

• set out for Ministers what sort of trade-offs are involved in tax policy (between increasing equity, increasing efficiency, reducing compliance and administration costs and maintaining tax revenue), without pre-empting the Government's role of actually making the trade-offs.

4. To ensure that the Tax Inquiry achieves these objectives, the Government can provide the Inquiry with terms of reference that:

• establish two stages of work;

Doc 1 Page 2 of 45

• provide guidelines for how the inquiry team should go about its task; and

• indicate the subjects that the Inquiry should focus on.

Proposed Terms of Reference for the Tax Inquiry are set out in full in the annex to this memorandum.

5. I seek agreement from FIN that the work should be conducted in two stages:

• stage one will involve an inquiry team developing and the Government making decisions on principles to guide tax policy in New Zealand and what the general structure of the New Zealand tax system should be; and

• in stage two the Government will develop concrete policies, which can then be announced towards the end of this Parliamentary term.

6. This two-stage process means that in the first stage the inquiry team needs to draw conclusions that are sufficiently general that they can serve as a guide to overall tax policy, but sufficiently particular so that they provide a clear idea of the actual tax policies that they would lead to.

7. I propose guidelines for how the inquiry team should go about its task that emphasise a consultative, open process and keeping Ministers informed of progress.

8. I also propose that FIN agree that the Tax Inquiry should focus on the extent to which the tax system can contribute to broader social and economic objectives such as promoting higher savings, encouraging secure, high quality employment, generating a fair distribution of income and maintaining a sustainable environment.

9. As the next steps in the establishment of the Tax Inquiry, I am considering possible members of the inquiry team for stage one. After discussing this with relevant Ministers, I will report to the Cabinet Appointments and Honours Committee with recommended appointments.

Proposal

10. This memorandum asks FIN to make decisions on the design of the Tax Inquiry. It also proposes the next steps in the establishment of the inquiry team.

Background Information

Why Establish a Tax Inquiry?

11. The last fifteen years have seen an overhaul of New Zealand’s tax system. The tax base has been broadened, tax scales have been flattened and the economic costs of the system have been reduced. This has led many people to ask whether the current tax system meets New Zealand’s needs, both now and in the future. An inquiry into the tax system will help answer these questions. There is therefore both the scope and the need for a public inquiry into New Zealand’s tax system.

12. In the budget speech I announced:

Doc 1 Page 3 of 45

We will set up a broad-based and wide ranging tax review to advise on the principles and structures best suited to sustaining a robust revenue base over the long term.

This Inquiry is an important opportunity for the Government. It will play a significant role in helping us work towards our objectives, in particular developing an inclusive, innovative economy for the benefit of all, protecting and enhancing the environment and providing strong social services, which is a prerequisite for closing the gaps.

13. The Tax Inquiry will report to me and to the Minister of Economic Development. It will concentrate on how to ensure a sustainable flow of revenue to meet Government requirements in the face of changing economic, social and technological conditions. It will advise the Government in broad terms about whether the New Zealand tax system can be improved. Ideally the tax system should raise revenue simply, efficiently, fairly and reliably in an environment of changing technology, growing globalisation and increasing complexity. It should do this in ways that do not materially undermine social cohesion, economic well-being or the environment.

Comment

What Should the Government’s Objectives for Establishing the Tax Inquiry Be?

14. A successful Tax Inquiry would:

• reach high-quality, independent conclusions. The inquiry team will not be restricted in the options it can consider. I recommend that we emphasise this independence when the Government announces the Inquiry;

• be credible to stakeholders with differing viewpoints. An open and inclusive process will increase the credibility of the Inquiry’s conclusions by ensuring that key stakeholders realise they have been given a real opportunity to put their cases forward and have been listened to – even if the Inquiry does not agree with some stakeholders’ views; and

• set out for Ministers what sort of trade-offs are involved in tax policy (between increasing equity, increasing efficiency, reducing compliance and administration costs and maintaining tax revenue), without pre-empting the Government's role of actually making the trade-offs.

How Can the Government Ensure that our Objectives for the Tax Inquiry are Achieved?

15. To help ensure that the Government’s objectives for establishing the Tax Inquiry are achieved, the Government can provide the Inquiry with terms of reference that:

• establish two stages of work;

• provide guidelines on how the inquiry team should go about its task; and

• indicate the subjects that the Inquiry should cover.

Doc 1 Page 4 of 45

16. The Terms of Reference for the Tax Inquiry are set out in full in the annex to this memorandum. Paragraphs 17 to 22 below provide a summary of these terms of reference. I also seek FIN agreement that I can, if discussion with the inquiry team suggests it is desirable, make minor amendments to the terms of reference.

The proposed two-stage process

17. I seek the agreement of FIN that there will be two broad stages:

• stage one will involve:

- the inquiry team developing and the Government making decisions on principles to guide tax policy in New Zealand and what the general structure of the New Zealand tax system should be. The inquiry team’s work will be completed by the end of July 2001; and then

- the Government announcing the Inquiry’s findings and our response to these findings; and

• stage two will involve:

- the development of concrete proposals for policy change, which can then be announced towards the end of this Parliamentary term. Since the general policy skills involved in establishing a policy direction differ from the technical tax skills involved in developing detailed tax policies, the second stage is unlikely to be led by the same inquiry team as the first stage.

18. This process will allow the Government to establish the general policy direction it wants to follow before it develops detailed tax policies. It recognises that the general policy skills involved in establishing a policy direction differ from the technical tax skills involved in developing detailed tax policies. The proposed process will also help ensure that detailed work on tax policies will only be undertaken for policies consistent with the Government’s general tax strategy.

19. This two-stage process means that in the first stage the inquiry team needs to draw conclusions that are sufficiently general so that they can serve as a guide to overall tax policy, but sufficiently particular so that they provide a clear idea of the actual tax policies that they would lead to.

Proposed guidelines for how the inquiry team should go about its task

20. I seek the agreement of FIN that the following guidelines for how the inquiry team for stage one should go about its task should apply:

• officials and members of the inquiry team will report back to Ministers as the Inquiry progresses. This will help ensure that (without interfering with the Inquiry’s independence) the Government is kept aware of the progress of the Inquiry, that the Inquiry meets the Government’s expectations and that there are “no surprises” in the Inquiry’s findings;

• the process should be open and inclusive, with opportunity for the public and key stakeholders to provide input, perhaps by way of the inquiry team commissioning studies;

Doc 1 Page 5 of 45

• since tax policy is a well-developed field, the inquiry team would gather and assess the views of stakeholders, previous studies and other reviews that the Government is conducting, rather than devising principles and policies from scratch. The inquiry team’s reporting deadline (by the end of July 2001) reinforces this; and

• as the Minister responsible for Treasury and IRD, I will make available tax- policy officials from Treasury and IRD to provide analytic and secretariat support, and would expect them to contribute significantly to the inquiry team’s work. The support will include a full-time secretary to the Inquiry, reporting to the Chair of the Inquiry, who will co-ordinate the support services to be provided. The Tax Inquiry has been given high priority in the Tax Policy Work Programme I have agreed with Treasury and IRD and I have approved committing resources to the Inquiry accordingly. The inquiry team will also have the ability and the budget to engage other experts to provide advice and assistance on specific issues.

Proposed subjects for the Tax Inquiry to cover

21. We want the inquiry team to focus on the key issues. There is a question about the level of detail with which we indicate the subjects that the Inquiry should cover. Putting in too much detail could lead to an inquiry that is too robotic. This would cut across the higher-level thinking that I am looking for.

22. I seek the agreement of FIN that the Tax Inquiry will:

• assess the extent to which the tax system can contribute to broader social and economic objectives such as promoting higher savings, encouraging secure, high-quality employment, generating a fair distribution of income and maintaining a sustainable environment; and

• recommend structural changes for the tax system, if appropriate. In doing so the Inquiry will focus on the following questions:

- Can the tax system be made fairer in its role of redistributing income? This includes considering whether the income tax base should be broadened and the extent to which marginal rates should increase with levels of income, wealth and expenditure. The Inquiry should consider the best mix between different tax bases such as income, consumption, financial transactions and wealth.

- How can the tax system be designed to encourage desirable behaviour (e.g., work and savings) and discourage undesirable behaviour (e.g., the

wasteful use of non-renewable resources)?

- How can the level of tax that is reasonably required by government for the provision of essential social services such as health, education, superannuation and social welfare be achieved reliably in the medium and long-term bearing in mind the need for the tax system to be an effective instrument of fiscal policy in the management of the economy?

Doc 1 Page 6 of 45

- Do the tax system and tax rates need to be modified in light of new technology and international competition?

Next Steps: Potential Members of the Inquiry Team

23. I am considering possible members of the inquiry team, and, after discussing this with relevant Ministers, will report to the Cabinet Appointments and Honours Committee with recommended appointments.

Doc 1 Page 7 of 45

Financial Implications

24. The overall budget of stage one of the Tax Inquiry will depend on:

• the remuneration of the inquiry team and the number of meetings;

• whether the inquiry team’s secretary is an official (if he/she is not, additional expense is involved in employing him/her); and

• the cost of technical and other advice (which will in turn depend in part on the skills of the inquiry team’s members).

A plausible maximum cost is $695,000 ($640,000 in 2000/01; $55,000 in 2001/02) and a plausible minimum $335,000 ($315,000 in 2000/01; $20,000 in 2001/02), all figures GST inclusive. I propose to fund the inquiry team up to a total cost of $520,000 ($485,000 in 2000/01; $35,000 in 2001/02) by reprioritising within Vote: Finance. If expected costs are above this and if the issue of an additional appropriation and any impact on the Government’s fiscal provisions arises, I will report further to the Cabinet Committee on Government Expenditure and Administration (EXG).

Legislative Implications

25. Establishing the Tax Inquiry has no legislative implications.

Regulatory Impact Statement

26. Establishing the Tax Inquiry does not require a Regulatory Impact Statement.

Treaty Implications

27. Establishing the Tax Inquiry does not contravene the principles of the Treaty of Waitangi.

Human Rights Act

28. Establishing the Tax Inquiry does not contravene the Human Rights Act.

Publicity

29. I seek the agreement of FIN that when the Government announces the Tax Inquiry we emphasise that the Inquiry will play a significant role in helping us achieve our objectives (as discussed in paragraphs 11 to 13 above), that the Inquiry will be independent and in particular that the inquiry team will not be restricted in the options it can consider. I also seek the agreement of FIN that the Government should announce the terms of reference and members of the inquiry team at the same time.

