Taxation (Urgent Measures and Annual Rates) Bill

Hon BILL ENGLISH (Minister of Finance) Link to this

I move, That the Taxation (Urgent Measures and Annual Rates) Bill be now read a first time. This is crucial legislation at a time when New Zealand has elected a new Government, the world economy is in turmoil, and New Zealand’s economic outlook is more uncertain than it has been for several decades. There has been an extensive debate in New Zealand about taxes, tax levels, tax rates, and tax cuts. What has been clear in election year is that, essentially, the argument for lower taxes has been won, and won to the extent that the former Government introduced its own tax-cut package.

This bill will outline the changes in income tax rates and thresholds. The new independent earner credit for low and middle income New Zealanders is aimed at people earning between $24,000 and $44,000. The bill also includes changes to KiwiSaver, which National campaigned on, to make KiwiSaver more affordable, fair, and more durable, and I will come back to that. The bill also includes the repeal of the research and development tax credit.

I want to deal with one issue regarding the fiscal cost of this package. In the 2008 Budget the previous Government outlined a set of tax cuts. This package, including the recent change to KiwiSaver that was announced today, is fiscally neutral compared with the 2008 Budget. The cost of extra tax cuts has been offset by the other changes that are included in this bill.

I want to pick out a couple of the features of the bill that will be important. The first is the independent earner tax credit. As anyone who has dealt with tax scales will know, lower income earners in New Zealand already pay quite a low rate of tax, and any shift in those low thresholds costs a lot, because a shift in a threshold that is $9,500 or $10,000 applies to taxpayers who earn $100,000 as much as it does to those who earn $20,000. The independent earner tax credit is a method by which individuals who earn lower incomes—that is, from about the minimum wage of about $24,000 to about $44,000—will receive an increment to their income equivalent to quite a significant shift in the tax thresholds, but in a way that targets the assistance to that group rather than passing it on to income earners at the high end of the income scale. About 630,000 people will qualify for this credit in the first year. It covers a group of people who, in 9 long and wasted years under Labour, received no tax reductions whatsoever, primarily because they did not have children. That is what happened in the last decade.

The independent earner tax credit will not be paid to people who are receiving benefits, pensions, Working for Families tax credits, or national superannuation. I would point out that as a result of the tax changes national superannuitants will have quite a significant uplift in their income, and it will take some time for that particular message to filter through.

The other significant change in this bill, apart from the tax cuts themselves, is related to KiwiSaver. It has been the view of the National Party that a long-term savings programme ought to have broad political support. It needs to be durable, it needs to be affordable, and it needs to be fair. The reality is that over the next 5 years or so, the fiscal capacity of the Government will be significantly less. KiwiSaver and its extensive range of subsidies were introduced when the Government was probably at the peak of the fiscal surpluses that it will see for maybe another decade, and certainly for the two decades before that. So those significant incentives were introduced at, probably, the highest point in Government finances that will be seen in a generation. It was National’s view that they may prove not to be sustainable, and I think events in the last 6 months have borne out that judgment.

So we have made some changes to KiwiSaver that preserve the incentives that are paid into the savers’ accounts and that make a number of other changes such as the abolition of the employer tax credit and the abolition of the member fee subsidy. The main change has been to reduce the minimum member contribution rate to 2 percent. We believe this will allow a good deal more New Zealanders to be able to stay in the scheme for a start when times are tough, and for many others to be able to enter the scheme because of the lower contribution rate. [Interruption] Well, Labour members had their chance in the election campaign; as far as I know they made no coherent case in respect of KiwiSaver, and that is one of the reasons they lost the election.

We are also abolishing the research and development tax credit. This is a decision that has been greeted with a little bit of commentary. The fact is that it was an expensive scheme that in our view was not well targeted, because many businesses that are already able to deduct 100 percent of their research and development expenditure were spending a great deal of time reclassifying existing expenditure so that they could get the deduction. [Interruption] I say to Dr Cullen that when he sees the mess that the previous Government has left in our fiscal track this will look like one of the more obvious and simpler decisions that the current Government will make. That is the backdrop against which this tax cut package ought to be seen.

The fact is that the fiscal outlook is showing at least a decade of ever-rising deficits and consistently rising public debt, and there is a number of reasons for that.

Hon DAVID CUNLIFFE (Labour—New Lynn) Link to this

Quite clearly the honeymoon is already over for those New Zealanders who thought they had voted for a kinder, gentler kind of National Government. This morning the Governor-General graciously read the Government’s agenda-setting Speech from the Throne. The Government’s overriding goal is to go for growth by turbocharging productivity, while at the same time protecting the most vulnerable! That, of course, reflected the lines recited by the National Party during the recent election campaign: “Vote for us—none of the good stuff will change, but you will all be better off.”

As a loyal Opposition we see our role as being to encourage that which is good for New Zealanders, and to oppose robustly that which is not. Today, on this first business day of this new House of the forty-ninth Parliament, New Zealand already has the opportunity to test whether National’s rhetoric matches its reality. Patently and sadly, it does not. Badly designed tax cuts benefit upper and middle-income earners, while the losers are low-income families. National is undermining KiwiSaver at a time when the world is facing an unprecedented credit squeeze. Go figure! While targeting productivity and, supposedly, innovation, National guts the research and development tax credit that has almost universal support by people who actually design things, build things, and export things. Go figure!

