The Government seems unlikely to rush tax changes into this year's May Budget except for a few easy-to-implement, one-line changes with few political implications.
The big changes, such as implementing a capital gains tax and raising GST from 12.5% to 15%, are likely to be either put in the too-hard pile of review recommendations or be part of a wider public discussion document.
Putting issues out for public discussion would allow the Government to gauge wider electoral reaction to changes affecting large numbers of voters.
The Tax Working Group made 13 recommendations to the Government yesterday.
Finance Minister Bill English and Revenue Minister Peter Dunne reacted by saying they would "carefully consider" the report.
There were some hints from the ministers they would consider some law changes this year.
Mr Dunne noted the group's concern regarding the misalignment of tax rates which encouraged the use of trusts and companies - with tax rates of 33% and 30% respectively - to shelter income that would otherwise be taxed at the higher personal tax rate of 38%.
"This is inherently unfair to the wage and salary earner, who is then left to bear a disproportionate share of the personal tax burden."
He was also concerned about the manipulation of family income in some instances to obtain Working for Family tax credits.
There was growing evidence trusts and companies and highly-geared residential rental properties were being used to reduce taxable income and so qualify for Working for Families.
Such abuse potentially placed an unfair burden on the 60% of families who did not receive those credits, Mr Dunne said.
Polson Higgs tax partner Michael Turner said a comprehensive review of welfare policy and how it interacted with the tax system, as recommended by the working party, would not happen until after the next election.
Prime Minister John Key had already ruled out touching the Working for Families credits before then.
It was likely that, as with the introduction of a higher age for pension entitlement, any changes would be introduced gradually.
Someone with three children could possibly earn $110,000 before the Government stopped paying the last cent of welfare credits, Mr Turner said.
The group's 13 recommendations could be divided into three categories: a great idea but would never happen; a great idea but would take time to implement; small things that can be pushed through in the Budget.
Aligning the company, top personal and trust tax rates was a nice idea but the Government did not have the money to do that in the current economic climate, he said.
Keeping New Zealand's company tax rate competitive and retaining the imputation credits meant keeping a watch on Australia.
If it moved, so would New Zealand.
Reducing the top personal tax rates of 38% and 33% was also a good idea, but the Government was only likely to move on the 33% rate, which affected the largest number of voters, Mr Turner said.
The working group recommended broadening the tax base but Mr Turner said the most obvious way to do that was to introduce a capital gains tax and lift GST.
However, there were problems with both.
While most OECD countries had a capital gains tax, many of those countries - such as Australia - had found it was not as efficient as it should be and had made changes.
Increasing GST was an efficient measure of tax collection but lower-income earners needed some compensation, as they were the most affected.
A higher GST rate should be included as part of a wider tax reform package.
The working group supported a more targeted approach to the taxing of residential properties and the introduction of a low-rate land tax as a means of funding other tax-rate reductions.
Mr Turner said there were some problems with both approaches.
People did not invest in residential property just for tax reasons.
Given the performance of sharemarkets in the last 18 months, and the collapse of finance companies, investors could at least have their property investment intact at the end of the credit crunch, compared with losing all their money when companies collapsed.
The effect of a land tax was to immediately drive down the value of land, making it difficult for people who had already seen their valuations fall.
If banks were already pressuring home-owners to reduce their mortgages, seeing a further fall in land values would compound the problem, he said.
The easy things to implement this year would be removing the 20% depreciation loading on new plant and equipment and removing tax depreciation on buildings if evidence showed they did not depreciate in value.