Consultation

30. Treasury, Inland Revenue, the Ministry of Economic Development and the Ministry of Social Policy have been consulted in the preparation of this memorandum

Doc 1 Page 8 of 45

and agree with its recommendations. The Department of Prime Minister and Cabinet was also consulted in the preparation of this memorandum.

Recommendations

I recommend that FIN: a agree that there will be two stages of work:

• stage one will involve an inquiry team developing and the Government making decisions on principles to guide tax policy in New Zealand and what the general structure of the New Zealand tax system should be. The work of the inquiry team for stage one will be completed by the end of July 2001. The Government will then publicly announce the Inquiry’s findings and our response to these findings; and

• stage two will involve the development of concrete proposals for policy change, which can then be announced towards the end of this Parliamentary term; b agree that the inquiry team for stage one will complete its work by the end of July 2001, and stage two will be completed before the next general election; c agree that the following guidelines for how the inquiry team for stage one should go about its task should apply:

• officials and the inquiry team will keep Ministers informed as the Inquiry progresses;

• the process will be open and inclusive, with opportunity for the public and key stakeholders to provide input, perhaps by way of the Inquiry commissioning studies, preparing and releasing issues papers and arranging various discussion fora;

• since tax policy is a well-developed field, the Inquiry will gather and assess the views of stakeholders, previous studies and other reviews that the Government is conducting, rather than devising principles and policies from scratch; and

• the Government will make available relevant tax-policy officials from Treasury and IRD to provide analytic and secretariat support, and would expect them to contribute significantly to the Inquiry. The support will include a full-time secretary to the Inquiry, reporting to the Chair of the Inquiry, who will co-ordinate the support services to be provided; d approve the terms of reference for the Tax Inquiry as set out in the an nex to this memorandum. The terms of reference indicate that the Inquiry should:

• assess the extent to which the tax system can contribute to broader social and economic objectives such as encouraging secure, high- quality employment, generating a fair distribution of income,

Doc 1 Page 9 of 45

maintaining a sustainable environment and promoting higher savings; and

• recommend structural changes for the tax system, if appropriate. In doing so the Inquiry will focus on the following questions:

- Can the tax system be made fairer in its role of redistributing income? This includes considering whether the income tax base should be broadened and the extent to which marginal rates should increase with levels of income, wealth and expenditure. The Inquiry should consider the best mix between different tax bases such as income, consumption, financial transactions and wealth.

- How can the tax system be designed to encourage desirable behaviour (e.g. work and savings) and discourage undesirable behaviour (e.g. the wasteful use of non-renewable resources)?

- How can the level of tax that is reasonably required by government for the provision of essential social services such as health, education, superannuation and social welfare be achieved reliably in the medium and long-term bearing in mind the need for the tax system to be an effective instrument of fiscal policy in the management of the economy?

- Do the tax system and tax rates need to be modified in light of new technology and international competition? e authorise me to make minor amendments to the terms of reference if discussion with the inquiry team suggests it is desirable; f invite me to consider possible members of the inquiry team and, after discussing this with relevant Ministers, report to the Cabinet Appointments and Honours Committee with recommended appointments; g note that I propose to fund stage one of the Tax Inquiry from within Vote: Finance D3 Policy Advice Tax up to a total cost of $485,000 in 2000/01 and $35,000 in 2001/02 GST inclusive; and h note that I will report back to EXG if the expected budget for stage one of the Tax Inquiry is more than the amount in recommendation g above and if the issue of an additional appropriation and any impact on the Government’s fiscal provisions arises.

Hon Dr Michael Cullen Minister of Finance Minister of Revenue

Doc 1 Page 10 of 45

In Confidence

Annex: Terms of Reference for the Inquiry into the Tax System

INQUIRY INTO TAX

Functions

The Tax Inquiry has been appointed to carry out a public inquiry into the tax system so that the government has an appropriate framework within which to build tax policy.

The functions of the Inquiry will be:

(i) to examine and inquire into the structure and effects of the present tax system in New Zealand;

(ii) to formulate proposals for improving that system, either by way of making changes to the present system, abolishing any existing form of tax, or introducing new forms of tax; and

(iii) to report to Parliament through the Minister of Finance, the Minister of Revenue and the Minister of Economic Development.

Context

The last fifteen years have seen an overhaul of the New Zealand tax system. The main changes have been to remove special allowances and exemptions and varied tax rates. The result has been to broaden the tax base, flatten tax scales and greater resource allocative neutrality.

Critics say that the present tax system allows individuals to arrange their legal affairs so as to escape full rates of personal income tax, treats some types of production unevenly, and favours some forms of long-term saving over others.

A second concern is that the tax system as a whole has become less progressive, while at the same time the interface between the tax and benefit systems is generating very high effective marginal tax rates for some low income people and families.

Thirdly, threats to the tax base are found in new forms of transacting (such as internet trading and internet banking) and the use of new tax havens. A related problem is whether increased globalisation requires re-examination of the very possibility of New Zealand setting its own tax rates and what will happen if it does.

Finally, there is a growing debate about how relevant the tax system is to the core features of the economic structure. (Rival) contenders to augment or replace elements of the current tax structure are sector-specific taxes to be used as an instrument for sectoral assistance, cash flow taxation, financial transactions taxes, and eco-taxes.

There is both the need for and scope to review the tax system at the level of broad principle as well as in some detail. For this reason, it is proposed to divide this process

T2000/1473, PAD2000/200: Establishing the Tax Inquiry Page 1

Doc 1 Page 11 of 45

In Confidence

into two stages. The Tax Inquiry is the first stage of the process and will explore the broad principles of the tax system. Stage two will consider the detail of implementing any changes proposed in stage one.

Purpose

In the budget speech the Government announced:

We will set up a broad-based and wide ranging tax review to advise on the principles and structures best suited to sustaining a robust revenue base over the long term.

The review will concentrate on how it is possible to ensure a sustainable and continuous flow of revenue to meet Government requirements in the face of changing economic, social and technological conditions. It will form the basis of advice to the Government in broad terms about whether the New Zealand tax system can be improved.

Ideally the tax system should raise revenue simply, efficiently, fairly and reliably in an environment of changing technology, growing globalisation and increasing complexity. It should do this in ways that do not materially undermine the environment, social cohesion or the effective use of resources.

Task of the Tax Inquiry

The Tax Inquiry will:

(a) assess the extent to which the tax system can contribute to broader social and economic objectives such as encouraging secure, high-quality employment, generating a fair distribution of income, maintaining a sustainable environment and promoting higher savings;

(b) Recommend structural changes for the tax system, if appropriate. In doing so the Inquiry will focus on the following questions:

i Can the tax system be made fairer in its role of redistributing income? This includes considering whether the income tax base should be broadened and the extent to which marginal rates should increase with levels of income, wealth and expenditure. The Inquiry should consider the best mix between different tax bases such as income, consumption, financial transactions and wealth.

ii How can the tax system be designed to encourage desirable behaviour (e.g. work and savings) and discourage undesirable behaviour (e.g. the wasteful use of non-renewable resources)?

iii How can the level of tax that is reasonably required by government for the provision of essential social services such as health, education, superannuation and social welfare be achieved reliably in the medium and

T2000/1473, PAD2000/200: Establishing the Tax Inquiry Page 2

Doc 1 Page 12 of 45

In Confidence

long-term bearing in mind the need for the tax system to be an effective instrument of fiscal policy in the management of the economy?

iv Do the tax system and tax rates need to be modified in light of new technology and international competition?

(c) The Tax Inquiry will report on progress to the Minister of Finance, the Minister of Revenue and the Minister of Economic Development at regular intervals during the course of the review.

The conclusions need to be sufficiently general so that they can serve as a guide to overall tax policy, but sufficiently particular so that they provide a clear idea of the actual tax policies that they would lead to. The Inquiry will submit its final report to the Minister of Finance, the Minister of Revenue and the Minister of Economic Development by the end of July 2001.

Process Expectations

The process should be inclusive, with opportunity for the public and key stakeholders to provide input, perhaps by way of the Inquiry commissioning studies, preparing and releasing issues papers and arranging various discussion fora.

Since tax policy is a well-developed field, the Inquiry would gather and assess the views of stakeholders and previous studies, rather than devising principles and policies from scratch. The Inquiry’s reporting deadline (by the end of July 2001) reinforces this.

The Government would make available relevant tax-policy officials from Treasury and IRD to provide analytic and secretariat support, and would expect them to contribute significantly to the Inquiry. The support will include a full-time secretary to the Inquiry, reporting to the Chair of the Inquiry, to co-ordinate the support services to be provided. The inquiry team will have the ability and the budget to engage external parties to provide advice and assistance on specific issues.

Officials and the inquiry team would keep Ministers informed of the progress of the Inquiry.

The Government will consider the report of the Inquiry, and indicate publicly its views on what principles should guide tax policy and what the general structure of the tax system should be.

Stage two of the process will develop the conclusions reached during the tax review and construct a set of workable proposals that can be put before the New Zealand public in the context of the 2002 general election.

T2000/1473, PAD2000/200: Establishing the Tax Inquiry Page 3

Doc2 Page 13 of 45

Tax Review 2001 Summary of Submissions: raw material

This is a 20 page list of the points raised in submissions, not an edited summary of submissions. It is set out in the chapter structure of the Issues Paper, with a list of “sundry” points at the end.