The problem with this bill is essentially twofold. Firstly, equity: who gets what? This is Robin Hood in reverse—taking from the poor to give to Bill English. But, perhaps even more important, it is design. There is no logical link between the measures contained in this rushed bill and the Government’s own self-described priorities. It will not work. It will not contribute to growth and productivity. It is the wrong tool at the wrong time, for the wrong problem.

What will it cost? National’s tax plan will cost about $12.3 billion, once we take into account the October tax cuts from Labour’s plan that have already been instituted over 5 years. It is about the entire health or education budgets. Of course it is partly offset by the $3.5 billion that is being sucked away from KiwiSaver, or the $1.5 billion from our innovative firms. But, even so, due to the Government’s self-confessed snafu around the contribution to KiwiSaver, it is not fiscally neutral. The extra $700 million has tipped it into the red.

That is despite Treasury’s advice that there is no problem to solve—that the level of fiscal stimulus in Labour’s earlier package was sufficient, given the level of borrowing and the international environment. It is timely, therefore, to consider Labour’s economic legacy to New Zealand: the longest postwar expansion; real incomes up a quarter after inflation, over the decade; gross Government debt cut in half, from 35 percent to 17 percent; net debt in surplus for the first time since Sir Julius Vogel borrowed to build the railway system in the first place; $14 billion contributed to the Cullen fund; inflation at moderate levels and falling, allowing an official cash rate cut of 1.5 percent last week; and huge investment in infrastructure, roading, and rail, around ten times that invested by the previous National Government. That is not to mention the buy-backs of corporate failure, like Air New Zealand and KiwiRail, or promoting a New Zealand - owned Kiwibank.

National knows that things do not look good internationally. Last week Bill English issued a press release to announce that 2009—shock, horror, probe!—would be “challenging”. Yesterday John Key took time away from directing money markets on where the exchange rate should be to say that the forecasts do not look great. But that has not stopped the Government from launching tax cuts that are badly designed and a profligate waste of money that will only build up debt by borrowing to fund household consumption, rather than contributing to the drivers of productivity, which the Government says it is espousing.

So how far into debt is this going to drive us? The answer is that we simply do not know. The Government has not yet published the forward debt track projections. The Government knows what they are. My bet is they will take us all the way back to what we inherited in 1999. I would be surprised if they do not clip 35 percent again. The decade of prudence under Labour was gone on the first day of the new Government’s profligacy.

So who gets what? What about the equity of this package? National’s tax plans state its true priorities. Rewarded are the highest paid, by getting the top marginal tax rate dropped from 39c to 37c in the dollar. But almost as important is the fact that someone on three quarters of a million gets $240 a week, whereas the average income earner gets about $2 a week. Even more important than that is the disadvantage to working families who are caught by the threshold changes that they do not get, which were in Labour’s package. By 2011 anyone earning from $14,000 to $20,000 will be paying 21c in the dollar under National, but they would have been paying 12.5c under Labour. Those are hard-working families who are not being compensated in any way in this package. They are the real New Zealanders who are bringing up kids, in a recession, and are worried about their jobs, but they are being hit by this tax package. It is Robin Hood in reverse—giving to the top income earners.

It is a scandal. But more important, it is the truth of what National stands for. Forget the election rhetoric, forget the flimflam. On the first business day of the House the real agenda has surfaced. I thought the Government would have had a more decent pause, but on the first business day we see what it is about.

Just to put into practical terms what this means for families, let us take under the Labour and National packages the two families who were mentioned in the Inland Revenue Department’s briefs. Under the Labour plan, Meg and Jack, who are both 35, have two kids. Jack earns $45,000 and Meg earns $20,000. By 11 April they would have been $85 a week better off. This is an average family with two kids. Under National, its poster couple Dave and Diane have three kids. They are earning $30,000 and $50,000, around the same, and are receiving Working for Families. They are $26 a week better off, or roughly $60 worse off than they would have been under Labour. These are official Inland Revenue Department figures.

So let us be really clear about who is getting what. Ordinary working families are not getting anything, and top income earners are. Why are we not surprised? Does it help the economy? I am afraid not. It is a huge spend-up that will do nothing to address the underlying drivers of growth and innovation. It does not boost productivity. It guts the research and development tax credit. It is no wonder the manufacturers and exporters associations say that that credit was essential to level the playing field with Australia. This is from a Government that criticised us for the fact that people were crossing the ditch. In its first day the Government has gutted the competitive advantage of our most innovative firms that employ more, export more, and earn more on average, and grow faster.

What is the sense in that? Will it boost savings or increase liquidity in the banking system? It will do quite the reverse. Stunning logic, is it not? When international banking is under threat and is having to give guarantees to get wholesale deposits into the system, the Government is undermining the best savings scheme ever designed in New Zealand’s history. Are we surprised? No, we are not surprised, because the last time we free-funded superannuation, Muldoon came and took it away in his first year in the House.

This is déjà vu, ladies and gentlemen. I hate to say: “We told you so.”, but we did tell you so. Unfortunately, we are all going to have to live with the consequences. It does not matter to us—we are happy to serve as Her Majesty’s loyal Opposition—but it sure as hell matters to New Zealand families who are struggling and worrying about their jobs and about the household budget. Those are the people most at risk from this ill-conceived, inequitable, hurried, wolf-in-sheep’s clothing, Robin Hood in reverse shambles of a tax plan.

