Improving our tax system - Rt Hon John Key

23 Comments
26 February 2010
Improving our tax system

In this issue of Key Notes I talk about improving our tax system, changes underway to ACC, improvements to the volunteer bonding scheme for graduate doctors, nurses and midwives, lifting achievement in our schools - and provide links to several large sets of photographs from my visit last week to Hawke's Bay. Enjoy!Click here to watch my latest video diary

IMPROVING OUR TAX SYSTEM

I've had lots of comment and questions about our ideas for tax reform, and I want to thank those of you who have shared your views.

Over the past eight months, the Tax Working Group has looked at our tax system and found that the mix of taxes is not ideal. We want to fix that, to improve our economic performance, help create sustainable jobs, and lift family incomes.

We'll be making some changes to the way property is taxed. Those changes will be fairer for taxpayers. We'll announce details in the Budget in May.

As part of the overall package we are also considering increasing the rate of GST to 15 per cent, together with a reduction in personal income taxes across the board, and up-front increases in benefits, New Zealand Superannuation, and Working for Families payments.

What would be the effect of this tax switch?

Prices would rise by just over 2 per cent, but at the same time people would have more money in their pockets through income tax cuts, and increases in benefits, Super, and Working for Families.

As a Government, we are working to ensure that the extra money in people's pockets would be more than the increase in prices. If we can't make sure that happens for the vast bulk of people, we won't be increasing GST.

Today, in a speech to Grey Power on the North Shore, I spoke more about our proposed tax changes and how they will lift superannuation payments.

Read and comment on my speech here.

MAKING ACC AFFORDABLE, SUSTAINABLE, AND FAIR

National is committed to ACC. We want it to be a fair and efficient 24/7 no-fault insurance scheme for all New Zealanders. But in the past four years, the cost of ACC claims has risen by 57 per cent - five times as fast as inflation. Meanwhile, unfunded liabilities have blown out from $4 billion to $13 billion.

Without changes, this would mean big increases to ACC levies for everyone - families, workers, and employers. That's why this week we passed a new law to help get levy increases under control, and make ACC more affordable, sustainable, and fair. Click here for more details.

BOOSTING DOCTORS, NURSES, AND MIDWIVES

The second intake of Nationals' voluntary bonding scheme for graduate doctors, nurses, and midwives has opened for registrations. Under the scheme, graduates who are keen to work in hard-to-staff areas and specialties for three to five years are eligible for student loan write-offs and cash incentives.

Demand last year was huge. We expected 350 doctors, nurses, and midwives to apply. We ended up welcoming 890 into the scheme. That's great news for areas with shortages of critical health professionals. This year we've added to the areas and specialties in the scheme. Registrations for graduates close at the end of April.

LIFTING ACHIEVEMENT IN OUR SCHOOLS

A few weeks into the school year, it's great to see the vast majority of teachers and schools introducing National Standards in a practical and professional way. National Standards will ensure primary and intermediate schools regularly assess children's progress in reading, writing, and maths, and provide that information to parents in plain language. The standards will help identify pupils who are struggling so that teachers and parents can give them extra help.

Last week we appointed an independent advisory group to support the implementation of National Standards. This group, which includes Professor John Hattie, will provide the Minister of Education with free and frank advice about National Standards, and any refinements that could make them better. Learn more about National Standards here.

BACKING THE BAY

Last Friday I had a really busy day in Hawke's Bay - as Prime Minister and Minister of Tourism - catching up with the locals. A big thank you to everyone I met for making the day in the Bay such a great one. See photos by clicking on the links below:

Watching the boys wharf jump and checking out the McLean Park upgrade

Meeting workers at Mr Apple in Whakatu

Visiting the Havelock North Community Centre

Getting on my bike in Hastings to support Bikes in Schools

Enjoying the Art Deco Festival

FROM MY DIARY

Today I've been in my electorate and tonight I'm opening the Asia-New Zealand Lantern Festival at Auckland's Albert Park.

On Saturday I'll be at the Helensville Show. If you live in Auckland, I hope you'll come and join us for a great day out!

Best wishes

John Key

Prime Minister

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#1 - Alain Liger 2010-02-26 17:40 - (Reply)

Welcoming the tax change, Gst if fair but it would have been so much simpler to reduce the system to two rates for individuals with top rate matching company tax rate and suppress any incentive to create a trust. Re. ACC have you thought about identifying "high cost" "sports" and offer a paying licensing system that covers injury or no cover if people carry the sport without a license?

