Editorial: John Key's tax juggling act

OPINION: Prime Minister John Key likely woke up today with fewer friends in the property industry than he had yesterday, but his reform of the tax system will have many feeling relieved.

Mr Key yesterday unveiled a series of proposals that he says will put the economy at the heart of his agenda for 2010, but for some it will definitely mean some painful readjustments.

Ahead of yesterday's announcements the Prime Minister was sitting on an explosive-looking arsenal of tax measures following a thorough inspection of our creaking tax system by the best tax minds in the country. The weapons at his disposal ranged from tinkering at the edges to some fairly severe options, and so far Mr Key is keeping clear of the really dynamite reforms.

He kicked the nasties into touch straight away, ruling out a land tax, a capital gains tax or a change to the way the tax on rental properties is calculated. All would be deeply unpopular with National's grassroots voters.

While a capital gains tax is off the table, there is a clear signal that the party is largely over for the property investment fraternity, which has benefited from a favourable tax regime. As this newspaper has argued before, the system has skewed investment towards housing, at the expense of the rest of the economy. A crackdown on property taxes will not be popular with the industry, but looks like a wise move.

For middle New Zealand there is the prospect of personal income tax cuts later this year, with the sting in the tail a more than likely increase in the rate of GST to 15 per cent.

That increase is undoubtedly a blow to low income families, but the pill was sweetened with a decision not to introduce any major changes to Labour's popular Working for Families policies and Mr Key has promised not to penalise lower income families in other ways.

The changes promised to Working for Families are more about closing loopholes that allow well-off families to claim entitlements that, in all fairness, they should not be getting. The families who receive Working for Families help, not surprisingly, are very fond of them.

He also unveiled a busy looking programme, including help to remove "roadblocks" to water storage and irrigation in Canterbury. Canterbury's farmers and conservationists have heard it all before and the road is still blocked, especially with the future of Environment Canterbury still swinging in the breeze.

With an election two years away and a huge amount of political capital in the bank, the programme unveiled yesterday will undoubtedly siphon some of it off. But if Mr Key manages to pull off the juggling act of rewarding middle New Zealand with tax cuts while protecting poor families and increasing GST at the same time, it will be a pretty trick indeed.

- © Fairfax NZ News