Hon PETER DUNNE (Minister of Revenue) Link to this

From the time that the Business Tax Review announced in 2007 a cut in the corporate rate, effective from 1 April this year, to 30c in the dollar, it was inevitable that there would have to be substantial movement in the structure of the personal income tax scales. The measures that were contained in the Budget this year started us down that path.

The Taxation (Urgent Measures and Annual Rates) Bill does two things in that regard. Firstly, it takes us a step further along that path, by introducing a second set of changes with effect from 1 April next year; and, secondly, it also starts to address some of the issues raised in the briefing paper from the Inland Revenue Department, which noted that one of the consequences of the structure of our taxation system over the last few years had been, because of the high top marginal rate, an increasing tendency by high and upper middle income earners to seek to shelter their income through various devices, in order to limit their liability. It is important to see the types of changes that this bill makes to the personal income tax scales, because that starts the process of lessening the attractiveness to those income earners of the types of sheltering schemes that they have been involved in over the years. I say it starts the process, because it is by no means an end in itself.

In that regard, the objective is stated in the coalition agreement between the National Party and ACT that United Future’s long-term goal is a 30c in the dollar corporate rate, a 30c in the dollar trust rate, and a 30c in the dollar top personal rate. That has to be what we now aspire to, in order to completely remove the anomalies that are currently within our taxation system. At that point we would probably need to look to an intermediate rate of 10 percent, and a rate of 20 percent at lesser levels of income, to make a top rate of 30 percent work. But that objective is not inconsistent with the approach contained in this bill, and it has to be where our tax structure is headed in the long term. The issue is not just about the integrity of the system in New Zealand, and already we have seen the example of our system starting to lack integrity. It is becoming complicated; it is becoming a disincentive for people. But the reality of getting a flat top rate of 30 percent actually starts to make it a much more internationally competitive system. That has to be the goal that we work to.

The other part of this bill that is less attractive, and which I will not be supporting when it comes to a vote in the Committee stage, is Part 2, relating to the research and development tax credit. I think that the removal of that provision is a mistake, for all the sorts of reasons that I have heard various groups state. I think they are absolutely correct. It is important to note that the scheme actually took effect only from 1 April this year, so a massive claim against it is not likely until the end of the current revenue year, and that is actually protected by the provisions of this bill. So I do not see much point, long term, in the elimination of that scheme.

I also make the point that one of the incentives behind reducing our corporate tax rate, which, as I say, set off this process of taxation reform, was the need for competitiveness with Australia. One of the areas where Australia has a huge competitive advantage over New Zealand is the area of research and development. The tax credit that was introduced at least brought us to parity in that respect. In these days of a single trans-Tasman market and all of the initiatives that have been talked about in respect of that, I think it is a retrograde step to be getting rid of that credit at this stage. I think a far better step would be for all the Government’s research and development, innovation, and enterprise policies to be subject to a significant review, to make sure that they meet the objectives that have been set for them. But when we look at that matter alongside the changes being made to personal taxes, I think we see that the bill, overall, does deserve support.

This bill also brings in the confirmation of the annual tax rates for this year. It introduces the new independent earner rebate, and that deals with an issue that has been of concern for some time. It is available for those people who do not benefit from Working for Families or equivalent packages, but who see themselves as being in a disproportionately unfair position in respect of other taxpayers. It is the same sort of argument for single people that I might, in another forum, advance in respect of income splitting. There will be some complexities around the independent earner tax credit scheme, but I think they can be addressed, and we have had advice that that can be done adequately in the context of this bill.

The question of KiwiSaver is, I think, one that will be controversial in some areas, but I have never seen the changes that are being proposed as gutting the scheme or reducing its effectiveness. The fact that over 800,000 New Zealanders have already signed up for KiwiSaver, and the fact that compared with other saving schemes on the market at the moment, even in its revised form it still remains competitive and attractive, I think will ensure its future for a long time ahead. We are starting to see now the development of a voluntary savings culture in New Zealand—something we have sought to achieve for the last 30 years, without success. I do not see the changes in this bill, given the momentum that there is in place already, as detrimentally affecting that to any great extent. I think we will need to address in due course the issue of whether KiwiSaver at some point should be converted from the currently voluntary savings scheme into a compulsory scheme, but that is another debate, for another day. I do not see these changes as affecting that issue one way or the other.

This bill is timely. I think it is appropriate that it be passed before Christmas, so that the changes that it intends with regard to personal tax changes can take effect from 1 April next year. That would then give us a three-stage package—a four-stage package if we include the 1 October tax cuts this year—coming in on 1 April 2009, 1 April 2010, and 1 April 2011. But even at that point, when the top marginal rate has come down to only 37 percent, a further reform programme will still be needed to make more substantial change, in order to continue to ensure the robustness of our taxation system. As I said when the previous Government’s measures were introduced on Budget day this year, they were, in my view, a transitional step towards the type of change that I have spoken of. I see these changes tonight in a similar regard. They are good for New Zealanders. They will be welcomed by those who will benefit from them, and I am very happy to give them my support.

