Speech Don Brash Institute of Directors breakfast session

Comments on National Party Tax Policy

I want this morning to clarify where the National Party stands on tax policy, as our position has been mis-represented by an increasingly desperate Labour-led Government.

I have been upfront about my view that if New Zealand is to be a country that delivers strongly rising incomes, we need to reduce tax rates substantially. In particular, I am on record as indicating that we should aim to substantially reduce personal income tax rates in New Zealand.

This is not to say that in the current situation this can or should be achieved overnight, or in one large round of tax cutting. Longer term goals are one thing; short-term priorities quite another.

National's top priorities for tax reductions are tax relief for low-to-middle income families, and a cut in corporate tax rates to boost business investment.

This Labour-led Government has, over the past four years, increased 15 different taxes, many of them a consequence of the decision to lift the top personal income tax rate to 39%. That move has pushed 20% of full-time workers into the top 39% tax bracket. Over the past four years, the Government has raised $3.6 billion in extra tax - an average of $2,600 per household over this period.

The Government has accumulated large budget surpluses while families are struggling to make ends meet. Tax cuts are long overdue.

Tax cuts would allow parents that crucial extra margin for clothes or sports equipment for their children, or for music or sports tuition, or would contribute to childcare costs, and so on through the endless list of needs a young family has. Significant tax cuts would over time provide the crucial extra dollars to provide for new furniture or appliances, or for a down-payment on a car or home.

Instead, this Government has allowed the budget surplus to grow for four years, while families have had to cut back.

Now that the Government is in some political trouble, it is more likely that we will see some tax cuts in the forthcoming Budget. It will represent a long-delayed and cynically-timed public relations effort designed to shore up their political support.

A National Government will make gradual but sustained progress in cutting personal tax rates, but there are other immediate priorities in education, in retraining for the longer-term unemployed, and in better policing of our communities, which will mean that the top tax rate can be reduced only gradually.

National is committed to lower tax rates as part of a coordinated set of policies to build a more prosperous nation.

For this audience, the good news is that the company tax rate would come down. The bad news is that reductions to the top personal income tax rate will be gradual.

I know that many of you will be disappointed that I am not signalling a commitment to a substantial reduction in the top rate immediately. I know too that purists will highlight the undesirability of such a large gap between the top personal rate and the 30% corporate rate which I have proposed. I fully understand that point of view.

In effect, what my colleagues and I are doing is asking those in the higher salary bracket to be patient. Clearly, we want to give ourselves, as a Government, some room to provide relief for the very large numbers of people in the middle income brackets.

It is our judgment that a programme which affords relief to the hard-working, heavily-taxed New Zealanders in the middle income area, with small, gradual changes to the top rate over a number of years, is the type of package most likely to receive the consistent electoral support which would underpin a commitment to sustained growth in real incomes in New Zealand.

The details of our tax policy will be released closer to the next election.

But let me make three announcements today.

Our first objective is to provide tax relief for low-to-middle income families. It is likely that the Government, having done nothing for four years but harvest the fruits of other people's work, will finally and reluctantly provide some tax cuts in this area. It is likely to be too little, and it will certainly be too late. National will assess what more needs to be done after the Budget this year.

Secondly, under a National Government, there would be an immediate cut in the company tax rate to 30%, to match the Australian rate, and if the Australian company tax rate goes lower, so will ours. Ultimately ours should go lower in any case - we are competing with more than just Australia.

National is focused on making New Zealand a higher income country, and higher incomes come from productivity growth, which in turn comes substantially from business investment. Taxing away business cash-flow is inconsistent with New Zealand's generating the business investment necessary to build a prosperous nation. National is totally focused on lifting the incomes of hard-working New Zealanders. Around a quarter of the workforce are employed in businesses employing five or fewer employees, and there are over 250,000 businesses of this size, many of them small family businesses, of which most farms are a good example. We are determined to encourage firms to invest, boosting productivity and employment, and ultimately the income-generating capacity of the country.

Thirdly, for those on higher incomes I am making it clear that there will be no large one-off tax cut. What there will be is a gradual and sustained reduction in tax rates over a number of years. We will spell that out in more detail before the next election. We have a number of priorities, of which reducing tax rates is just one.

National is committed to reducing personal income tax rates, and committed to a flattening of the tax structure. The current high rates at relatively low levels of income are a nonsense and must be reduced. Talented Kiwis will not put up with mediocre aspirations, and are not indifferent to the levels of taxation they face. They want to live in a dynamic market economy, not one strangled by an interfering government.

For example, when young doctors are finally fully trained, many with large student debt burdens, this Labour Government punishes them with a 39% marginal tax rate, plus GST of 12.5% on what is left to spend. It is no wonder they are heading overseas. The same applies to skilled trades-people or anybody who has spent years building up a small business from scratch.

The Government's tax policy is utterly self-defeating.

It is summed up by the proverb we all learned at school. It is to cut off your nose to spite your face.

Our attitudes to taxing those who through hard work and talent have managed to earn a high income are nothing more than the politics of envy and resentment. And that attitude is also based on a perception that high incomes are permanent - it is the sort of attitude that could only be fostered by a Cabinet most of whose members have spent their entire life in the public sector on a steady income. They are totally out of touch with the day-to-day experience of ordinary New Zealanders working in a competitive marketplace.

Inland Revenue data suggest that, of those on the top tax rate today, only half will be on that rate in five years time. That would, for example, be a common experience for a professional rugby player. But it also applies throughout the workforce. National does not believe in hammering with punitive taxation those who, after many years upskilling or building up their business, are finally earning the high income they deserve.

I would hope that over the next two terms of government we would be able to move towards a flatter tax scale. But ultimately, lower taxes require a disciplined approach to managing government spending.

Reducing tax rates over time does not require a government to slash spending - what is required is that the growth rate of government spending is kept a little below the growth rate of the economy. That requires discipline.

National will provide that discipline, and deliver a sustained reduction of tax rates over the longer term, as an essential part of a strategy to boost the incomes of all New Zealanders, and make New Zealand a place where we, our children and grandchildren, will choose to live and work.

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