Report highlights personal tax cut benefits

Last updated 16:44 21/03/2013

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Personal tax cuts may have a greater economic benefit than cutting company tax rates, says a joint report by Treasury and the Inland Revenue Department. 

The finding contradicts the belief that cuts to the corporate tax rate are the best stimulant for economic growth.

They recommend officials further investigate options for reducing personal tax. 

The report says most of the benefits of personal tax cuts accrue to Kiwi residents, whereas some benefits of company income tax cuts would be enjoyed by non-residents, given New Zealand's high level of foreign capital ownership. 

Personal tax cuts across the board would increase labour supply and gross domestic product, economic welfare, savings, and reduce macroeconomic vulnerability. 

The cuts would also deliver further "dynamic growth benefits from reducing personal tax rates, for example higher productivity and entrepreneurship", and would be relatively easy to implement, the report says. 

The report says reducing personal tax rates by about one percentage point each would have a fiscal impact of $1 billion. 

It says a cut to corporate tax would increase GDP, due to increased investment in corporate sectors and longer term productivity gains, and national savings to a more limited extent. 

But it could result in a net welfare loss as the tax loss to the country - from which non-residents would benefit - would outweigh the gains from improved investment incentives. 

Corporate tax cuts would encourage foreign investment but give resident shareholders little incentive to invest, as the imputation system would claw back any benefit when income was distributed.

The report was prepared in response to questions from Finance Minister Bill English as to whether changing tax settings could materially improve the country's economic performance.

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