Hon Dr MICHAEL CULLEN (Labour) Link to this

The Taxation (Urgent Measures and Annual Rates) Bill enacts the policy that the National Party released then tried to bury—in terms of the details—as fast as possible. National’s tracking polling would have shown exactly the same result as ours showed. The one point in the campaign when National Party support started to fall was straight after it released its tax policy, and that was because the details were so unpopular.

This policy is a tax increase for low-income earners and low-income families. It is a reduction, in terms of incentives, for many people. It is a destruction, in terms of savings, for many people. It is an undermining of private sector research and development. It is a policy for a dumber society, with lower growth, lower productivity, and marginally lower tax rates—and even those by not very much. It increases tax compared with the current law—not current policy, but the current law. It increases tax on all low-income earners earning between $14,000 and $24,000 a year. I hope ACT votes for those tax increases. It means second-income earners in families. It means all beneficiaries with some additional work income. It means all superannuitants with some additional income, whether from savings or from employment. They will all face higher taxes under this bill.

Secondly, this policy increases tax for all low-income families with children that earn up to $44,000 a year, and for many middle-income families that earn up to as much as $80,000 or more a year. Why? Because they do not qualify for the independent tax credit. The example that Mr Goff gave this afternoon is absolutely right: a two-income family on $55,000—one income of $33,000, one income of $22,000—will lose $14 a week, or $730 a year, compared with the current tax scales for the next 3 years, which have already been legislated for. Indeed, a family with a combined income of up to close to $90,000 a year may lose under this policy.

It reduces incentives. Economists tell us that what is important in terms of incentives is the marginal tax rate—not the average tax rate, but the marginal tax rate. I have never agreed with them completely. But what does this bill do? It increases the marginal tax rate for people on between $14,000 and $20,000 a year, and for people on between $20,000 and $42,500 a year, it lowers it by 1 percent. That is going to cause a mass outbreak of productivity increases across the country! For those on between $42,500 and $44,000, this bill lowers the marginal tax rate by 13 percent. Crafty Kiwi workers will strenuously work hard until they are on between $42,500 and $44,000, so that they get a 13 percent marginal lower tax rate; then they will suddenly stop working hard. It will have to be very carefully judged to achieve that kind of success. Those on between $44,000 and $70,000 have the same marginal tax rate, those on between $70,000 and $80,000 have a 4 percent higher marginal tax rate, and for those on $80,000-plus it is 2 percent lower. Will Gerry Brownlee suddenly burst into a sweat, sprinting to work, because his tax rate goes down from 39 percent to 37 percent?

It is stupidly complex, with the new independent tax credit. Why? Because National members promised the average wage worker that it would be 50 bucks a week on top of—but then they said it would include—what Labour was promising, and the only way that they could do that and make it affordable was to invent a new, clumsy independent tax credit that was abated out. That daft thing will cost the best part of $10 million a year to administer. And who will do that? Bureaucrats—the very people whose numbers are going to be cut! Some bureaucrats somewhere will get chopped to pay for people to administer the independent tax credit.

What happens to KiwiSaver? Well, I tell Mr Dunne that this policy does gut that scheme. It cuts the employee contribution from 4 percent to 2 percent, and National has not budgeted for any increased uptake. National says that that cut will lead to more people taking up the scheme, but it has not budgeted for anybody taking it up. It does not believe that more people will take it up. Why? Because National members are also going to legislate to allow the employers to shift their 2 percent on to the employees. The employers will end up paying 4 percent to get 4 percent, instead of paying 4 percent to get 8 percent as they would have done under the current scheme.

But it is worse than that, because National is also lowering the cap on the employer superannuation contribution tax exemption, which I am sure Ms Bennett has never heard of. Contributions up to 4 percent are tax exempt, and that is the current KiwiSaver contribution rate by employers. It goes down to 2 percent. If employers choose to pay 4 percent, they will be taxed on the remaining 2 percent, and that will be a reduction of what goes into the employee’s account. Anybody in this House who is on the post-1993 member superannuation scheme knows about that particular aspect of the scheme. Instead of 4 percent, it becomes 3.4 percent, but, more than that, it is a direct incentive to employers to cut their contribution to 2 percent, if they are giving 4 percent at the present time.

The next point is what is going to happen to portability with Australia. We negotiated it on the basis that the two schemes were comparable. In Australia the employer pays 9 percent and the employee pays nothing. The employer pays 9 percent of a wage or salary into a scheme on behalf of the employee. Our scheme—4 percent plus 4 percent plus the tax credit—equates to about the same level overall. It was on that basis that we were able to negotiate portability between the Australian mandatory scheme and KiwiSaver. Have Government members checked with the Australians? No, judging from the smiles on their faces. Are they checking that the Australians are happy to proceed with portability on the basis of a 9 percent scheme versus a 4 percent scheme? I think not. I do not think they will be. I think that portability is running out the window. It was a major policy to encourage high-value Australians in the professional and managerial areas to come here for a period of time, because they would not lose their Australian superannuation entitlements and the ability to contribute.

We have the abolition of the research and development tax credit—dumber companies. Who welcomed this policy? Briscoes, the well-known exporter, producer, manufacturer, and icon of New Zealand business! This is a policy—a bill—about consumption. If the member opposite wants to encourage consumption purely to stimulate the economy, then why has he got a new structural tax change, which he himself admits will lead to ever-increasing deficits being forecast into the future? He would have been better to follow something like the Māori Party policy, and, indeed, what the Australian Government has done, in terms of one-off payments to stimulate the economy in the short term.

