Prime Minister John Key is today expected to target tax breaks for landlords in his first parliamentary speech of the year setting out the Government's plans.
He would not rule out an increase in GST from the present 12.5% to 15%, one of the options put forward in a smorgasbord of alternatives last month by the tax working group.
Mr Key strongly hinted yesterday the Government would address the iniquities arising from wealthy people arranging their affairs to avoid paying tax but who enjoyed the benefits of taxpayers, such as education and healthcare.
"That's not fair," Mr Key said, "particularly if that is being paid for by low and middle-income New Zealanders who can't afford it. So let's put a bit of fairness into the system."
The tax working group highlighted the fact that there were 9700 families with rental losses who claimed Working for Families.
It also pointed to the use of trusts to lower tax obligations, such as a trading company owned by a trust.
The distribution from trusts to a beneficiary of the trust is taxed at 33% as trustee income is not counted as income for Working for Families purposes.
The tax working group highlighted the advantages of having alignment in the top tax rates for personal, company, trust and portfolio investment entities and the distortions that occur when they are not.
The tax working group said New Zealand's tax system was "broken" and it could not be fixed by tinkering.
Mr Key's speech today will contain the Government's formal response to the tax working group's ideas for broadening the tax base in order to lower personal and corporate taxes, and encourage investment away from housing.
But it is not expected to be a speech heavy on detail.
That will be left for Bill English's May 20 Budget.
"There will be a clear indication of the pathway for tax change in New Zealand," Mr Key said.
"It will spell out the areas [in which] we think some work is required. It will rule some aspects into the programme; it will rule other things out."
Mr Key begins the year under pressure from his own support base as well as Opposition parties to roll out some big policy initiatives.
But the real focus will be on how bold he is prepared to be on tax reform.
"2010 is important for implementing the Government's change agenda," he said.
Changes to the tax system would be a "serious step" in putting New Zealand on to a faster growth path.
"It's not the only one, but it is an important one."
He has already ruled out a capital gains tax on the family home, but the working group also proposed a way of taxing capital gain on rental property, and a more general low-rate land tax.
Reiterating some of the concerns about rental properties, Mr Key said about $200 billion was invested in the rental housing sector and yet the Crown lost $150 million last year.
The Government's goals, he said yesterday, were "fairness in the tax system, equity amongst taxpayers and a robustness and sustainability of the tax system".
On Working for Families, the tax working group pointed out that with the family tax credits, more than 40% of households either pay no tax or get more in family tax credits than they pay in tax.
It also increases the effective marginal tax rate on extra income earned to 58% for the primary earner in a family receiving Working for Families on an income of more than $48,000.