#2 - john kinnell 2010-02-26 18:30 - (Reply)

There was a time when the Government of the day allowed life & medical assurance premiums to be tax deductible the idea being to encourage savings. These deductions/exemptions were at some stage abolished. There was also a time when taxpayers were encouraged to invest in oil gas & other mining ventures the idea being to encourage investment in these areas in order to make the country less reliant on importing essential materials such as oil and to assist major corporates through improved cash flow to employ more people to work in these areas of exploration and development. Perhaps also the tax bands should be inflation indexed in line with the CPI so that people did not continue to pay more taxes in real terms.

#3 - Pete Fowler said:
2010-02-26 19:17 - (Reply)

Prime Minister, the only beneficiaries of higher GST and lower direct income tax will be bludging parasites like property speculators. You're just taking from the poor, who pay GST on almost everything, to the rich, who pay proportionally less, because they blow money overseas. Regards.

#4 - Dave Adam 2010-02-26 19:53 - (Reply)

Not a good month for you at all in my books John - I'm not sold and my National vote is now up for grabs. So much for your promises of tax cuts and catching up with OZ! Now its 'fiscally neutral' tax cuts - and there's no way we can catch OZ given the way your Government is performing. I will wait to see what the net effect is on my family & my businesses - but my calculations indicate imminent tax (incl. rates, ACC & power) increases. Further as a property investor (for my wife & my retirement and family legacy) I'm appalled at the misinformation you are peddling as I get no tax, legal, or accounting advantages that any other businesses/sectors aren't entitled to - so you plan to disadvantage me! On the ripping off of tax payers $s by senior MPs credit cards - you should have sacked Heatley (the 2 wine bottles were the straw that broke that camels back - not the focus of that issue) and not defended his appalling behaviour and lack of judgement. It was theft and you are wrong about that being tolerated in the private sector and to suggest that it is poor judgement and leadership on your part when greater integrity and leadership is needed from the Beehive. When are you going to lead, get strategic (instead of playing tactics with tax) and operate on the obese public sector to reduce the $250+M per week borrowing?

#5 - Jo 2010-02-26 20:41 - (Reply)

Here is something for all who read 'Key notes' Government is big business'.

#6 - Raymond Van Orsoy de Flines said:
2010-02-26 21:14 - (Reply)

I like to see GST removed from council rates and essential services like power and water. or an option of a low GST rate on basic food like bread milk etc like what is done in Australia. At this stage New Zealand will always be far behind with Australia. More sustainable mining and oil exploitation in NZ would be good to raise desperately needed cashflow.

#6.1 - Jan Brown 2010-05-08 10:52 - (Reply)

When GST was introduced the only good thing was it was on all items except financial services.But maybe it could now be extended a little to things like rates, electricity but not food. Why? an example. If I grow barley and there is no GST on food that is what I will sell it for but somehow it could get delivered to the brewery-oh dear. A flat rate is the best with exemptions that are easy to police, not bits here and there

#7 - Hab Hansen 2010-02-26 22:02 - (Reply)

I agree with where you are going however every day I see older people struggling to survive with the cost of power increasing, Can the government not look at giving superanuitants releif by less GST on power and telephone charges and council rates. I agree that it would be an excellent idea to take GST off essential items such as bread and milk. Why can't the government look at benificiaries working for their income e.g set hours per week doing community improvement at least they would be working for what they are paid and be establishing a work ethic

#7.1 - Karen 2010-04-30 09:30 - (Reply)

I suggest forgetting the free rides on the ferry and instead subsidise utilities. I know of several single super's who sit at home in the dark wrapped in a blanket in the middle of the winter to save on power

#8 - Roz Brown 2010-02-26 22:51 - (Reply)

re Taxation - would enjoy Aotearoa being the leading light in FTT - Financial Transaction Tax aka Tobin Tax. Suprised at the omition of this tax from the report.

#9 - Malcolm Stobie 2010-02-27 08:41 - (Reply)

GST on rates and other taxes is just wrong - tax on tax cannot be justifed, and I encourage the government to fix it. Also deductibility of health insurance premiums should be re-instated as incentive to those that take responsibility for their own health costs, reducing the burden on the state. Expenses should remain deductible against total income on investment property, at least for small investors with a single rental property - the target should be large multiple owners. Overall I think the tax changes are heading in the right direction.