A handful of submissions are omitted, because they could not be efficiently summarised in this manner. The submissions omitted are:

#161 Peter Read #167 Guy Salmon #193 Waikato Resource Use Tax Study #198 Child Poverty Action Group #209 PWC #222 KPMG

Chapter 1 Frameworks

- formally endorse GTPP - support for Review’s position of GTPP - undue weight given to economic theory. Should take into account studies of the effect of a tax rate decrease on economic activity and real life success stories (Singapore, Ireland) - need empirics to back theory - connection between saving, investment and consumption and the economic model used by the review should be made clear - look at system holistically rather than silos of tax rates etc - framework is not always carried through to the analysis in the paper - need debate about the proper powers of IRD - importance of a level playing field is overstated - do a matrix of compatible proposals to avoid “cherry picking” by politicians - need to consider the types of transactions which may be subject to tax - support for BBLR - Certainty and simplicity are important - introduce a government tax strategy statement - agree more independent analysis good; but no new government agency should be set up to do this - problem that taxation amounts to taking property by force; how do we devise a mechanism to constrain tax/GDP ratio?….an unwritten rule, developed through debate - a primary challenge of the Review is to design an innovative globally attractive and competitive tax system - address how tax contributes to “economic transformation” - tax system as an instrument of growth

Chapter 2 Bases

- Retail Merchants (#105) do not support broadening the base (they have 9 taxes already) - Should have only income tax (direct and simple) - Wealth and ability to pay do not necessarily bear any relationship to taxable income (in support of wealth/capital gains tax) - Agree with rejection of wealth taxes (incl. Estate duties)

Doc2 Page 14 of 45

- New taxes: advertising; packaging; information tax; weapons and ammunition

Capital gains

- Yes/no - support status quo - should tax “monies received” whatever their source - other people have it - can discourage restructuring - CGT as bad as the problem it seeks to fix - a well designed CGT would encourage enterprise, as it would allow deductions for start up losses and entrepreneurs would be less concerned with taxes on gains later on - only wealthy people make capital gains - investments held over 1 year treated as capital assets and taxed on realisation with compensation for inflation (refers to Australian treatment). Minimum exemptions, but principle residence below $500,000; assets held 10 years+; $200,000 wealth threshold. - If we have capital gains tax, it should tax only true gain, taking into account inflation, exchange rates, and losses - NZ should encourage all residents to have offshore investments (will help stabilise the exchange rate) - If no RFRM on housing, capital gains to be explored as a alternative - Could be beneficial, even if it raises little revenue, if it changes behaviour e.g. prevents asset bubbles. CGT could improve the quality of investment by encouraging investment in productive assets rather than property. - Threshold for capital gains (say $1-2m) - If no RFRM, taxation of gains of actively traded equities funds is an unwarranted disincentive to professional funds management - If we have to have capital gains tax, RFRM seems least offensive, at 2+% (50 year average). Should take account of value at start and end of tax year, to allow for market adjustments.

RFRM

- a problem that asset might not generate the income to meet the tax - is a wealth tax, after the review rejected wealth taxes - boundary issues - unfair in the sense that the actual returns to assets may be different from the deemed returns - government is in partnership with investors anyway (tax take a function of economic activity) - if introduced, should be revenue neutral - puts pressure on asset valuation - may have opposite effect to that intended; may encourage investment rental property (secure return relative to notional return, and can gear to avoid tax) - favour investments with a regular income stream - owning equity = certain tax; uncertain return - rules to separate out qualifying assets incur compliance costs - assets held for part years? - RFRM assumes investors will be sophisticated enough to to adjust their asset portfolio to retain the desired after tax risk/return profile - would only work properly if imputation credits are refundable

2 Doc2 Page 15 of 45

- interface with withholding/imputation regime? - Implementation/change cost - Could result in double tax in some situations - Tax treaty partners might not accept it - Has to be comprehensive to have good incentives; this may not be possible - Would increase filing - not credible that govt would introduce a new tax and lower other taxes - must have a broad base to combat avoidance - easy to avoid on housing via 100% gearing - without including housing, the costs probably outweigh the benefits - timing: value determined at start of the year; tax at the end: what if the asset loses value? - Effect of exchange rate risk - Will favour security of cashflow over growth: is this good? - Check assets on death of taxpayer to see if tax has been paid in the past - Requires information on asset value and outstanding debt - Has advantages: not distorting choice among dividends and capital gain; indexes for inflation - If apply to owner occupied housing should also apply to rental - On non-performing assets, the government could take an equity position, which could be bought out later, effectively deferring the tax - Impact of market forces on setting the risk free rate - Must be applied widely, to remove distortions between direct and collective investments - Increases after tax volatility; not applied overseas, so this may disadvatage NZ vs. overseas - Mechanism for setting the risk free rate; smoothed one-year govt stock rate?

Home tax

- Very bad (lots of submissions) - Supported; should be investigated further - Problem of taxing houses on Maori land (inalienable) - Social context different; other countries have more rental - The statistics quoted do not necessarily support over-investment; a better comparison would be value of private housing occupied, not ratio of owned to tenanted - Government gets benefit from high level of home ownership; doesn’t have to provide housing subsidies - Might inhibit the foolish practice of elderly living in large houses and relying on the state to support them - Ownership need not impede mobility: you can rent out your house - investment experts inept; poor returns in sharemarket; problem is poor alternative investments to housing - much house price change reflects inflation - taxes unpaid work in improving houses - over investment in housing as resulted in a higher cost of equity capital - should allow deductions for depreciation etc - compliance cost may outweigh economic benefit - factors that made housing an attractive investment (inflation, baby boom) are past; explaining this and benefits of diversified portfolio may be better than tax - consider alternatives to RFRM to remedy the distortion - house values rise and fall

3 Doc2 Page 16 of 45

- inconsistent with simplification - would not lead to a change in investment pattern - devaluation of housing assets would reduce the value of mortgage security, increasing bank costs - avoid by selling house to a trust or company - incidence effects: also, effect of accommodation supplement and income related rents - $750m revenue isn’t worth the trouble - student loans already prevent people from buying houses - a good wealth tax that would help flatten income tax rates and discourage overinvestment in housing at retirement - a practical way to tax people who are hiding their wealth in assets - rents would rise - people do not have the objective of increasing wealth or avoiding tax in mind when they buy a house. - Will lead to overcrowding - There is no real tax concession for housing, because the choice is between renting and owning - Other countries give subsidies, not taxes - Purpose of a house is not to make a profit but “to provide essential resources biologically and ecologically for the growth and welfare of future generations” - inequitable to tax houses and not other property (e.g. motels, hotels, farms) - people would borrow against houses to fund consumption - tax could be avoided and would be costly to administer - easier to borrow against houses than other assets - not an investment, a necessity - no way to define commercial operations as exempt and individuals as liable - all assets should be taxed the same way - taxing unearned income is dishonest; charging a tax on opportunity cost - tradition of homeownership - people work (taxed) during life for debt free house - main beneficiaries lawyers & accountants - paying off mortgage only mechanism for saving for some people - pensioners debt free but low income - people will emigrate - would add to the disproportionate burden carried by individuals - would encourage people to keep high levels of debt - what about rental person would have to pay if they did not own their own home? - Would not change investment pattern, as people have to live somewhere - Capital people put into houses already taxed when working to earn it & tax on savings while saving for a deposit & tax (GST) on repairs and maintenance - Penalises people who work vs. beneficiaries - Should be limited to second homes and properties above $300,000 - No money generated by house equity - Why not tax other things people own (also as an argument against housing tax) - Right to shelter is a fundamental right - What would happen when house values fall? (would you get a refund?) - It is a right not a privilege to do what we like with our money - Pensioners felt they were helping the country by paying for their own home - Landlords get $1 billion from the taxpayer [Accommodation Supplement?]; we are looking in the wrong place - A formula to devise a differential between low and high income groups should be devised

4 Doc2 Page 17 of 45

- Inconsistent with fewer and lower taxes - All houses are owned by someone, so you can’t free up money for other purposes - Will require an increase in NZS - If people have fewer assets as a consequence of house tax, government will miss out on the rest home claw back. - People would move to consumption rather than other investments - Could have a negative impact on the building trade; would shift to other activity offset this? - To encourage investment in non-housing assets use a positive policy (e.g. tax relief for investing in local business) - Creates an incentive to suppress increases in value (by not doing maintenance etc) - Will depress house prices - A tax on realised capital gain from housing might be better - Rents will rise - Might be a good way of taxing wealthy - Housing is already taxed (rates) - What if the house is rented out and makes a loss? - Housing a haven for risk-averse saving - Money shifted out of housing will go into managed funds and thus off shore - Home ownership contributes to social cohesion - Ownership gives security of tenure - Ok to charge a capital gains tax on a home owner when they sell their house a second time(?) - Paying off a mortgage the best means of compulsory saving for some people - Owner-occupied house tax is selective and therefore iniquitous - Should allow a deduction for lost value

R&D

- treat as an expense, as it has a short life - incentives good - repetition of details of submission to the select committee on the R&D bill (#230)

Cashflow & wealth & gift

- opposed - gift duty maybe good (alongside a death duty) - have an integrated death/CGT/wealth/gift tax a low rate - How about deferring the purchase deduction for long lived assets until sale or exhaustion - Make cashflow available as an option for small businesses - Should expand discussion/explore cashflow further - Should have at a low level cashflow tax to counter mobility (also transaction taxes)

GST

- Increase it/Reduce it - Don’t increase it as it applies to essentials - GST good as is - Exemption on rental properties an issue because of the overlap between residential and commercial property - Any decrease in tax should apply to GST

5 Doc2 Page 18 of 45

- GST may be the best tax to increase, but at some point avoidance and evasion will increase significantly - Not connected to ability to pay - Would be good to see HES data on distribution of GST - GST supports redistribution - For business, GST has lower compliance cost than income tax - Consider development of GST into a comprehensive consumption tax - Comprehensive GST good; taxes tourists and the black economy - Rates should be GST exempt as this is a tax on a tax - GST rate should be no more than 10% - All businesses should be GST registered - Investigate removal of input credits? (cascade problem; but simpler) - Remove from food - Remove from fresh fruit & vegetables - Remove from milk - Variable rates - Leave it alone as exemptions and rate changes cause disruptions to retail pricing - Financial & imported services should be included in the base, allowing a reduction in the rate. They should be considered together - Raising GST to offset reduced excises would increase pensioner costs 3.7%; $430 p.a. - May place a larger load on low/middle earners - Allow tourists to claim GST refunds - If any tax is to be increased, it should be GST - Exemptions are aggravating; so is 12.5% rate because it is hard to calculate - Is regressive

Stamp & Cheque

- support abolition

FTT/Tobin

- supported because it taxes the rich - opposed; narrow base; number of transactions is not a good proxy for anything - short-term speculators make withdrawals to purchase other investments - Tobin intended to help third world countries (as well as dampening currency speculation) - FTT used in Australian states without problems - FTT and Tobin should be thoroughly investigated - FTT could be a partial replacement for GST; could replace income tax - FTT could be implemented slowly - FTT: The low rate mitigates the cascade effect - FTT: Reduced compliance costs will offset the cascade effect - FTT: Businesses will avoid middle men - FTT taxes financial transactions GST misses - Money is a public good; the more transactions you make, the more you use the good, so it is fair to pay tax on this - Would curtail frivolous and speculative transactions - FTT should be calculated at 0.05%, not 5% as in the issues paper - People would not bother to avoid FTT because the rate is so low - FTT can achieve the benefits of Tobin - Compliance cost of GST cascades too

