Nash Stuart: Taxation (Consequential Rate Alignment and Remedial Matters) Bill — Second Reading 
Nash Stuart: Taxation (Consequential Rate Alignment and Remedial Matters) Bill — Second Reading 
[Volume:659;Page:7866] 
STUART NASH (Labour) 
: 
 I rise to support the Taxation (Consequential Rate Alignment and Remedial Matters) Bill in its second reading. It is basically a technical bill in nature but a necessary bill. As has already been mentioned by other speakers the main issue that the bill addresses and rectifies is the alignment of resident withholding tax on interest paid to individual taxpayers with the new marginal tax rates. 
Now please do not get me wrong—I certainly do not agree with the National Government’s new marginal tax rates. They were rushed through under urgency and they ended up giving believe it or not 30 percent of tax cuts to the top 3 percent of taxpayers. That is simply not fair. Nor did National’s tax cuts address at all the rising cost of living that those earning under $40000 are now facing under the current Government. But I tell New Zealand not to worry because Phil Goff as Prime Minister is less than 2 years’ time will work very hard to address that dreadful unfairness and inequity. The bill deals with a number of technical issues but resident withholding tax is the issue that has by far the greatest impact on ordinary hard-working Kiwis. I do have a slight reservation which I will address soon. 
I have said before and I reiterate today that every new and amended tax must be judged across six categories. The first and foremost category is economic efficiency. Tax legislation should not hinder the growth of the economy. It should in some way improve the efficiency of the tax system and therefore the whole economy. The second category is revenue adequacy—how much tax will it gather for the effort required to gather the tax? The third is revenue integrity which is the effectiveness in raising revenue and the ease of avoidance. 
The fourth category is simplicity of administration and compliance which means that the costs to the Government of administering the tax system and the costs to the taxpayer of complying with the tax system are kept as low as possible. The fifth is coherence which means that a particular tax makes sense in the context of the entire tax system. The sixth category is equity and fairness—that is who bears the burden of tax? 
I would like to expand on the sixth point. It is the one that the Labour members on the Finance and Expenditure Committee fought hard for. It is to the credit of the Inland Revenue Department that it understood our argument and concerns and amended its recommendations accordingly. What I am referring to is the rate at which the default resident withholding tax is set for individuals with bank accounts that earn interest. At the risk of losing the attention of some members opposite I will provide a couple of figures that put that important point in context. 
As we know there are four tax brackets within which all income falls: 12.5 percent 21 percent 33 percent and 38 percent. The tax that individual taxpayers pay on the interest earned from money sitting in a bank account should be the marginal tax rate—or their tax bracket—that their wages or salaries are taxed at. 
So those who earn close to the average wage of around $38000 per year and thus received no tax break whatsoever from the National Government in its Scrooge McDuck Christmas package will have a top marginal tax rate of 21 percent. If they earn as much as the chief executive officer of Telecom who I think ended up with a Christmas bonus in the form of a tax cut of around $400 per week—because he really needed it—then their top marginal tax rate is 38 percent. Their income tax rate is the rate at which the interest in their bank account should legally be taxed. If the bank does not know people’s tax rate then the interest they earn will be taxed at the default rate. 
Initially the Inland Revenue Department recommended to the Finance and Expenditure Committee that the default rate on all bank accounts be taxed on 1 April 2011 at the top tax rate of 38 percent the rationale for this being that the largest tranche of resident withholding tax is collected from this group at about $392 million per year. 
There are however only around 267000 taxpayers on that 38 percent top marginal tax rate and a further 3.3 million Kiwi taxpayers are on marginal rates lower than that. Now a total of 3.6 million sounds like a lot but members need to be aware that this figure includes interest on bank accounts opened and maintained for example by parents on behalf of their children. 
The Inland Revenue Department believed that if taxpayers were on the lower top marginal tax rate they would contact their bank proactively and get their default resident withholding tax rate lowered to the correct rate and I am sure that many would have done so. The department’s rationale was also based on three of the six categories which I outlined initially that constitute a sound tax. The department said that the top tax rate being the default would promote economic efficiency revenue integrity revenue adequacy and revenue simplicity. 
I agree to a large extent—the default tax rate being the top marginal tax rate does by and large meet those tests. However in the view of the Labour team on the committee it did not meet the test of equity and fairness. That is what the Labour Party and Phil Goff stand for—equity and fairness for all hard-working Kiwis. In fact every member of the Finance and Expenditure Committee agreed on that point. 
So we asked the Inland Revenue Department to do a scenario analysis around setting the default rate at 12.5 percent and 21 percent. The analysis confirmed that the fiscal risk of setting the default rate at 12.5 percent was simply too high. The department then concluded that a 21 percent default rate was more likely to ensure that the highest portion of individuals is taxed at the correct rate but the risk is that that might not encourage those on the top marginal rate to proactively change their resident withholding tax rate upwards. 
The department determined that the fiscal risk of setting the default rate at 21 percent instead of 38 percent was possible under-reporting of around $47 million. In the end the department agreed with our rationale around equity and fairness and did agree to the select committee’s recommendation of a 21 percent default rate. The department also agreed that it would proactively engage with banks and those taxpayers on higher marginal rates of 33 percent and 38 percent to ensure that the fiscal risk of under-reporting the correct rate for resident withholding tax was mitigated and to ensure that the number of Kiwis who are either knowingly or unwittingly avoiding their full tax responsibility is kept to a minimum. 
At the beginning of my speech I noted that I had one slight reservation about the important issue of amendments to the resident withholding tax and it is this. Even with the default rate now set at 21 percent there are still some 1.453 million Kiwis on the 12.5 percent tax rate. As I said before a lot of them may well be children for whom their parents have set up and maintain a bank account. But that is still 1.453 million Kiwis who are on the 12.5 percent tax rate—that is earning between $1000 and $14000 a year—and who have a combined interest income of $1.13 billion dollars. 
The previous speaker Mr Foss said that that demographic did not have significant assets. I would have thought that $1.13 billion in interest income is reasonably significant but those 1.453 million Kiwis will be overtaxed if they do not proactively contact their bank and ask for their resident withholding tax rate to be lowered to the correct appropriate marginal tax rate. So all the members of the Finance and Expenditure Committee sought and received assurances from the Inland Revenue Department that it would do its utmost to guarantee that all New Zealanders are given as much information as possible through public education and advertising campaigns to ensure that those being under-taxed and those being overtaxed are well informed of their rights and the processes required to change their resident withholding tax to the correct rate that matches their marginal tax rate. As mentioned unlike a lot of other taxes this one requires New Zealanders to be proactive to ensure that they are taxed fairly. 
That aside I do support this bill and I commend it to the House. Thank you.