He knows he is in a huge budgetary hole now with no way out. The Speech from the Throne today was simply his throwing in the towel. It basically said “Well, as long as we’re the Government there are going to be huge deficits. Somehow or other this policy will stimulate sustainable growth and growth in productivity.” It may stimulate consumption, but because the Government will be borrowing more and more, it will lead to a structural increase in New Zealand interest rates, which will be a cost upon New Zealand business. Companies that want to expand research and development will not be encouraged, and productivity will not grow. What is the National Government’s answer to all of this? A tax cut of a maximum of $15 a week for anybody on an ordinary income. That is all it is at its maximum—$15, the value of the famous block of cheese at the time of the Budget this year. Parents will be told by teachers that Johnny may be failing, and somehow that is meant to increase productivity in the New Zealand economy. On top of that, there are some minor changes or something or other to the Resource Management Act.

This is an economic programme? This is about a brighter future? No wonder Anne Tolley is the Minister of Education. She is the personification of the National Party’s brighter future. No wonder Paula Bennett is the Minister of Social Development and Employment, and no wonder poor Gerry Brownlee, whom I have already had to help hour after hour in this Parliament, is the Leader of the House. This policy is not about a brighter future. This is about an obsession with one issue and sacrificing everything else—savings, investment, research and development, incentives—on that one crucible, that one anvil of an obsession with trying to lower tax slightly at the margin. If that is an economic policy, God help us. This Government, we are told, is still in the honeymoon period; well, as far as I am concerned it is looking like nascent necrophilia over there, and I look forward to burying the body sometime in the next 3 years.

Dr RUSSEL NORMAN (Co-Leader—Green) Link to this

The Green Party believes that we in this country need to look at who we are taxing and why. Does our tax system really provide the incentive framework to encourage a civilised, fair, and sustainable society? Taxes are used both ways—they are revenue for important Government activities, but they also create economic signals that encourage some activities and discourage others. We in the Green Party generally believe in taxing the bad things, like pollution and waste, but not the good things, like people’s efforts at work. We also believe in progressive taxation. Those who can afford to pay should pay. We believe that that is a fundamental principle in a decent society.

The Green Party will be opposing this bill because we believe it makes our current tax system worse, not better, and I would like to explain a bit about the background to the Green Party’s approach to tax policy. We would like to shift some tax off wages and enterprise and make up the difference by taxing pollution and waste. New Zealand needs a tax shift. We need to tax incomes less and tax polluters more. This bill is not about an ecological tax shift, sadly.

We urgently need, for example, a resource levy on commercial water-use. If we want to use resources more efficiently, then resource levies make sense. This would reward those commercial water-users who use water well and put the heat on those who waste water. It would set up the right kind of incentive to use the resource efficiently and, in fact, increase productivity in the way we use natural resources—a word that was used often in the Speech from the Throne this morning. We think we have to use these kinds of tax signals to create market mechanisms to achieve environmental goals and economic goals.

Tax shifting takes taxes off incomes, which we support, but it puts them on to resource use. There has been a big growth in commercial water-use over the last decade, and there should be a resource levy around that. About three-quarters of fresh water is used for irrigation for intensive agriculture and about 10 percent is used by large industrial users. As a general rule, no price is paid for that. We are not proposing that there should be the privatising of water or tradable water rights, but there should be a charge. That is the kind of tax shifting that the Green Party subscribes to. If we want to use a public resource for commercial profit, then the public should be paid a rental on that.

A resource levy is not an extra tax. It is fiscally neutral, and we believe in a fiscally responsible approach to tax. It is not an approach to tax that cuts the money available to health and education; nor does it lead to more Government borrowing, as it seems National’s and Labour’s tax cuts inevitably will. We believe that a fiscally neutral approach is actually much more responsible. That is our approach to tax shifting.

Contrary to what is often said, New Zealand is not a high-tax country. It has tax rates that are below the OECD average, and there is not a huge pressing need right now, when we look at the international tax situation, to immediately cut New Zealand’s tax rates. There is a lot of talk in the regulatory impact assessment about the international situation, but internationally New Zealand does not do too badly in terms of taxes.

I would also like to say that tax gets a bad rap. Nobody likes paying taxes, yet, if we are honest we will say we all need and want the things that taxes pay for: decent hospitals, public schools, and the ability to look after the environment. These are the building blocks of a civilised, fair society. There is no shame in taxes. “Tax” should not always be seen as a bad word. Even though nobody wants to pay taxes, we all want what they deliver. In fact, we wonder whether the people of New Zealand really value a tax cut ahead of improving our schools, cutting our hospital waiting lists, and cleaning up our environment. We challenge any party that advocates a tax cut for the rich to first prove that our public services are adequately funded and provide a fair go for all Kiwis. The Green Party did not bribe its way back into Parliament off the back of tax cuts that our nation cannot afford.

Kiwis pay their tax in the expectation that it will be used to deliver a decent society. People out there want a society in which there is safe housing for all those who need it, but it costs money. We cannot keep making spending promises without telling people where we are going to get the money from. People want a society where their kids and other people’s kids get a chance at a decent education and where rivers are cleaned up so they are safe for swimming in. When people get sick they want a hospital with enough resources to provide them with a bed if they need it, doctors, nurses, and all the rest of the staff, and even bureaucrats—those evil bureaucrats who book the appointments, answer phones, and give doctors and nurses time so they can actually treat patients. That is why people pay taxes.