6 Doc2 Page 19 of 45

- Reduces the liquidity of assets - Tobin would reduce the 90% of foreign investment that is speculative Excises

- either remove all excises, or increase alcohol & gaming to match tobacco - removing would lead to increased cost to society from increased consumption without the revenue to pay for it - removing fuel excise would worsen pollution & congestion - making RUC deductible makes them meaningless - excises are ok - administration cost of collecting tobacco tax is low - efficiency of of tobacco excise as revenue generation is not relevant - should we also tax soft drinks? - raising petrol excise to UK level would raise $10 bn - could count petrol excise as taxing the imputed benefit people have from driving themselves rather than being driven - use revenue for educational purposes - use petrol excise to get rid of motor registration: costs come from the use of vehicles, not their existence - redefine as health taxes (hypothecation) - reducing excises will not make families of addicts better off - motor vehicle accident costs of alcohol - increase tobacco excise by large amounts often, alongside spending on quitting, especially for Maori and low income groups - tobacco tax should be part of a national tax system with the potential to reduce socio-economic and health inequalities - tobacco excise reduces tobacco consumption - excises should be removed: do not achieve objective - different rates for different types of liquor lacks logic - changing current excise policy would reduce inequity (i.e. broader control strategy would reduce consumption and thus inequity) - addiction means choice not a good assumption - tax means may be a good way of addressing externalities from substances (tobacco costs widespread; very costly so every tool should be used; few benefits from smoking) - more externalities than public health - questions about the data on smoking costs - tax relief for healthy alternatives - higher cigarette prices reduce marijuana consumption - smoking worse than other “moral hazards” - smokers not necessarily well informed - objective of tobacco excise should be clarified - petrol excise can be seen as a capital charge on roads. If abolished, should be replaced with a capital charge. Since much of the road network is owned by regional government, this would transfer revenue from central to local government - discussion of petrol excise is too brief - if smoking is so bad, why not ban it? - tobacco and alcohol are luxuries; it is ok to tax them - alcohol excise would be more progressive if it was levied on a GST basis rather than on alcohol content - unlike alcohol/smoking/gambling petrol is a necessity - abolishing (phase out) excise a good idea (from the alcohol industry) - tax policy should improve health and social well being as well as raise revenue

7 Doc2 Page 20 of 45

- smoking is the leading preventable cause of death in NZ; increasing excise is the most effective anti-smoking strategy - increasing excise deters young people from starting smoking - low income/Maori smokers are more responsive to excise - much alcohol/tobacco/gaming is imported - alcohol excise is inefficient at revenue raising, but that is not its objective - Pigouvian argument - freedom of choice is not a strong argument in response to addiction - education and cessation alone are not effective anti-smoking policies

Gaming

- different duties on different activities not good - reduced tax will lead to more gaming - for racing, simplify by replacing duty with fiscally equivalent increased GST - reduced tax increases profitability, increasing supply; more supply increases the prevalence of problem gambling - Abbot and Volbeg 2000 is flawed - Anyone can be a problem gambler; not connected to a deeper problem - Gambling sector is unproductive relative to other sectors [?] (cites Australian Productivity Commission 1999) - More gaming tax; hypothecation - An increase in tax on casinos cannot be justified on the basis of gaming industry relativity arguments

Tax Mix

- replace income and profit taxes, in particular a Sales Tax (replacing GST), an FTT, and turnover tax for large corporations. - May be better to have more taxes than GST/Income (each tax should offset total economic costs against benefit…income tax currently too high) - Shift some of the local body rate burden onto a local GST (one rate across the country) - Eliminate all income taxes; replace with GST and environmental taxes - Small increase in GST, alongside a three step tax scale with a free zone of $10,000 - $15,000. - Shift burden from direct to indirect - An expenditure tax to replace all other taxes (including local body rates) - Taxes on wages, production and savings should be progressively replaced by rental or leasehold charges for the use of natural resources and natural monopolies

Tax burden

- should be increased as health education and welfare are underfunded - should be reduced (some say a lot; also too many people on benefit) - economic growth is important; reduce the tax burden - some submissions from overseas saying tax influenced decision to leave - high enough; put effort into removing anomalies - should be as low as possible - lower burden would reduce the evasion/black economy incentive - should not be reduced (important role for government) - maximum 30% of GDP; more targeting of spending

8 Doc2 Page 21 of 45

Chapter 3: Eco Tax - Carbon taxes a good idea: discourages vehicles & their costs. Include ACC….and scrap vehicle licensing to save administration - Do not adopt eco-taxes unilaterally because they would hurt competitiveness - Many alternatives to eco taxes - The Review’s preconditions for a acrbon tax will not be met - Post 1990 greenhouse reductions should be taken into account or grandparenting allowed if emissions trading is introduced - Have similar problems to excises (selective) - Use taxes to offset externalities generated by unsustainable behaviour - No hypothecation of excises - Excises (like FBT) do not need to collect a lot of revenue to be good - Petrol excise a de facto green tax; should not be repealed until specific taxes in place - Opposed; lack of analysis on costs and benefits to NZ of global warming; impact on production costs; lack of effect on global emissions/warming; lack of agreement about warming - Externalities are non-zero: better to be partially right (tax them) than exactly wrong - Eco taxes address an externality; NZ has strong limitations on property rights to pollute - Price mechanism preferable to regulation; should focus on the workability of eco tax in addressing the externality, relative to alternatives - Good incentives from financial instruments - Financial instruments can adapt to changing standards (society’s standards tend to rise as the cost of meeting them falls) - Review approach to carbon tax supported, especially because of exemptions - Methane tax may be worthwhile - NZ farmers unique in not being subsidised, unfair to apply methane tax - Need substantial case to justify exemption (e.g. if new overseas plants are less polluting than current NZ, case for local exemption on the ground of exported pollution doesn’t hold up) - Many businesses do recognise their impact on the environment, and attempt to address it - Revenue neutral eco-taxation may still disadvantage particular industries relative to overseas competitors - Role for Negotiated Greenhouse Agreements - Negotiated GHG agreements more effective than universal instruments like carbon tax - Incentives for clean alternatives - Carbon charges should only be applied to increases above a base load - Real world carbon charges have exemptions for existing industries - A tax high enough to reduce GHG emissions would lead to import substitution - Should encourage new activities, rather than taxing old - Consider empowering local govt to introduce local eco taxes for local problems - Local eco taxes might discriminate among competing businesses in different locations - Eco tax would capture the rent from environmental resources - Make tax system more favourable to LPG vehicles (write off of additional capital cost (including for calculation of value for FBT purposes); remove LPG excise, replace with RUC system; increase petrol excise and RUC in recognition of lower impact of LPG) - May be inevitable, but NZ should not lead the world

9 Doc2 Page 22 of 45

- Property rights may be better than taxation as a response to environmental externalities - Support cautious approach of the review - Would enhance our clean green reputation - Following implementation of a carbon tax, an Ecological Tax Reform Commission be established to develop environmental tax shift packages - Should recommend that the Resource Management Act be amended to allow local bodies to apply local taxes to local problems - “property rights” arguments not right - burden of proof should be on all taxes - “paternalism” argument flawed, because taxation is inherently paternalistic - some good material on carbon taxes & methane - NZ might or might not benefit from global warming - NZ has high emissions per capita of methane - Should be a presumption of taxation of emissions - A carbon tax would have to be very carefully designed to influence consumption and investment, and may still not be the best instrument - Burden of proof argument in the issues paper should take into account cumulative costs, and threshold effects - Adopt the precautionary principle - Economic and environmental benefits can be achieved at the same time - There may be uses for environmental taxation other than a carbon tax e.g. to assist take up of hydrogen filling stations for new technology cars - Environmental taxation is consistent with property rights; a claim can be made on wealth without altering the right to hold property; eco-taxes are similar to other taxes in this regard - Marginal net damage of NZ emissions is not measurable - Case for a carbon tax has not been made - Should keep options open; evaluate full range of options - We would not be the first country to introduce a carbon tax - We are not unable to take action - We do not have a high marginal cost of abatement - Marginal cost of abatement will become an international price - Comment on Infometrics report (which models benefits of alternative tax cuts funded by a carbon tax): issue with net revenue from corporate taxes; also note benefit from GST option comes from an (unrealistic) cut in nominal wages (#211) - There is a much larger literature than that quoted on eco-taxes - Petrol excise and energy resources levies should not be removed until replaced with better mechanisms for recognising externalities - NGA only ok as relief from a carbon charge if the result is an equivalent improvement in carbon performance - State of the environment important to the economy; wider review (possibly Royal Commission) needed - Methane tax favoured, on public health grounds: would encourage consumption of less fatty forms of protein. - Any carbon tax should apply to all sectors, should not be the primary mechanism, should be transparent (revenue used for tax reductions or reducing emissions), rigorous analysis of compliance costs, and based on level of externalities - Purpose of a Carbon Charge is to prepare the economy for emissions trading; postponing till commitment doesn’t make sense. Alternate view: no charge till commitment. - Reduce tax on “goods” instead of taxing “bads”; e.g. reduce company tax on fruit and vegetable growers

10 Doc2 Page 23 of 45

- Align the Tax Review and the Climate Change Steering group; also National Energy Efficiency and Conservation Strategy (which is inconsistent with the Review; e.g. accelerated depreciation on energy efficiency/renewable energy equipment; transport pricing)

Chapter 4 tax rates Tax Rates - personal and corporate should be aligned (19%; 30% or less;) - corporate rate should be aligned with Australia. - Do not cut corporate rate; if any money for cuts, should go to low income earners - Reduce corporate rate 1% point per year and see if growth offsets the revenue loss - Allowing deferral (and write off) of tax liability if the money is added to share capital - Single rate best; but two rate an achievable improvement - Progressive tax can be done with a smooth function rather than steps - Lower corporate rates encourage firms to pay taxes here and take deductions elsewhere - Other taxes as well as corporate affect competitiveness - Alignment of corporate and personal is desirable, but a lower corporate rate is more important - A single rate would greatly simplify the tax system - Look further at free zone - Reverse the 1996 cuts; index the 1988 scale for inflation - Given strong case for proportional tax, case for two-rate is weak. Two rate still has many of the drawbacks of progressivity. Equity problem of single rate can be reduced with credits - 39% opposed - 39% imposes compliance costs on business - 39% unfair in the context of the broad base - 39% bracket opposed: avoidance - Two-step opposed as too much benefit for the wealthy; also cost to low income earners - Progressivity is fair and efficient: Diminishing marginal utility of money - Argument for progressivity is diminishing marginal utility of money; but there is no logical end point to this; so as long as needs of poor can be met proportional tax is better - Progressivity may be harmful: wealthy may do good things with their money - Envy not a good argument for progressivity - The tax system can be used to target people on low incomes. Rebates can do this - Tax assistance based on the number of dependents - Secondary tax can be unfair - Employees unable to carry over from one year to the next; reconciliation to allow for fluctuating income - Any increase in taxes should be direct taxes - 33% should at worst be retained; preferably lowered - 33% too high for corporate - maximum rate 25% - 7.5% of taxpayers account for 40% of the revenue; this is unfair, a disincentive to companies and entrepreneurs, and damaging to democracy - top 5% pay 24% of tax; bottom 24% pay 3% of tax. - two tier personal scale supported - two rates: 20%/27.5% threshold at $38,000; 27.5% aligned corporate - flatter, simpler is desirable