#9.1 - Jason 2010-03-10 19:13 - (Reply)

Hi John I'm 36 years of age and have paid taxes since the age of 17 which comes to 19 years. I am currently self employed and have 1 rental property. I believe that expenses should remain deductible against total income of rental property as your proposed changes would see me lose my rental. Be a different story if I owned more than 1 investment property. Regarding the possible G.S.T increase, as a small business owner I will cease to exist if G.S.T is increased as I struggle just to get by and will probably have to ask the bank for an overdraft to ensure that my employees get their wages. Please be mindful of us hardworking little fish who have always paid their fair share of taxes and continue to do so!

#10 - Pierre van Heerden 2010-02-27 14:21 - (Reply)

Hi John, To date your government has done an admirable job. The proposed tax changes are, however, going to be a watershed as to wether this perception continues. Changes to the treatment of rental properties could have some far reaching impacts which I do not believe have been fully considered. Most people investing in rental properties are doing so to try and build up a nestegg for retirement. They are not speculating, but systematically putting money away to make sure the government does not have to look after them in old age. If there are speculators, then tax them on the gains, that is fair. If the proposed change merely relates to depreciation on buildings not being allowed but that other expenses are still deductible - I could accept it. If it goes as wide as to ringfence property losses, then I believe there will be long term impacts including more people moving to Australia where this is not the case, where medical cover is excellent with Medicare, where salaries are higher, where rentals will not increase at the same rate as here if there are less rental properties available. Property investment is a long term decision, not one that one wants to reverse in the short term. If short term decisions have to be made due to something like ringfencing, I believe many investors will face bankruptcy as they have made long term decisions based on the tax system. In the current environment more bankruptcies are not what we need. I support a revamp and change, but let's also look at the expenditure and investment side. What alternatives are being provided to get ordinary people to rather invest in growth and other assets for retirement? Let's take a bigger picture view and have a vision, not punish those that have a bit of initiative to try and plan for retirement with a few investment properties. I would appeal to you to ensure that the changes don't impact negatively in the long term by doing things like ring fencing investment property losses.

#10.1 - R Gravatt 2010-02-28 17:20 - (Reply)

Attention John, I agree with Pierre about the rental housing. Many of the baby boomers have scraped up a little extra to start paying for a second home to help in their retirement.In fact I recall this being taught in future proofing talks I have attended as well as NZ Housing phoning every few weeks before the recession and trying to encourage us to buy a home that they would rent for us. My view is to forget tax cuts and have no tax at all- just raise GST to 25%. This is true user pays and works well in other countries. I read a Massey University assignment on Tax a fews years ago and they said that a good Government should beable to run on 10% tax. Food for thought. Rose Gravatt

#11 - Paul Rossiter 2010-02-27 14:37 - (Reply)

Tax? Bad times are with us and as people are put out of work they cease to pay tax and apply for a benefit. So a source of income becomes an expence. As the economy improves there will be more jobs and less people on benefit and the government should come out of the red. So do not panic in the short term. Hints about new tax with no details are a real worry. Property tax? What does this mean you are going to hit all those people who have saved and purchased properties most of them National voters. All the people without properties many who do not vote for you are to be let off? The Government should encourage people to save and invest. Every private rental home saves the government having to build an extra State house. Yet you plan to hurt those who use their money to help the community in this way. Generally your tax policy apears to fit more with Labour than National. Generally National was off to a good start but I am worried about where we are going now. On top of the extra GST I hope we do not have all those climate change taxes you were talking about, The price of power is already too high it will be a struggle to get through winter without extra taxes.

#12 - Chris ODonnell 2010-02-28 11:07 - (Reply)

How are small businesses expected to cover the costs of a gst hike? Many of us will need to install new POS & management programmes & shut down for a few days while everything instore is repriced. Also with profits being so tight even after letting staff go there is still not enough cash in retail currently to make minimum wage again yet myself, and lets not get into never having a holiday & 70 hour weeks. I see no tax breaks or benefits for me?

#13 - David 2010-02-28 13:16 - (Reply)

Hi John, First, I wish for a better future for N.Z.Secondly, I don't have a problem with GST increase we need new aircraft for our Airforce,search and rescue is very important to New Zealand. Finally, I am really angry after listening to Willians he said we must pay for the mistakes made by home buyers leaky homes.John if I make a poor investment that is my fault. Don't expect me to stand by Wiilians idea's. Sincerely, David.