In general, cutting taxes means having less for spending. This Government has already announced a pretty expensive programme of spending, and it seems it is being added to all the time. We have to assume either that there will be cuts somewhere else, aimed perhaps at those who are least able to speak in their own defence, such as the poor, the old, the young or—or, perhaps, and/or—that our national debt will increase very significantly. That, of course, means that future generations will have to pay interest on whatever money we borrow today for our tax cuts. So if we borrow to pay for tax cuts today, the next generation will have to pay taxes to pay the interest on the debt we build up to pay for our tax cuts.

It is also true that many of our social services need more funding. Look at residential aged-care. Surely one of the marks of a civilised society is how we look after our vulnerable elderly when they can no longer fight so well for their own rights. I do not know that we can say we are a truly civilised nation unless we fund aged care properly. The horror stories that come out of our rest homes are too tragic and too unacceptable and should make one pause before suggesting that the first thing this country needs is a tax cut.

Do our vulnerable families need less support? Do those kids who get moved from crowded, damp household to crowded, damp household—sometimes deadly households—often having to change schools and having their education disrupted, need less support than the rest of us? I think that, actually, they need more. I think they deserve more. The challenge to this Parliament is to actually deliver more, and that costs money. Kids with asthma and glue ear from damp houses never get a chance to participate in the greatness this country has to offer.

When it comes to KiwiSaver, the Green Party has supported a policy that supports an increased level of savings, both to control inflation and to improve our balance of payments account, and also to strengthen investment in local communities. It was for that reason that we supported KiwiSaver. We had some doubts about KiwiSaver. KiwiSaver is far from perfect. We were dubious to some extent as to whether it would really increase overall savings or simply move some private savings into KiwiSaver, which would happen anyway. We were worried about the impact of KiwiSaver on Government savings due to the cost of funding the scheme. We were also worried that basically we were using taxes to subsidise inequality in retirement income between those who could save and those who could not afford to save and therefore never got any of the tax benefits.

None the less, in spite of our reservations about KiwiSaver it seemed a sensible approach to try to increase savings. We did want a 2 percent rate as an option, and, actually, we are pleased that the 2 percent rate is coming in. We are also pleased that the Government has ensured that low-income earners get the full $20 a week. But, overall, the problem with the bill is that it reduces incentives to save. So we do have tax shifting. We move taxes off income and put them on to savings. I am not sure that this is really a very wise long-term strategy for a nation with a chronic account deficit.

I also question whether this is really the best way to deliver an economic stimulus package. These tax cuts will either be spent or be saved. If they are spent a good proportion of them will be spent on imported goods—that is, we will borrow money from overseas in order to stimulate someone else’s economy, because we will be purchasing their goods. If the tax cuts are saved they will not have a stimulatory effect on the economy. It is not a very good way to stimulate.

Infrastructure spending makes a much better stimulus package, especially if it is infrastructure that can be built using local goods and services. Housing and home insulation are a much better option if we want to have an infrastructure spending programme to stimulate the economy. They can be sourced locally, so we do not, effectively, stimulate someone else’s economy. Sustainable infrastructure is a much better stimulus package. Public transport, sewerage schemes, trees on eroding land—there is so much more we could do.

I would like to mention that the Buy Kiwi Made campaign would make a significant impact on protecting Kiwis’ jobs. I would also like to touch on the regulatory impact assessment, which, according to the bill itself, is completely inadequate. The Government has made a great deal about regulatory impact assessments, so there is a tremendous hypocrisy in the fact that the first bill this Government introduces states that it has an inadequate regulatory impact assessment because of inadequate time.

I hope that the Government will bring up in much more detail the regulatory impact assessment as the bill goes through the House over the next day or so, so that it can stand by its election promise to make sure that all regulation it introduces has a proper impact assessment.

Hon Sir ROGER DOUGLAS (ACT) Link to this

ACT welcomes this Taxation (Urgent Measures and Annual Rates) Bill as a small step in the right direction. This bill is in marked contrast to what we saw from the Labour Government over the last 9 years—a Labour Government that refused to adjust the tax brackets or to index them. As a result of that we saw a marked increase in the average amount of tax paid by average wage earners, so much so that low-income workers did not receive a real increase in wages during those 9 years after taking tax into account.

This bill restores the tax threshold position of 10 years ago for those who are on 21c in the dollar or those who are on low to middle incomes. It does not restore the relative position of those on the 33c or 39c index. In other words, those on the higher income are still in a relatively poorer, or worse, position than they were 10 years ago. The arguments that have been put forward by the Labour speakers in relation to the bottom tax rate of 12.5c simply do not hold water. If we analyse the people who pay only 12.5c we find that around 90 percent of that group actually come from high-income families. They are the wives or the husbands of high-income earners. They are the children of high-income earners. What the Labour Government did in its tax legislation of last year was to encourage income splitting so high-income earners who had the capacity to do that said “Thank you very much Labour” and the poor suffered, and the low-income and disadvantaged paid for that.