11 Doc2 Page 24 of 45

- case for redistribution beyond a safety net is doubtful - as well as generating revenue and reducing inequality, it should feel “fair”; low rate flattened scale or two rates with a large step feels unfair - perhaps fill in large steps with more small steps? - reduce load on low/middle earners. - Should not penalise effort - Increasing tax rates on low incomes does not hurt all low paid: many are members of high income households, or beneficiaries - Could raise minimum wage or introduce changes slowly to reduce impact of higher rate on low earners; or introduce rebates - Avoidance and evasion by companies a bigger issue than the rate - support proportionality (19%; 20%). Single rate system best. - progressivity is desirable; higher taxes on high incomes; Scandinavians do this - tax free zone, funded by abolishing rebates for donations, housekeepers, LIER, Family assistance, and maternity[?]. - free zone, to reduce compliance & administration cost to $6,000; 18% to $30,000; 28% above - free zone $5,000 - free zone $5,000, with next $5,000 taxed at 10% - free zone to $10,000 - free zone to $10,000; 10% to $20,000; 20% to $40,000; 30% to $60,000; 40% above $60,000 - free zone, but only available to people below $9,500 - problems with ACC lump payments (caused by progressivity: high rate of tax on backpay of compensation) - lower personal taxation - corporate rate lower than personal rate: 20% do this first, over time (6 years). Cutting company tax has more benefits than cutting other tax, due to the proportion reinvested. No need for preferential treatment of foreign investors at 20%. - 1994 cuts were poorly designed; this should be taken into account - two rates ignores the growing gap between rich and poor - an additional step beyond 39% - as flat as possible - proportional, with targeted credits for low income earners

Taxable unit

- support individual basis/support income splitting - All couples, married or de facto, should be able to register their partnership with IRD, so any income earned by either can be declared partnership income, and each partner would pay tax on their own share of that income. - Allow anyone to split with anyone - In NZ there are diverse views and practices regarding intra-household allocation of income. - electronics may allow people to choose family taxation - the tax system discriminates against married couples when one partner works outside NZ (“enduring relationship with NZ” rule). - Align welfare criteria for household unit and tax criteria - Inconsistency between relationship property legislation and individual income tax - Use a tax rebate to recognise non-earner in a couple - Single income tax liability at $45,000 is $9,720; $50,000 from two $25,000 incomes is taxed $9,360

12 Doc2 Page 25 of 45

- Statements about numbers of people on low incomes and whether or not they are in poverty need numbers to back them up - Single tax rate solves the problem - Business people can achieve income splitting by making the spouse a partner; a PAYE earner with the same income can’t do this - Exempt income up to the amount of the welfare benefit/child support for dependents

Tax/Benefit

- replace benefits and Family assistance with vouchers - support universal child benefit - have a maximum allowable EMTR (e.g. 70%) - smooth abatement/EMTRs - lengthen abatement zones to reduce EMTRs? - Inconsistency between $47p.w. family support to low income one child family and $261p.w. to wealthy superannuitant couple - Welfare is welfare, whatever you call it - CTC not examined; it is ill-conceived as beneficiary families don’t get it - horizontal equity: recognise the costs of children, at all incomes - tax deduction/rebate for cost of children - Extend child tax credit to all families - Review should consider taxes, benefits, and credits together - Increase the $80 free zone; abatement regime 25%/50%/75%; improve data exchange IRD/DWI. Abatement is within the scope of the tax review - A general principle that no-one should be worse off from moving from benefit to work

Universal income

- supporters reiterate benefits - differences among Universal Income, Unconditional Universal Income, Universal Basic Income. UI refers to human rights standards that provide a living wage unconditionally on top of any other income received. - UI is a wage for everybody’s job of being a citizen in a democracy. People have the right and responsibility to choose useful work for themselves. - UI reflects a return on public domain resources (assets owned equally by all members of society). People should receive this (a lump sum), and pay a proportional tax - UI promoters opposed to user pays/fixed charges, as these are a larger percentage of lower incomes - UI would not necessarily replace welfare benefits, as extra allowances would still be necessary for disability, children etc. - Issue of human rights is not mentioned in the issues paper - $6,000 - investigate further - benefit of single tax rate, no high EMTRs, no minimum wage, no issues with superannuation, no student loan scheme, no statutory child support, no maternity leave, no holiday pay, no WINZ outweighs cost of churn - Universal tax credit of $5130 ($99 p.w.; derived from the discount at $38,000 on a 33% tax rate provided by the current 15%/21% regime) less current credits, paid to all (Rankin; #158). Taxation is a factor payment for use of public capital; thus the

13 Doc2 Page 26 of 45

envisioned tax credits can be seen as a dividend, and thus distribution, not redistribution. Welfare to continue, reduced by the amount of the credit.

Chapter 5 Entities

Entities

- closely held/widely held distinction good (but not for charities/societies) - co-operatives are similar to partnerships so should have similar tax treatment (also similar to LAQCs) - tax not the main reason people choose entity forms - trusts/partnerships/companies exist for different reasons - additional compliance costs from treating all entities as companies would outweigh the benefits - minimum of 25 partners for a widely held partnership - support for reducing entities down to partnerships/companies/trusts - greater integration good; dividend deductions? - Widely held savings vehicles: income can be attributed to owners, as it is unitised. - align the rates applying to different entities and individuals - have a widely held pass through entity (cf US s-corp) - widely held entities should be accorded elective irrevocable pass through treatment (allow preferences to pass through to shareholders) - neutrality important; in particular between direct and collective investment

Charities

- The benefit of the deduction is worth the cost of reduction in the tax base - mutuality deduction should be retained - iwi should be able to register as charities - report details of donations to IRD (or similar), but not made public - refundability of imputation credits is good - requirement to donate all funds within the year of earning not good; within 12 or 24 months ok. - Holistic approach: foreign investors should not be more favourably treated than domestic charities - Variety of tax treatments in the non-profit Third Sector is inconsistent with equity and efficiency; develop an integrated set of rules - Charities should not pay tax; may be required to keep simple accounts to demonstrate they are really charities - No change to the definition of charitable purpose - Increase the rebate on charitable donations or lift the donation limit from $1500

FBT

- abolish: avoidance and compliance costs - exempt health insurance - use depreciating value of the vehicle rather than purchase price as the basis for calculating FBT on cars - application to computers provided to employees - has high compliance costs and problems with the way private benefits are calculated - should be paid by employees, not employers - tax via PAYE

14 Doc2 Page 27 of 45

Chapter 6: International

- what about companies operating in NZ enjoying the benefits of operating here when they are not prepared to contribute towards the benefits of being here - electronic communication? - Support reduction for non-residents, via targeted reduction as in Annex D, or an increase in foreign investor tax credits for portfolio investors - Effective tax rate: 15% (aligned with conduit regime) - Triangular: imputation credits in NZ streamed to NZ shareholders; franking credits should be streamed to Australian shareholders - Review mechanisms for allocating foreign tax creadits to NZ shareholders (Review comments are inequitable) - Non-domiciled individuals should be exempt from FIF for (say) 8 years - Support simplification - Extend gray list to OECD and other countries with a minimum tax rate of 20% - Active/passive distinction is good, but the proposal in table 6.5 is too complex - Active test should apply to the black list too - Taxing of CFC through grey list subsidiaries needs to be reviewed - Tax rate should be attractive to both foreign and domestic investors - Opposition to special regimes for particular investors - Should not discriminate in favour of overseas investors (there are benefits from foreign investment, but it is a loan that is never repaid) - An exit tax on dividends and interest flowing overseas, alongside a reduction in company tax - Residence can change in response to taxation - AIL should be extended to loans between associated parties - Opposed to lower taxation of foreigners; will hasten asset sales to foreigners - Why not tax companies that send billions offshore more? - Agree that reducing effective tax on inbound by mechanisms other than just lowering the corporate rate - Don’t tax people working overseas on their overseas income - FIF should apply only to closely held entities; scrapped for widely held - FIF threshold $50,000 should be cost of holding, not value. - CFC regime: NZ taxpayer may have to file a CFC return or calculate branch equivalent income when it may be hard or illegal to do so - FIF outside Grey List hard; volatility - Agree FIF rules are fatally flawed - UFTC regime should be remedied by applying a deemed UFTC to all countries except low tax jurisdictions - Reduce NZ tax on equity investment by non-residents to 15% via targeted reduction in the company tax rate for relevant investments - Introduce active/passive - Absence of CGT already makes NZ attractive to foreign investors - Remove or enlarge grey list - FIF increase de minimis to $1m; amend foreign superannuation; exempt publicly listed companies - Competitiveness: main trading partners have lower tax burdens - Extensive debate needed on whether there are benefits from taxing overseas investors less than NZ - Internationally normal outbound regime involving an active income exemption - Keep grey list - Complexities of proposals in Annex D will outweigh the advantages

15 Doc2 Page 28 of 45

- Proposals disadvantage “mixed” resident/non-resident investments - No withholding on dividends as a voluntary alternative to FITC - Allow NZ companies with imputation credits to transfer credits to their FDWP account and attach FDWP credits to their foreign shareholders dividends - Foreign tax credits should be creditable against NZ NRWT payable on distributions to non-resident shareholders - Do not disallow foreign tax credits - Anti-avoidance focus for outbound - Disallowing tax credits in favour of allowing a deduction for foreign tax is not in NZs best interest. - Trading companies listed on a recognised stock exchange in non-grey list countries should be exempt FIF. Modify DRR in line with RFRM, with no wash up - Do not increase AIL - Compliance costs of current regime high; removing grey list would worsen compliance costs - Consider how NZ looks to residents as well as non-residents - AIL should be extended to operating leases with non-residents (issue with Non Resident Contractors Witholding Tax)