#14 - Peter Graham 2010-02-28 20:32 - (Reply)

Prime Minister Increasing GST and reducing income taxes make sense because its better to tax spending than earnings. However why does it need to be 15%? Why not 13.5 or 14% I am sure one of these would be easier to 'sell'. The other thing about the GST vs income tax is the adverse effect on us Government Superannuitants, and there are about 75,000 of us! So far you mentioned increased benefits, to offset any increase in GST, for those on welfare payments, the poorer wage earners and NZ Superannuitants. You've also said any tax changes, that is including GST, will be fair to all New Zealanders. Us Government Superannuitants have yet to hear how they, that is any increase in GST, will be fair to us.

#15 - Mohamed 2010-02-28 22:31 - (Reply)

Dear Prime Minister It is good idea to fix tax system, to improve our economic performance, help create sustainable jobs, and lift family incomes. We need productive tax systems where we can discourage non-productive investments such as property and encourage productive investments to generate more and more jobs and to accelerate economic development. I think that new Zeeland can develop as a tourist hub and as an agricultural hub. Even NZ has an opportunity to develop as an agri-business exchange and as excellent fund management destination. In addition, tax cut should apply to all categories including low wage earners with tax rate around 19. When they get more income, it will generate more demand for products and services.

#16 - Russ Goodall 2010-03-02 08:25 - (Reply)

John, it's been correctly said that the Labour Government raised GST about 20 years ago from (I think) 10 per cent to 12 and a half per cent, and that no compensation was given by Labour to the taxpayer at the time. oOn the other hand, your government intends to compensate taxpayers for the intended rise. Nowhere have I seen a comparison drawn between the two seemingly equal amounts of two and a half per cent. I am no statitician but I see a difference between what look like two rises of equal amounts - they are definitely not equal. The first increase boosted the amount of GST paid by 25 per cent. If National raises GST by the same percentage in the May budget, that will entail an increase of 20 per cent. That is not a great difference, but when National's pledge to compensate taxpayers in various ways is taken into account, the present government's lower rate of increase makes its case more compelling overall. It certainly trumps what Labour did.

#17 - Peter Curling 2010-03-04 10:00 - (Reply)

Regarding the proposed tax changes, once again it seems that baby boomers suffer. My wife and I struggled to get our one third deposit together to buy a house and paid interest rates varying from 14% up to 21%. We were heavily taxed, up to 66% at times. Having been 'lucky' enough to work very hard to achieve a qualification and then 60+ hours a week for years, we decided to take early retirement. We are still five years from receiving superannuation. The financial crisis has seen interest rates and share prices tumble taking our very hard earned income down with them. Now it is proposed effectively to increase prices by 2%(?), lower higher tax rates (which we are not on) and increase superannuation by 2%. I think it is also intended to increase resident withholding tax. So what do the canges mean for us? Higher cost of living and reduced income. Surely a reduction of the lower tax rate by 2% would have the same effect as increasing superannuation and not leave out in the cold, reasonably successful Kiwis who have worked hard and contributed more than most to the tax coffers for years. Don't get me wrong, we are not against the basic idea of the tax changes but we are more than a little upset at the prospect of being hit yet again, especially as it is avoidable.

#18 - David White 2010-03-04 22:38 - (Reply)

I don't think you're going far enough. Borrowing $250,000,000 a week is reckless. You should be closing junk departments that Labour set up or inflated. It is time you owned up to the fact that the IPCC is discredited, and that the ETS is premature, dubious, expensive and should be postponed until the dust is settled.

#19 - Shanthi 2010-03-07 16:15 - (Reply)

I know its only ideas for the budget, but you seem very vague: People with higher incomes may save or pay off existing debts in the current economical climate. I can't see how beneficiaries are actually going to benefit from the ideas proposed in your speech. You also never mentioned how you intend to tax 'evaders' who bury their taxes in trusts and investments. If a capital gains tax was included it could close the loop hole in the current laws. This would help to make the tax system fairer and you wouldn't need to raise GST (or raise it as much) so lower income earners would benefit. A capital gains tax is in place in Australia, so putting one in place in New Zealand would help bridge the gap between our economies. You also wouldn't have to mine our beautiful national parks. (What's the point of being kiwis if we can't protect our national treasures?) Split income tax would also make the system fairer, as many families of five are taxed the same amount as an individual on the same income.

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