National could use a dose of Prebble's medicine

CRAIG SIMCOX/Dominion Post

TAX MASTER: Richard Prebble during his valedictory speech in Parliament.

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OPINION: Prime Minister John Key could do worse than have a fireside chat with former ACT leader Richard Prebble as  he sets about deciding just how far to go on tax reform.

Mr Key has been given an unpalatable message about the state of our ramshackle tax system. His inclination will be to take a big corrective policy gamble here, using his extraordinarily high polls rating to carry his caucus and the electorate down the reform path.

There will be nervous nellies in his caucus, however. Some will regard a rise in GST - seen as necessary to balance the ledger after company and personal tax cuts - as political suicide.

That's where Mr Prebble comes in. As associate finance minister to Roger Douglas in the reforming fourth Labour government, Mr Prebble faced the task of sorting out the grossly inefficient old Post Office once it was restructured into NZ Post.

One of the potentially catastrophic political decisions involved the need to close 432 Post Office branches - many of them opened not for reasons of postal efficiency but as vote-catching sops to marginal electorates.

Mr Prebble told Vivienne Smith, author of the book on this saga, Reining in the Dinosaur, that he was constantly bombarded with advice from businessmen on SOE boards about what he could and could not do politically and how many branches he could close at once. He had to adopt a stock retort: ''Look, you run the business and I'll run the politics.''

He closed the lot in one fell swoop, on February 5, 1988. The sky did not fall in on Labour as a result of this shock. In fact the government seemed to be admired for courageous action. And nor did the government  lose ground over the initial introduction of GST, then set at 10 per cent, because it coincided with massive  personal tax cuts, with the top rate dropping from 66 cents to 33c in the dollar.

All this should assist Mr Key's case to his nervous nellies: a courageous government gets rewarded for unpalatable decisions; indecision and timidity get punished.

The reforming fourth Labour cabinet then went on to agree on a flat tax, envisaged at around 23c in the dollar, with a guaranteed minimum family income support mechanism. That fell apart because then prime minister David Lange got cold feet, called for a breather, and unilaterally abandoned the decision of his own cabinet.

If that had gone ahead it would be interesting to speculate how the New Zealand economy would look today. Mr Key and his tax working group would not be facing tax mobility problems. In fact, companies and skilled  workers would probably be bolting to this side of the Tasman instead. Tax policy went downhill from this time, especially after the incoming Helen Clark's fifth Labour government imposed a 39 cent top tax rate, cutting in at only $60,000.

That was a purely political ''politics of envy'' move that had disastrous consequences.

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The wealthy, thumbing their noses at the politicians, went into tax avoidance mode, structuring their incomes through trusts, portfolio investment entities and loss-attributing qualifying companies, leaving middle-income earners to pay. One disastrous consequence was the property boom.

More recently Labour introduced vote-catching measures such as the middle-class-welfare Working for Families scheme - now shown to be widely rorted - and interest-free student loans.

No wonder the tax working group found the resulting tax system to be uncompetitive and shambolic.

Ten per cent of taxpayers are paying nearly half of all the personal tax revenue take. The $200 billion invested in rental property (four times the value of the stock exchange) yields a tax loss of around $500 million because book losses can be set against other income.

A capital gains tax is unlikely as Mr Key and Finance Minister Bill English both doubt the vehicle's effectiveness. A land tax is possible, but has big business opposition and farmers will need special  treatment.

Mr Key has pledged that beneficiaries and pensioners would be compensated for any GST increase.

The question is whether Mr Key and Mr English have Richard Prebble's bottle.

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