Attracting high income/wealth people (Tax cap etc)

- Supported/opposed; tax break for the wealthy - no; income is generated by the overall activities of the community, not just personal enterprise. - Realistically, will we get enough extra people/revenue to make this worthwhile? - Might attract drug barons etc - Double taxation arising from non-recognition by NZ of hybrid entity forms overseas - Support domicile and cap; consider effects of lower caps - Maximum natural persons tax of $500,000 - Alternative: “sustained exceptional performance rebate” for people whose taxable income grows at above average rates

Chapter 7: Savings

- savings levels are low - GST provides an incentive for saving, as it is not payable on money saved, so the tax can be deferred until the money is spent. - general (as opposed to superannuation) savings matter too; tax free threshold for individual income from savings, and cash investments (term deposits); $900. make up lost revenue with tax on equity portion of residential housing not owner occupied. - reducing direct taxation would encourage savings - are we asset rich but cashflow poor? - SSCWT: allow variations in the rate to reflect the rate of the individual taxpayer - Neutrality is important to maximise growth, which is the key objective - Superannuation savings are not like any other form of personal savings; this justifies special tax treatment: EET - Low income is not necessarily linked to poverty, but old age brings vulnerability - Support incentives - Employee share plans are over taxed compared to overseas - Support for policy that delivers a direct connection between the act of saving and receiving a benefit from saving - Consider alternatives to TTE, given the problems with long term savings

16 Doc2 Page 29 of 45

- Concessions are regressive; so don’t have them - Exempt interest income and see what happens - US IRAs: TET. Tax the biggest impediment to savings. “Cullen” scheme will result in taxing the retirement fund as well as paying fees, with inferior returns - Incentives e.g. non-taxable interest - Oppose incentives; support TTE - Costs of concessions outweigh the benefits - Differentiate between concessions and low tax rates: high tax rates discourage saving - Reduce tax rates on employer contributions to superannuation - Tet ; TtE - ttE: rebates for investors whose marginal rate is lower than the fund rate; qualifying schemes taxed at close to the lowest marginal tax rate; possibly exempt gains in qualifying vehicles; leave current regime for savings entities in place so the long- term saving regime runs in parallel. - Do more analysis of savings issues - Should have small incentives, with ceilings - Concessions likely to reduce the quality of savings and investment decisions - Taxing savings on nominal rather than real returns is a problem - Generous NZS is a disincentive to save - Poor NZ performance caused by poor quality investment rather than low savings

Sundry

Pharmac should hold shares in pharmaceutical companies; transfund hold shares in oil industry or global transport industry A withholding tax on money leaving the country Deferring tax: may be a problem if the tax liability is greater than the estate Tax treatment of rental property too generous Reducing depreciation rates would have a significant effect on investment Credit Unions should not receive favourable tax status Support for deductions for work expenses (membership fee for academic belonging to association, conference expenses) The Review should present a list of anomalies to the Government IRD treatment of taxpayers Transitional issues should be considered Call income tax production tax (which would be proportional, as you cannot distinguish among employees if tax is levied at the firm level; progressivity then restored with tax credits mimicking the current tax scale) No taxation of redundancy pay Partially replace benefits with loans Remove deductibility of advertising Compliance costs a major issue. Combination of complexity, uncertainty, and penalties increase compliance costs Subjecting main parties’ tax policies to independent review is a good idea Tax reform should be retrospective when this is not disadvantageous to the taxpayer, legitimises agreed revenue practice, or corrects legislative oversight Forestry concession recognises 25 year absence of cashflow in forestry Should have targeted incentives for both foreign investors and local Tax system can be used for non-fiscal objectives (Review recommends this in some places itself). This should only happen if it is fair and efficient to do so. Separate discussion documents on entities and RFRM Tax trusts heavily to remove the incentive to use them for avoidance

17 Doc2 Page 30 of 45

Housekeeper/Childcare rebate should be increased to at least $1,000 p.a. Compliance costs: these are significant; compounded by multiple rates Depreciation allowance for buildings is too generous Have the tax take set by the Reserve Bank (on simple scale low rates/no deductions) Exclude education grants when calculating family support Provide fallback recommendations in case parts of the Review’s findings are not implemented Allow interest on student loans as deduction against qualification-related earnings. For business, combine income tax and GST into a quarterly PAYG return, reforming provisional tax Issues paper does not ”grapple with trade offs”: not enough attention to social goals or consequences Address: appropriateness of maintaining the distinction between debt and equity instruments; appropriateness of maintaining the capital/revenue boundary; substance approach to tax avoidance laws; FDWP and DTAs; tax treatment of employee option arrangements. Re: withholding tax on deposits PAYE option: ignores variability; problems arising from progressivity; timing of income; compliance costs Use of family trusts for avoidance of 39% tax rate Taxation of pre-1990 pensions: claim that the principal is being taxed under the current regime: tax rate applied to pension savings should be no greater than tax normally paid on that amount of income IRD should let taxpayers know if they have overpaid at year end as well as seeking out those who underpay NRWT on Australian property business loans; liability depends on the ownership of the bank you borrow from Increase government efficiency (spend the money more wisely) Binding rulings: the quicker and cheaper it is to get rulings, the tighter the anti- avoidance regime can be. Crown to meet cost of rulings with wide application? OECD is not a good basis for comparison; NZ is different Compulsory super payments at 2.5% of wages Fire service levy good, but should not be collected via insurance as not all vehicles and buildings are insured. Rates may be better; for vehicles, motor registration Parental leave tax credit should be flat rate Companies are buying fire insurance on the international market to avoid the Fire Service levy. Taxation reflects the fact that without society there would be no wealth Small business not well enough represented on the Review Free Trade zones within NZ with low taxes to attract foreigners Do not use the Scandinavians as an example of good practice (submitter met Scandinavians admiring NZ reforms) Failure of the issues paper to adequately identify tax-based remedies to the burgeoning gap between haves and have-nots. Lack of reference to voluntary sector organisations Tax incentives for health insurance Timing of terminal and provisional tax for new businesses can lead to tax greater than profit; so spread out Itemise government spending on “summary of earnings” Error in petroleum tax regime representation in issues paper Allow people to get tax rebates for opting out of e.g. health Deductions against any expenses that save the government money (e.g. health insurance) Tax concession for pre-school child care

18 Doc2 Page 31 of 45

Review members have only one thinking style Two tiered tax system for “sophisticated” taxpayers and the majority Compliant about the tax-exempt status of veterinary clubs Complaint about use of trusts as avoidance mechanism Targeted tax incentives to encourage new investment NZ tax treatment of an individual’s Aust. superannuation if they take up residency in NZ Cash jobs as means of evading GST Greater tax benefit for investments that remain solely in NZ Avoiding tax by removing money from a business before it reaches the books Tax burden should be shifted from wages/production/savings to resource rentals and charges on natural monopolies Support private medicine via tax system Use Schedule 4 Part B to target Grey List preferences (UK unit trusts) Tax is pointless without goals Local body rates are increased frequently: Central Govt would face uproar if it tried to do this Primary/secondary tax system inconvenient and burdensome (student) Anomalies: reduce by aligning tax system with accounting standards Avoidance: revised GAP with statutory guidelines to Courts No to a specialist tax court Remove concessions Provisional taxpayers pay tax at a higher rate on the same income than PAYE taxpayers Market Adjustment Tax (to reduce the volatility of e.g. petrol prices) Stock valuation: raise exemption from $5,000 to $50,000 Tax incentive for purchase of first home Effect of inflation on the tax system Use principle of Healthy Public Policy (consider policy interlinkages and effects on health of all policy) Should use Regulatory Impact Statement criteria to check tax proposals To reduce compliance costs, businesses should have the option of an alternative minimum tax calculation (percentage of accounting profit) RWT has no allowance for inflation; all forms of saving should be taxed on a real not nominal basis Strategy for the Review: concentrate on reducing the economic costs of taxation; don’t spend too much time on detail of capital and entity taxation In arguing commercial court cases, perhaps the Crown should only be able to engage representation equivalent to that available to the taxpayer Bank Account Withdrawal Tax: no cash, only electronic transactions (via an electronic”wallet”), which are then taxed. This curtails avoidance, and allows for exemption of low earners (#237) Avoidance: air points paid for by employer, used by employee Tax in kind (artists in Mexico) Arguments for user pays: to encourage economising behaviour; and to curb power of government to make decisions on people’s behalf Improve information provided by IRD to taxpayers (retailers) Consider local government taxes too: $2 billion pa; counted overseas. NZ has less revenue raised locally than other countries, but more autonomy in raising it. For last 10 years rates have gone up twice as fast as prices. Current rates are inequitable.

19 Doc 3 Page 32 of 45

OFFICE OF THE MINISTER OF FINANCE AND MINISTER OF REVENUE

The Chair Cabinet Policy Committee

THE GOVERNMENT’S RESPONSE TO THE FINAL REPORT OF TAX REVIEW 2001

EXECUTIVE SUMMARY

1. Tax Review 2001 (“the Review”) has presented its final report. It will release this publicly on 24 October.

2. I seek agreement from the Cabinet Policy Committee (POL) to deliver the Government’s initial response to the report in a speech I am giving to the Institute of Chartered Accountants of New Zealand tax conference on 26 October.

3. I further request that POL notes that each party to the coalition agreement is free to carry out independent work in respect of personal tax rates.

4. A full review of New Zealand’s tax system from first principles is long overdue. The last full review predated increasing exposure of New Zealand to the global economy, the deregulation of the financial sector, e-commerce and many important social developments. The tax system itself has also been subject to major reform in the last 20 years. This led me to ask whether the current tax system meets New Zealand’s needs, both now and in the future and to set up the Review.

5. The themes of the final report are:

• the tax reform programme has, over the last 20 years, headed in the right direction and that direction should not be reversed; • the broad architecture of our tax system is adequate for today’s needs and radical restructuring is not required;

• further improvements consistent with the direction of the tax reform programme could be made; • the tax system is an integrated whole: change to one area may impact on others. For this reason ad hoc changes to the system should be avoided; and • process is important: good tax policy is a result of an open, transparent and consultative process.