A real negative of this bill, however, is its failure to flatten the tax scale and, thereby, its failure to gain the opportunity to promote growth in this country. But when we talk about tax we are really talking about Government expenditure because taxation, in the end, is all about expenditure. What a Government spends, a Government must take from the public to pay for that expenditure. If the Government takes $50 billion, it has to tax $50 billion. If it takes $100 billion, it needs to tax $100 billion. We need to recognise that, and we need to pay a lot more attention to it.

The Government is, in fact, no different in that respect from any household in New Zealand. It is therefore important and vital that any dollar the Government takes from taxpayers is spent effectively and that a dollar spent by a Government returns to the nation at least as much as it would have returned had it been left with individual New Zealanders. We know with absolute certainty that that did not occur under a Labour Government over the last 9 years. The fact is that over the past 9 years core Government expenditure increased by $18.2 billion, over and above inflation. This increased level of expenditure cost every New Zealander on average $1,000 per month or $12,000 a year.

I have listened to the speakers from Labour cry wolf about how they want to help the poor and the disadvantaged, but over the last 9 years they took $18.2 billion in extra taxation from average New Zealanders or $1,000 a month. The fact is that had we left that extra $1,000 a month with low-income families in particular, they would be a whole lot better off than they are at the moment. The fact is that Labour spent that extra tax, that extra $1,000 per family, on dubious programmes and failed social experiments that have not benefited New Zealand households by anywhere near the $1,000 a month it took from them. Labour would have been far better to leave the money with them. For families, that $1,000 per month represented books for children, meals in restaurants, carpets, clothes, and extra savings. For the economy it represented lost jobs in shops, factories, and service industries right across the country. That $1,000 that a Labour Government took from, on average, every household in New Zealand over the last 9 years was in large part redistributed via, as I said, dubious programmes. A large percentage was spent on extra bureaucrats and the bureaucracy. New Zealand’s living standards over the last 50 years have slipped from third to 38th and in no small part has that been because over the last 50 years much of the money that we have taken from individual New Zealanders has been largely wasted on poor programmes.

One of the things we need to do if we are to get through the recession we are in, and if we are to grow and to catch Australia over the next 20 years, is ensure that Government expenditure bears fruit and returns to the nation at least as much as it would have had the money remained with individuals. In these circumstances, it is a nonsense to pretend, as Labour speakers have, that reducing waste, for example, is somehow seeking heartless efficiency at the expense of equity. The fact is that waste consumes resources that would otherwise be available to improve equity levels throughout the community. The fact is that every dollar of waste—and we saw billions of dollars wasted by the previous Labour Government—that can be eliminated is a dollar that is available for another programme, in particular to help the disadvantaged, rather than there being a cost imposed on them.

So how should we mark this particular legislation? At best I believe it is a work in progress. Having said that, it is not bad, given that the Government has been in office only 1 month and the fact that it inherited a pretty damned awful fiscal situation. But the fact is that marginal tax rates in this country are too high, particularly for families. Although I support the aims of the Working for Families package, it was delivered in a terrible way and the marginal tax rates that it imposed are creating a situation where growth will not occur. We have too much wasteful private sector effort once again being devoted to devising ways around New Zealand tax laws. Mind you, the Labour Government in its last Budget helped the affluent to do that.

The system, I am afraid, is seen to be increasingly unfair. This particular legislation will help that but it will not overcome that problem. The tax scale is far too progressive, which is a disincentive for people to work harder and increase their income. If we are to create a structure for growth we will have to do a lot more than we are doing at the present time.

I will finish by saying that in a global economy New Zealand’s tax system needs to be as competitive as possible. If it is not, we will continue to slide as we did for the last 9 years under a Labour Government.

Hon PETE HODGSON (Labour—Dunedin North) Link to this

I was not going to take a call in this debate but a few things have occasioned me to. The first is that there has been a very long gap between National speakers; they are not showing up to defend this legislation and I am not sure why. That will not stop this Opposition laying out why we think this package is wrong, in the wrong time, and designed in the wrong way. The second reason I got to my feet is that I have just heard the speech from the ACT member Sir Roger Douglas, and that is a speech I have heard for 20 years. That is a speech I have heard for 20 years—where the member says that he cares for the low paid, and then votes to put up the taxes compared with what they would be in law already on our law books. This is a man who says he cares about the working classes, and when he was Minister of Finance and was followed on by Ruth Richardson this country saw the biggest rate of increase in inequality in the Western World. As measured by the Gini coefficient we became the second most unequal country in the world, behind the United States.

So when the member for the ACT Party gets up to say he is going to vote down more progressive legislation—as far as low-paid people are concerned—and vote for something that does low-paid people in the eye, and he is going to justify that by saying that low-paid people are actually very rich, and that they are part-time spouses of very rich people, then I think that that is a bewildered analysis and it needs to be laid to rest.

Generally speaking, people who receive small amounts of money are poor, and people who receive large amounts of money are not. That is roughly how it goes. No matter how many times over how many decades some sort of bewildered analysis says the opposite, it does not make it true.

