Have your say: English dampens expectations for Budget 2010 tax cuts

Bill English has signalled that Treasury's forecasts for extra tax revenues from potential property taxation changes in the May 20 Budget are lower than the NZ$1.3 billion estimated by the Tax Working Group and that any tax cuts are therefore likely to be smaller than some might have expected. English made the comments in Wellington yesterday while announcing the creation of the Productivity Commission. Here's what Radio Live reported:

The Government could have to back track on personal tax cuts after revelations it won't be getting enough revenue to cover them. The money was to come from a hike on the tax on investment property as well as a rise in GST. Last year's Tax Working Group said up to $1.3 billion could be raised by better targeting investment property. But Finance Minister Bill English says Treasury’s estimates of that are now falling, and although that means there's less money for tax cuts, he's playing down the changes.

Here's how Radio NZ reported the dampening of expectations:

Finance Minister Bill English says Treasury has a different view from the Tax Working Group on how much extra tax will be generated by changes to the way property is taxed. Mr English says that means the trade-offs between tax changes and cuts to income tax rates will be tighter.

My view Bill English is right to be downplaying expectations. This is the second time he has done it since John Key's state of the nation address. Back on on February 18 he said the government may not need to or be able to align the top personal income tax rate (currently 38 cents) with the family trust rate (33 cents) or the corporate tax rate (30 cents). The Tax Working Group recommended that the government look to align the top personal income tax rate, the corporate tax rate and the family trust rate to close a loophole that has encouraged investment in property, which is relatively lightly taxed. English said then that aligning those rates remained the government’s medium term goal, but the government was considering “whether it was affordable and whether it fitted with other equity considerations." I said back when John Key made his speech that the property tax changes that could be adopted in the May 20 budget would not be enough to provide big enough tax cuts. The GST increase to 15% is essentially gobbled up in compensation for the poor, while the property tax changes won't yield much. The possible changes still left on the table include a two year 'bright line' test for property traders, banning depreciation of rental houses as a taxable expense and ringfencing of losses. The Tax Working Group estimated the property various tweaks mentioned above would raise around NZ$2 billion, including NZ$1.3 billion from the depreciation change. Bill English is now saying it won't be that much. My bet is there is not enough to drop the top tax rate to 33 cents from 38 cents. My guesstimate would be 35 cents is the best the government can do. I suspect part of the reason for the hosing down of expectations is this report from Grahame Armstrong in the Sunday Star Times, which suggested a cut in the top rate from 38 cents to 33 cents.

The Sunday Star-Times understands the government has settled on lowering the tax rate for those earning between $14,000 to $48,000 – which represents the bulk of wage earners – from 21% to 19%. The May budget is also expected to lower the tax rate for those earning up to $14,000 from 12.5% to 10%. The Star-Times also understands the government will, in one hit, lower the top rate for those earning more than $70,000 from 38% to 33%, rather than doing it gradually.

This exercise in expectations management detracts from the core issue: the government needs to broaden the tax system to include property and land in particular if it wants to raise substantial amounts to cut the top tax rate and remove all the loopholes and tax avoidance via property investments. John Key ruled that out and seemed to hope he could make a difference to the top tax rate with a few tweaks here and there. Tweaks will not do it. Bill English just confirmed it. So no change there and little change in either the structure of the economy or the economic outlook. When is this government actually going to do something substantial? Your view? We welcome your comments and insights below.