Doc 3 Page 33 of 45

2

6. The Review’s main specific recommendations include:

• not introducing a general capital gains tax; • not expanding the income tax base to incorporate owner-occupied housing; • a two-step personal tax rate scale in the vicinity of 18 percent up to $29,500 and 33 percent thereafter; • New Zealanders’ offshore portfolio investment should be taxed by applying a standard risk-free rate of return to the value of the investment; and • a carbon charge may be a suitable means of addressing New Zealand’s commitments under the Kyoto Protocol but should not be introduced in isolation from or in anticipation of that.

7. On setting up the Review, the Government committed to considering its report, and indicating publicly its views on what principles should guide tax policy and what the general structure of the tax system should be. We also stated that, as a second stage following the Review, we would develop its conclusions and construct a set of workable proposals that can be put before the New Zealand public in the context of the 2002 general election.

8. The Review’s final report analyses some extremely complex issues and the Government should take the time to respond in full to its entire contents. I therefore propose that we give an initial response to the final report, before carrying out the second stage. This initial response will acknowledge the Review’s valuable work without analysing individual proposals in depth. It will seek to foster debate and will rule out certain options that are not acceptable to the Government. In particular, I propose to confirm that we do not intend to introduce a new tax on owner occupied housing, or to change fundamentally the current excise system.

9. I welcome the Review’s willingness to grapple with hard issues. Designing a robust tax system that delivers at least cost the revenue we need for Government spending is a difficult challenge. However, it has identified specific proposals that it thinks meet this challenge, rather than simply recommending that Government cut expenditure.

10. Many of the Review’s recommendations cover items already on the Government’s tax policy work programme. Where this is the case, the second stage can most efficiently be carried out by the Government using the existing work programme. Other recommendations – in particular, those in respect of personal tax rates – will require separate analysis. Consideration of recommendations regarding tax rates will be a matter for individual political parties to determine.

PROPOSAL

11. This memorandum seeks agreement on the Government’s initial response to the final report of the Review and to the development of future taxation policy proposals.

Doc 3 Page 34 of 45

3

BACKGROUND INFORMATION

12. A full review of New Zealand’s tax system from first principles is long overdue. The last full review predated the increasing exposure of New Zealand to the global economy, the deregulation of the financial sector, e-commerce and many important social developments. These significant events all carry major implications for the fairness and on-going viability of the tax system. Also, the tax system itself has been subject to a major overhaul. These changes led me to ask whether the current tax system meets New Zealand’s needs, both now and in the future. Cabinet commissioned the tax inquiry because of these changes rather than out of any specific tax reform agenda.

13. On 31 July 2000, Cabinet agreed to the establishment of a tax inquiry, to be carried out in two stages (CAB (00) M 25/5 refers). The functions of the first stage of the inquiry (now known as “Tax Review 2001”) were:

(i) to examine and enquire into the structure and effects of the present tax system in New Zealand; and (ii) to formulate proposals for improving that system, either by way of making changes to the present system, abolishing any existing form of tax, or introducing new forms of tax.

14. The chairman of the Review is Robert McLeod (Managing Partner, Andersen New Zealand), and team members’ backgrounds include tax accounting, law, economics and involvement with community organisations.

15. The Review released an interim Issues Paper on 20 June, discussing the main arguments that it was considering. Some of the ideas discussed, in particular the possibility of a new tax on owner occupied housing, caused considerable public controversy. The Review’s final report follows on from this Issues Paper and is due to be released on 24 October. I have read the final report and discussed its content with the chairman of the Review.

16. It is important that the Government is prepared to respond to the report immediately on its release.

COMMENT

Reasons for a considered response by the Government

17. Tax is an important area of Government policy. Changes can have far reaching, and possibly unintended, effects. An approach taking into account economic and fiscal strategy over an extended period is therefore important. Tax policy should be based on principles of transparency, external input and clear accountabilities. The Government took this into account at the outset when setting out process expectations for the Review. Its terms of reference provide that:

The Government will consider the report of the Review, and indicate publicly its views on what principles should guide tax policy and what the general structure of the tax system should be.

Doc 3 Page 35 of 45

4

Stage two of the process will develop the conclusions reached during the tax review and construct a set of workable proposals that can be put before the New Zealand public in the context of the 2002 general election.

18. The Government should both take, and be seen to take, the opportunity to carry out its commitment.

19. Tax policy is high profile as the business community is requesting lower company taxes, Australia has lowered its company rate and other political parties are proposing tax cuts. The recent study on “Talent” by LEK Consulting (commissioned as a result of the Auckland Business Forum) has highlighted the influence of tax in attracting and retaining high-skill, internationally mobile people in New Zealand.

Process

20. I believe that the Review has met its terms of reference and should be commended for achieving this. The final report analyses some extremely complex issues and the Government should take the time to respond in full to its entire contents.

21. I propose that the Government gives an initial response to the final report, before moving to the second stage of the tax inquiry. This initial response will not analyse all of the recommendations in the final report. I explain the proposed response at paragraphs 44-53.

22. Many of the report’s specific recommendations (see paragraphs 27-43) cover items already on the Government’s tax policy work programme. The Government is also carrying out other work, for example on climate change policy and minimising compliance costs, that has some potential overlap with the Review’s recommendations. I propose that the second stage of the inquiry can most efficiently be carried out by the Government using the existing tax policy work programme. We can reprioritise this to ensure that the key recommendations are examined before the next election. Other recommendations – in particular, those in respect of personal tax rates – will require separate analysis.

23. Consideration of recommendations regarding personal tax rates will be a matter for individual political parties to determine. Officials will not participate in this work.

Contents of the final report

24. Copies of the final report are available from the Cabinet Office.

25. The Review has aimed to produce conclusions that are sufficiently general to serve as a guide to overall tax policy, but sufficiently particular so that they provide a clear idea of the actual tax policies to which they would lead.

Key themes in the final report

26. The key themes in its final report are that:

• the tax reform programme has, over the last 20 years, headed in the right direction and that direction and should not be reversed;

Doc 3 Page 36 of 45

5

• the broad architecture of our tax system is adequate for today’s needs and radical restructuring is not required; • the focus of tax policy should be to enhance the overall economic well- being of New Zealanders by seeking ways to make the tax system more efficient while promoting fairness and raising sufficient revenue; • further improvements consistent with the direction of the tax reform programme could be made; • the tax system is an integrated whole: change to one area may impact on others. For this reason ad hoc changes to the system should be avoided; • an additional dollar collected is expensive in terms of economic efficiency and the way in which it is collected is important; • the greater mobility of skilled and financial capital means that economic costs of taxation are increasing. However, tax policy improvements can be made without reducing Government tax revenue; • there should be a strong presumption against extending concessionary tax treatment to particular activities or sectors; • broad based taxes that are expressed simply and clearly and which enable rates to be as low and as uniform as possible, reduce both the opportunity and incentives for avoidance; and • process is important: good tax policy is a result of an open, transparent and consultative process. Tax policy process, while good, can be improved.

Specific recommendations in the final report

Tax base

27. The Review remains convinced that, at a level of theory, it would be correct to expand the tax base to incorporate owner-occupied housing. However, it notes the lack of public support for this and therefore concludes that no such tax should be introduced in New Zealand at this point.

28. There is currently no comprehensive capital gains tax in New Zealand, although certain gains are taxed. The Review does not support the introduction of a general capital gains tax on asset realisation, acknowledging the complexity of designing and applying such taxes and recommending that certain capital gains should continue to be brought into the capital gains tax as the need arises.

29. It supports GST in its present form. It would not support a financial transactions tax or a cash flow tax.

30. Its analysis concludes that excises on tobacco, alcohol, gaming and petrol may not be justified on efficiency or equity grounds. It therefore recommends that the revenue raised by excises be substantially replaced by an increase in the rate of GST. If the Government does not accept this recommendation, it suggests that, as a minimum, anomalies in this area of the tax system are subject to further review.

Doc 3 Page 37 of 45

6

31. It suggests that in general should the Government wish to raise revenue it should increase GST and that cuts in revenue should be delivered by income tax. However, it notes that GST is not infinitely adjustable.

Eco-taxes

32. The Review considers that eco-taxes are appropriate only where three conditions are broadly satisfied:

• the environmental damage of each unit of emissions is the same across the geographical area across which the tax applies; • the volume of emissions is measurable; and • the marginal net damage is measurable.

33. At present, it advises that only a carbon tax would satisfy these conditions at the national level.

34. Outside of New Zealand’s commitments under the Kyoto Protocol, the Review does not favour unilateral action by New Zealand to mitigate global warming. If the Protocol is ratified by New Zealand and comes into effect, the Review considers that a broad-based carbon tax, which applies across all sectors including agriculture, merits consideration.

Personal tax

35. The Review recommends a two-step personal tax scale. It suggests a threshold in the vicinity of $29,500 and rates of 18 percent and 33 percent. Taxpayers above $72,500 would gain in static terms relative to the status quo. It would continue to tax individuals rather than families as a single unit. The maximum level of tax imposed on a single individual in any one year should be capped at $1 million.

Company tax

36. The Review considers that the company tax rate should be aligned to the higher rate of personal tax, which should be in the vicinity of 33 percent. It notes the impact of the company tax rate on foreign investors and therefore has specific proposals to reduce tax rates on inbound investment.

Entities

37. Different entities, such as companies, trusts and partnerships, are at present taxed in different ways. The differences are often not justified on tax principles. The Review recommends that any future entity taxation reform should take as its premise that widely held entities, such as listed companies, are taxed in their own right, whereas closely held entities, for example, family partnerships, are taxed by way of attributing income to their owners.

38. In the near term, the Review proposes that the treatment of saving and investment entities (SIEs) be reviewed so that only expected inflation-adjusted risk- free returns are taxed.

Doc 3 Page 38 of 45

7

International tax

39. The Review has considered inbound investment (non-residents investing into New Zealand) and outbound investment (New Zealanders investing offshore) separately.

40. In respect of investment by non-residents, the Review recommends that consideration should be given to a reduction in the tax burden on companies to the extent that they are owned by non-residents. It also recommends that immigrants into New Zealand should not be taxed on offshore income for at least seven years.

41. The Review recommends that a consistent treatment apply as far as possible to all foreign investment funds. This treatment, which the Review calls the risk free rate of return method, would tax investors on a deemed rate of return on the value of their investment at the start of each income year.

42. The Review has not reached a final recommendation in respect of New Zealanders making direct investment into controlled foreign companies. It suggests further dialogue with business to determine whether the existing rules can be improved.

