Dunne Peter: Debate on Prime Minister’s Statement 
Dunne Peter: Debate on Prime Minister’s Statement 
[Volume:660;Page:8666] 
Hon PETER DUNNE (Leader—United Future) 
: 
 I want to concentrate my remarks this afternoon on the Tax Working Group—on some of the changes it has recommended and on some of the changes that will flow from those changes. I will begin by saying that if one looks at that report very closely and addresses the distortions that it outlines in our tax system currently one is drawn to the inevitable conclusion that one of the most distortionary acts in New Zealand tax policy over the last decade was the move to increase the top tax rate in 1999. That of itself has given rise to a number of problems that we are now having to confront. What the report shows very clearly is that there has been a huge increase in the number and level of trusts formed since 1999 with significant spikes around the points where the marginal tax rates come in. People have been forming trusts not for asset protection purposes but for tax avoidance purposes as a consequence of the increase in the top tax rate. 
In 1999 when the top tax rate was increased the promise was made that it would affect only 5 percent of taxpayers. Notwithstanding the fact that over the last decade there has been a significant slowing in the reported increase of higher incomes in a time of high economic growth the 5 percent figure has risen to 9 percent. In reality because of the avoidance practice of which I have just spoken that figure is probably a lot higher in truth. We are starting to see the evidence reported—the report of around 10000 families is one example—of higher-income earners deliberately manipulating their taxable income to boost their eligibility for Working for Families tax credit. We also have the now well-rehearsed figure of a $200 billion investment in rental properties declaring $500 million in losses for tax purposes. 
We cannot ignore those issues and any reform of the New Zealand tax system has to start to address those distortions. That is why tax rate alignment has always been a priority for United Future and we welcome the fact that it is a medium-term commitment of this Government. I see the alignment of the top personal rate and the trust rate as an important start that we need to be focusing on to address the sorts of issues I spoke about a moment or two ago. We cannot have a system that is credible and fair if it gives rise to those distortions on an ongoing basis because people simply will not believe it. 
I want to welcome the Prime Minister’s announcement today that capital gains tax land tax and a risk-free rate of return method for investment properties are all off the agenda. I have long opposed capital gains taxes as inefficient cumbersome hard to put in place and based far more on envy considerations than on sound tax policy. I think it is now time to bury once and for all the capital gains issue as an option for New Zealand tax policy. But that is not to say that there are not big issues with regard to the taxation of investment property in particular that need to be addressed particularly in the light of the $500 million tax loss that I referred to a moment ago and the fact that we now have around 10000 families claiming Working for Families tax credit as a consequence of deducting their rental losses against other taxable income. We do need to be looking at the best way of plugging those holes. 
I have seen this referred to in some media as a concerted attack on landlords and property investors. It is not. It is simply about ensuring fairness and balance in the tax system and getting back to the important first principle that investment decisions are driven by the quality of the particular investment not the tax advantages to be derived from it. In that regard effective enforcement of the law as it stands is particularly important. I acknowledge the fact that in Budget 2007 Dr Cullen and I secured additional funding for the Inland Revenue Department to prosecute in a non-legal sense outstanding cases regarding properties. To date the return on that measure has been about 10 times the level of funding advanced. There is much more we can do in that area and I certainly think that will be a priority for action over the next little while. 
The recommendations regarding an increase in the rate of GST are problematic. We all know the efficiency of a consumption tax. In fact New Zealand’s is the best in the world and one thing we have to guard against is any argument that we start to exempt particular items from the GST net. We have a comprehensive GST in place now but any move to increase that rate of GST can proceed only if a couple of essential preconditions are in place. There has to be an adequate compensation package for low and middle income households in particular. It will not work if because of its regressivity in fact those families and households end up worse off as a result of any change. Any package that is introduced—this is the second precondition—has to be of a sufficiently coherent and administratively simple manner to ensure that we are not building a comprehensive cumbersome mountain of compensation to take the place of the GST increase. The challenge that the Government has over the next few weeks is working its way through that conundrum then seeing where the balance lies. 
I want to put on record my appreciation of the work of the Tax Working Group. When it was established I wondered whether it would be possible to have a clear and coherent debate on tax issues because of their sensitive nature. New Zealanders and the working group have responded in a remarkably sensible and mature way to that opportunity. I think that as the scale and structure of international tax systems become more dynamic and our international tax competitiveness becomes more of an issue the lesson of that working group is that we will need to be undertaking these types of reform processes on a far more regular basis than we do at present. If one thinks about it one sees that the changes that we are now contemplating whatever their eventual outcome will be in their scope the biggest single package of tax changes in this country probably in two decades. We did make some major changes to company tax a couple of years ago. We have made various changes along the way to personal taxes but the lesson is simply that we cannot afford to leave the gap between periods of considering major change as long as it has been because the world gets away on us for one and second the range of issues becomes too difficult to deal with. We do need to have more regular reviews and I will certainly be looking at ways that we can develop an ongoing tax working group - type process to achieve that. 
Finally let me say that it is all very well to talk about tax policy—how it might be implemented and who might benefit and who might not—but for it to be effective a good tax policy has to be supported by a good tax administration. A complementary part of this change will be ensuring that the Inland Revenue Department’s ability to deliver the systems the tax policy that we have in place now and the changes that will be made is up to that standard so that we have good policy supported by good administration. That will lead us to this point: a tax system that is credible and respected that is fair and equitable and that delivers the benefits it is expected to deliver to the vast majority of New Zealanders. That will be a considerable achievement.