Huo Raymond: Taxation (Consequential Rate Alignment and Remedial Matters) Bill — First Reading 
Text is incorporated into the Bound Volume 
Huo Raymond: Taxation (Consequential Rate Alignment and Remedial Matters) Bill — First Reading 
[Sitting date: 28 July 2009. Volume:656;Page:5177. Text is incorporated into the Bound Volume.] 
RAYMOND HUO (Labour) 
: 
 The Taxation (Consequential Rate Alignment and Remedial Matters) Bill is a technical bill that continues one of Labour’s work streams and makes some necessary changes. Tax cuts have been made to the individual and company tax rates. The bill introduces new resident withholding tax rates on interest income to align them with the new tax rates. The new rates for individuals will be 12.5 percent 21 percent 33 percent and 38 percent depending on their income. The bill introduces a new default rate of 38 percent for people who do not notify the bank of their correct tax rate. The new default rate will apply to accounts opened from 1 April 2010. That change has raised some concerns and I will come back to that matter later. 
Other changes in the bill include firstly aligning tax rates on portfolio investment entities with the new personal tax rates. Secondly the bill introduces a new 12.5 percent secondary code and a new 12.5 percent withholding tax rate for extra pays. That brings the withholding rates on employment income into alignment with new personal tax rates. Thirdly there are other changes concerning forestry and climate change and tax returns and trusts. 
It interests me that this bill is a good reminder of some important issues. The first issue is in relation to the magic words “tax cuts”. The National-led Government came into office with grand promises of a tax-cut programme that would benefit everyone. Many will recall that at the end of last year this honourable House was put into urgency to pass legislation to enable the National-led Government to implement tax cuts. Not long ago this honourable House was put into urgency again so that the Government could cancel those tax cuts. In other words in its very first Budget in May the National-led Government broke its No. 1 election promise which it campaigned on tirelessly and cancelled the next two runs of tax cuts. Sure it did pass a tax cut package but that gave one-third of the tax cuts to only the top 3 percent of taxpayers or to borrow Mr John Boscawen’s word to the top 3 percent of the “privileged” taxpayers. The April 2009 changes to personal taxation affect only people earning $40000 or more so 71 percent of taxpayers or again to borrow Mr Boscawen’s words those who are “underprivileged” received no tax cuts at all. It is regrettable particularly at this time of the economic downturn because there would otherwise be ample opportunity for the Government to redirect its tax plan to ensure that the tax cuts would benefit those who needed them the most and who would have spent them. This would also have served to boost the economy and save jobs. 
Secondly another magic word or I should say magic name is Dr Don Brash who has recently been appointed by the National-led Government to lead the productivity task force. This naturally brings us to the issue of productivity. It is deeply regrettable that the research and development tax credits were scrapped by the National-led Government. It appears that the sole reason the National-led Government scrapped the research and development tax credits was to fund its tax package. It is illogical because as I said earlier the No. 1 grand promise of a tax cut programme benefiting everyone was broken. Moreover to fund the No. 1 election promise—which was broken anyway—at the cost of innovation and productivity recalls the ancient Chinese idiom “killing the hen to get the eggs”. New Zealand business expenditure on research and development is one-third of the OECD average namely 0.51 percent of GDP. Treasury considered that figure a drag on New Zealand’s productivity growth and competitiveness and advised the Government to retain the tax credit. That advice was given on the basis that the credit offered a more effective means of incentivising business research and development than discretionary grants as the credit was more driven by business and could reach many more firms. 
The main disparity between New Zealand and other countries is in the low research and development spending from business as a percentage of GDP. Total research and development spending in New Zealand as mentioned by my colleague Stuart Nash is only 0.51 percent. That is low compared with spending in Australia of 1.15 percent in Japan of 2.62 percent in the UK of 1.1 percent in the US of 1.89 percent and the OECD average of 1.56 percent. International evidence shows that well-designed research and development tax credits can and will have a positive impact on productivity growth. Treasury advised the incoming Government that the research and development tax credit should be retained. Therefore a sensible move by Dr Don Brash would be to advise the National-led Government to reinstate the research and development tax credits. 
Furthermore it is equally regrettable that by cutting the incentives for KiwiSaver the National Government is decreasing the amount that New Zealanders will save. The low savings rates and the spending habits of New Zealanders are two obvious reasons behind the KiwiSaver scheme. The Government’s move has created huge uncertainty for the over 1.1 million New Zealanders who have already signed up and it takes opportunities away from future generations. 
The fourth issue is related to the changes made to the default rate. The bill introduces a new default rate of 38 percent for people who do no notify the bank of their correct tax rate. We have heard concerns that those tax changes being proposed will catch investors unaware and may see them pay more tax on their investment income. Mr Peter Truman was quoted in the  
Otago Daily Times 
 as saying: “many New Zealanders did not get around to notifying their financial institutions of their correct tax rate … Therefore we have the Government increasing its tax take from those who are not motivated or organised enough to advise financial institutions of their correct tax rate.” 
As a member of the Finance and Expenditure Committee I look forward to submissions on this bill. Thank you very much.