Savings

43. The Review does not see a case for tax incentives designed specifically to favour private savings.

Government’s initial response to this report

44. The Review’s analysis that frameworks are important in tax and that the system can be improved needs serious consideration.

45. The Government’s initial response should welcome the report and the depth of its analysis.

46. We should seek to foster public debate while stressing that the Review is independent and its recommendations are not Government policy. We should state that we will give a fuller response in due course, once we have had an opportunity to give the report careful and detailed consideration.

47. The Review has done valuable work and provided a good platform from which tax issues can be discussed. It will be useful not only to Government, but also to all stakeholders, including business organisations, political parties, professional groups and lobbyists.

48. I welcome the Review’s preparedness to grapple with hard issues. Designing a robust tax system that delivers at least cost the revenue we need for Government spending is a difficult challenge. However, it has identified specific proposals that it thinks meets this challenge, rather than simply recommending that Government cuts expenditure.

Doc 3 Page 39 of 45

8

49. This leads to two key conclusions for Government: that tax proposals should not be implemented on an ad hoc basis, but instead their impact on the whole tax system considered; and that the policy development process needs to be transparent and rigorous.

50. What Government can also take from the final report includes:

• that there is no need for large scale change to the broad architecture of the tax system and the direction of policy over the last 20 years; • that it is possible, and desirable, to improve the current tax system; • improvements do not require a reduction in revenue: we can have a better tax system while achieving our spending targets; and • process matters: good tax policy is the result of an open, transparent and consultative tax policy process.

51. I also agree that some of the key conclusions in the final report are a sound basis for further work. In particular, I am interested in work, as part of the existing tax policy work programme, on recommendations covering:

• entities; • savings and investment vehicles; and • international tax.

The Review’s analysis of a national carbon charge will be considered as part of the planned consultation on domestic policy options for climate change.

52. I also note the Review’s conclusions that broad based taxes at low rates are more likely to be sustainable in the long term, and that there should be a strong presumption against concessionary tax treatments for special interest groups. This Government aims to achieve sustainable tax revenues over time and I view this as best done by way of a good tax system, strongly enforced. The Review’s analysis indicates there are no simple answers. It has identified that there is no single tax reform that will solve all of the economic and social issues facing New Zealand. Part of the Review’s value lies in its confirmation of this fact. The Review shows how difficult it is to improve our tax system. Any proposals for major change must be considered in the light of its analysis.

53. There are, however, some issues where I do not agree with the analysis of the Review. In particular, I propose to take the first available opportunity to confirm that, regardless of any discussion in the report, we do not intend to introduce a new tax on owner occupied housing, nor to change fundamentally the current excise system. This will not preclude the Government from changing individual excise rates in the future if this is considered appropriate. In addition, while I do not agree that a fundamental change to the excise system is warranted, I consider that the anomalies in the excise system highlighted by the Review should be the subject of further work.

Doc 3 Page 40 of 45

9

FINANCIAL IMPLICATIONS

54. The Government’s response to the Review has no financial implications at this stage. The impact on the Government’s operating provisions of detailed proposals that arise as a result of stage 2 of the tax inquiry will be considered at that time as appropriate.

LEGISLATIVE IMPLICATIONS

55. The Government’s response to the Review has no legislative implications.

COMPLIANCE COST AND REGULATORY IMPACT STATEMENT

56. A compliance cost and regulatory impact statement has not been prepared. The Government’s initial response to the Review will not require a Government Bill or statutory regulations.

TREATY IMPLICATIONS

57. The Government’s response to the Review does not contravene the principles of the Treaty of Waitangi.

HUMAN RIGHTS ACT

58. The Government’s response to the Review does not contravene the Human Rights Act.

PUBLICITY

59. The Review, as an independent inquiry, has its own publicity proposals.

60. I propose to make a statement on 24 October, thanking the Review, welcoming its valuable work and seeking to foster an open debate on the final report’s contents. This press statement will also confirm that the Government has no intention of introducing a new tax on owner occupied housing, or of making fundamental change to the current excise system.

61. I am speaking at the national tax conference of the Institute of Chartered

Accountants of New Zealand on 26 October, a major theme of which will of course be the Tax Review and its report. In this speech, I propose to:

• repeat my thanks for the Review; • emphasise that good tax policy needs a good tax policy process; • outline the process the Government plans to take as it responds to the Review’s recommendations;

Doc 3 Page 41 of 45

10

• note that proposals to change one part of the tax system need to be aware of and address the consequences to other parts; • indicate areas of work that I intend to be incorporated into the existing tax policy work program; and • state that the issue of personal tax rates will be for individual parties to decide.

CONSULTATION

62. Treasury, Inland Revenue, the Ministry of Economic Development and the Ministry of Social Development have been consulted in the preparation of this memorandum and agree with its recommendations. The Department of Prime Minister and Cabinet was also consulted in the preparation of this memorandum.

RECOMMENDATIONS

63. I recommend that the Cabinet Policy Committee:

(a) note that Tax Review 2001 (“the Review”) is due to release its final report on 24 October 2001; (b) agree to the Minister of Finance issuing a press release thanking the Review for its valuable work, while confirming that we have no plans to introduce a new tax on owner occupied housing or to make fundamental changes to the current system of excises; (c) agree to the Minister of Finance providing the Government’s initial response to the final report outlining the process the Government intends to take in respect of the Review’s recommendations in a speech to the tax conference of the Institute of Chartered Accountants of New Zealand on 26 October 2001; (d) note that each party to the Coalition is free to carry out independent work in respect of tax rates.

Hon Dr Michael Cullen Minister of Finance and Revenue

Doc 4 Page 42 of 45

Office ofthe Minister ofFinance

Chair Cabinet Economic Growth and Infrastructure Committee

TAX WORKING GROUP

Proposal

1. The purpose of this paper is to infonn the Committee of the establishment of a Tax Working Group. The Group will operate under the auspices of Victoria University's Centre for Accounting, Governance and Taxation Research and will consider the medium-tenn direction ofNew Zealand's tax system, including assessing policy options.

Background

2. In February this year, Victoria University with the support from Treasury and Inland Revenue organised a successful tax conference which addressed a number of tax issues of particular relevance to New Zealand's current tax policy discussions. However, the conference did not promote detailed in-depth discussion of New Zealand's particular situation, nor allow policy responses to be developed.

Comment

3. To' build on this initial work, officials and Victoria University's Centre for Accounting, Governance and Taxation Research have established a tax working group that will bring together invited private sector and academic experts, as well as Treasury and Inland Revenue officials.

4. The working group's briefis to consider the medium-tenn direction ofNew Zealand's tax system, including assessing policy options. The Government has a medium tenn goal of reducing and aligning personal, trust and company taxes at a maximum rate of 30%. I consider that such consideration of the tax system is necessary - particularly in light of the challenges posed by the current economic and fiscal enviromnent and this medium-tenn goal.

5. The aim is to identifY issues that need to be considered when reviewing medium-tenn tax policy, rather than to make specific policy recommendations. There would be four topic sessions plus a final wrap up session. The topic sessions are:

• the fiscal framework; • revenue raising options; • structure ofthe personal income tax and GST systems; and • corporate taxes and integrity.

Doc 4 Page 43 of 45

2

6. Following these sessions, Victoria is proposing that a one-day conference would be held at the end of the year to introduce the issues to a wider audience and encourage discussion ofthe issues.

7. The working group will be chaired by Victoria University Pro Vice-Chancellor and Dean of the Faculty of Commerce and Administration, Professor Bob Buckle. The private sector experts and academics on the group will be: Rob Cameron, Paul Dunne, Arthur Grimes, Rob McLeod, Gareth Morgan, Mike Shaw, Geof Nightingale, Casey Plunket, Mark Wheldon, John Prebble and David White.

8. Officials will report to the Minister ofRevenue and me on outcomes ofeach workshop topic. The Minister of Revenue and I intend to attend the wrap-up session to discuss the conclusions ofthe group.

9. I attach copy of the press statement the Minister ofRevenue and I released on 8 May supporting the establishment ofthis process.

Recommendations

10. It is recommended that the Committee:

1. Note that a tax working group has been established under the auspices of the Victoria University's Centre for Accounting, Governance and Taxation Research and will consider the medium-term direction of New Zealand's tax system, including assessing policy options.

2. Note that the Minister of Revenue and I issued a press statement on 8 May supporting the establishment ofthe tax working group.

Hon Bill English Minister ofFinance

Doc 4 Page 44 of 45

Hon Bill English Minister of Finance Hon Peter Dunne Minister of Revenue 8 May 2009 Media Statement

New Tax Working Group to assist government

Finance Minister Bill English and Revenue Minister Peter Dunne today welcomed the establishment of a Tax Working Group, which will assist the government in considering the key tax policy challenges facing New Zealand.

The Tax Working Group, co-ordinated by Victoria University's Centre for Accounting, Governance and Taxation Research, will bring together invited private sector and academic experts, as well as Treasury and Inland Revenue officials. It will consider the medium-term direction of the tax system, including assessing policy options.

"A strategic review of the tax system is necessary - particularly in light of the challenges posed by the current economic and fiscal environment and our medium­ term goal of a 30 percent top personal tax rate," Mr English said.

Mr Dunne said there was an opportunity for the group to make a highly useful contribution. "We look forward to considering the interesting ideas that will no doubt emerge from the Tax Working Group.".

Between June and November, through a series of meetings and papers, the working group will provide informed tax policy discussion that can feed into advice to ministers and wider public debate.

It will consider the government's medium-term fiscal position, the pros and cons of possible reform options and whether or not any of these should be dismissed as unworkable.

The aim is to identify issues that need to be considered when reviewing medium-term tax policy, rather than to make specific policy recommendations. Topics to be considered include the fiscal framework, and the structure of personal income tax, corporate tax, GST and tax integrity.

3 Doc 4 Page 45 of 45

The Tax Working Group will be chaired by Victoria University Pro Vice-Chancellor and Dean of the Faculty of Commerce and Administration, Professor Bob Buckle.

The private sector and academic experts on the group will include Rob Cameron, Paul Dunne, Arthur Grimes, Rob McLeod, Gareth Morgan, Mike Shaw, Geof Nightingale, Casey Plunkett, John Shewan, Mark Weldon, John Prebble and David White.

Regular updates on the group's work will be available through the Treasury, Inland Revenue Policy Advice Division and Victoria University websites. A one-day conference in December 2009 - hosted by the university - will provide opportunities for wider debate and discussion around the group's findings.

Media contact: Grant Fleming 021 277 9869