Why won’t New Zealand cut taxes?

Despite an operating surplus of $1.24 billion for the most recently ending quarter, the ruling Labour Government in New Zealand insists on keeping income and corporate tax levels steady, says Craig Foss in the Wall Street Journal.

Since the Labour Party took power in 1999, taxes have become quite burdensome:

The top personal tax rate has been hiked to 39 per cent from 33 per cent.

The corporate rate – already a hefty 33 per cent – hasn't changed for over a quarter century.

New Zealand's income and corporate tax-to-GDP ratio now ranks 16th among Organisation for Economic Co-operation and Development (OECD) countries; seven years ago, the country placed 10th.

Oddly enough, this comes as governments around the world have learned the benefit of tax cuts:

Between 1990 and 2005, the average OECD corporate tax rate dropped from 37 per cent to 27 per cent.

In Australia, corporate taxes are now 30 per cent, down from 34 per cent in 2000, and personal taxes have been cut progressively over the past five years.

The Australian threshold for the top personal income tax rate, for example, has been pushed higher – from $46,200 in 2002-03 to $115,800 in the current tax year.

In New Zealand, however, the upper tax threshold has remained at $40,200 ever since the top rate was increased in 1999 to 39 per cent.

Little wonder, then, that things are beginning to look gloomier, says Craig Foss, the New Zealand National Party's associate finance spokesman:

In 2005 more than 20,000 New Zealanders moved to Australia, with expatriates there reporting average incomes more than a third higher than back home.

Multinationals are now avoiding the country and local companies' growth prospects are constrained; gross domestic product growth last year was a paltry 1.9 per cent.

Source: Craig Foss, Why Won't Wellington Cut Taxes? Wall Street Journal, November 29, 2006.

For text: http://online.wsj.com/article/SB116475575088534987.html

For more on International Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=26

FMF Policy Bulletin/ 12 December 2006