Finance Minister Steven Joyce announced on Thursday the two lower tax thresholds would rise from April 1 next year. The $14,000 threshold will move to $22,000 and the $48,000 threshold to $52,000.
That will provide a tax reduction of $11 a week for people earning $22,000 or more, rising to $20 a week for anyone earning $52,000 or more.
Otago-Southland Employers Association chief executive Virginia Nicholls said moving the tax thresholds higher was a positive step, but it was disappointing the threshold before the top marginal tax rate of 33% had not been moved.
It started at $70,000 and did not take into account changing income levels over time.
"In addition, many SMEs (small and medium-sized employers) are in the top personal income tax bracket. Movement in this space would have been welcomed, along with any movement in the corporate tax rate — currently 28% — given recent announcements in Australia."
It was time to have an automatic threshold adjustment based on changing income rates so the potential for fiscal drag — people moving into higher tax brackets — was not an ongoing issue, Mrs Nicholls said.
Federated Farmers president William Rolleston also expressed disappointment there was no movement in the threshold for the top rate of income tax or for the company tax rate.
Too many taxpayers would continue suffering the effects of several years of fiscal drag and New Zealand’s company tax rate ran the risk of falling behind those overseas, he said.
Crowe Horwath Australasian tax specialist Scott Mason said there were good reasons for the Government to consider lowering the corporate rate.
New Zealand had some of the highest business taxes in the world. The OECD average was closer to 20% and there were concerns about the competitiveness of New Zealand as a destination for capital, he said.
The United States was likely to reduce corporate tax rates from 35% to closer to 20%.
However, New Zealand company tax was essentially a withholding tax on behalf of the shareholders who paid tax at their own marginal rates, albeit with some offset from imputation credits.
"Reducing company tax rates, and leaving personal rates higher, drives retention of profits with companies — which may be invested in growth opportunities."
If it was assumed tax rates fell to the OECD average, $100 profit less $20 tax left $80. If paid out, another $13 tax had to be paid, assuming the shareholder was on a 33% tax rate.
If retained, that could be deferred and the company had more to invest in growth, Mr Mason said.
However, there was no guarantee extra funds in companies would be reinvested to drive sufficient economic growth to make up for the fiscal loss of doing so.
New Zealand was a country of SMEs and there were other ways of extracting cash from companies without triggering extra tax, he said.
New Zealand was a net importer of capital and the largest beneficiaries of a reduction in company tax would be foreign investors, who were unlikely to pay anything more than the corporate tax rate, not the top-up to 33%, creating significant fiscal leakage.
"There is a lack of firm data that proves significantly more productive capital investment would flow into New Zealand as a result. Supply elasticity is not as great, in my view, as some would portray."
The matter was one to monitor within the wider international context. But at this stage caution was a better option as the world rebalanced itself after proposed US tax changes and OECD actions in international tax.