I have another reason for getting to my feet, and that is that we have a global downturn coming, it would seem, and the question is how it will be distributed in this land. How will the downturn be distributed? Who will be taking it in the neck? Here is the beginning of the answer, and later this week we will have more of the answer. We will be going after the low paid. There will be a lower tax cut for the low paid under the National Government’s plan between now and 2011 than there would have been under the Labour Government’s plan that is already on the statute book; that is already in law. So we are about to strike down law this week that would give low-paid people a better deal, and high-paid people not such a good deal, and put in legislation this week that will give low-paid people a worse deal, and high-paid people like me a better deal—and that is wrong. It is wrong because it means that the distribution of the forthcoming recession will be meted unequally on those who can least afford to stand that decrease in their living standards.

But I have another reason for getting to my feet. This legislation removes the research and development tax credit that came into force on 1 April this year. It does not reduce it; it removes the research and development tax credit that came into force on 1 April this year—and that is really, really dumb. That is a very, very dumb thing to do.

Let us look at what the tax credit did. It said to folk that if they spent money on research and development attributable to the tax credit, they would receive a 15 percent tax credit, whether or not they were loss-making. If they were loss-making, the Inland Revenue Department would actually send them a cheque if they undertook research and development that qualified. The reasons the tax credit was put in place are several-fold. One reason, which the economic purists have to acknowledge, is that research and development is risky, and, therefore, having a 100 percent deductibility does not cut it. The second reason is that even if the research and development succeeds, it tends to be taken up by firms other than just the firm that undertook the research and development. In other words, it is not entirely appropriable to the firm that undertook the research and development.

That is the basic economic theory behind having a tax break for research and development. That is why nearly every Western nation, in some form or another, has some sort of contribution by the State to a research and development investment undertaken privately. That is why nearly every Western nation does that, and I am sad that the previous Government took so long to get a research and development tax credit in. We were opposed by Treasury; we were opposed by the Inland Revenue Department. Time and time again they came up with their view that the rest of the Western World had it wrong, and that somehow New Zealand had it right. Finally we prevailed, and I acknowledge the work of Dr Michael Cullen in that respect.

The tax credit goes to those businesses that, I assert, are more likely than businesses in general to pull us through this downturn. Let us look at companies that undertake research and development. They are more likely to be high-growth companies; not always, but as a group—there are about 3,000 of them—they are more likely to be fast-growing companies. As a group, they are nearly all involved in the real economy. We do not find appropriable research and development undertaken by money traders; we find it undertaken by people who are involved in information and communications technology, in engineering, in biotechnology, or in whatever it is to be.

We find that those people who work in companies that undertake research and development are more likely to be well paid. Do we not want a high-wage economy? And what is more, we find that companies that undertake research and development are much more likely to be exporters. So here we have it: a rapidly growing cohort of businesses, a cohort of businesses that is inclined to employ people at higher wages, and a cohort of businesses that is inclined to export. These businesses—and only these businesses—are to get a tax increase as a result of this legislation, and that is dumb. It is really dumb.

What is more, these businesses as a group—roughly, generally—are more inclined to want to reinvest into their company, and less inclined, on average, to want to take the earnings out of the company. Generally speaking, they are on a high growth because they have a high level of reinvestment, and that level of reinvestment can go up with a tax credit, which means that the growth will slow if the tax credit is removed. That is just simply the case.

But wait, there is more. Research and development travels. Research and development moves across borders. Research and development moves freely across borders, and research and development will move freely across our border. It will go substantially to Australia—not so much in the engineering sector, and to a lesser extent also in biotechnology, but certainly in information and communications technology. It will go to Australia. But wait, there is more. The research and development tax credit that came in on 1 April of this year was actually a little better than the one that was in Australia already, so research and development was moving from Australia to New Zealand until National announced its policies. We had some movement of high-wage, high-tech, high-growth personnel from Australia to New Zealand, and from Britain to New Zealand, but no more—no more. They have stopped coming, they will start leaving, and we will become dumber. And what is more, because our economy will grow more slowly as a result of the tax credit being removed, National will have a lower economic base to tax in the first place. So this is a dumb policy. If Australasia is to ever become a smart part of the world, New Zealand will become a dumb part of Australasia. It is a dumb policy. It is a stupid policy, and the Government’s excuse for saying it is that it cannot afford it. Well, I tell members what: when it is fully in place it will cost $332 million a year. If we divide that by 4 million people, it works out at $1.60 per citizen, per week, available for tax cuts somewhere—$1.60 per person per week. That is what we give New Zealanders, and the price we pay is a dumb economy. This bill is a bad bill for that reason alone.

CRAIG FOSS (National—Tukituki) Link to this

First, let me acknowledge the election of the Speaker, the Deputy Speaker, and the Assistant Speakers—including you, Mr Assistant Speaker. I also acknowledge my returning colleagues and new members. I look forward to hearing maiden statements from new members on all sides of the House, and if what we heard today from the two members who made maiden statements is anything to go by, then I say we are in for a great period. I look forward to hearing those statements. I also thank and acknowledge the 20,103 people of Tukituki who re-elected me to represent them in Parliament, the 17,904 people who voted with their party vote for National in Tukituki in Hawke’s Bay, and the more than 1 million New Zealand voters who voted for National’s 100-day plan. It is a plan of tax cuts—simple tax cuts. It is a 100-day plan of commitments—an economic plan for New Zealand.

One of the first things the previous Labour Government did when it came into office was to raise taxes. One of the first things the Labour members did was to take the top personal tax rate from 33c in the dollar to 39c in the dollar. It was 3,231 days later when they decided to cut taxes, in the face of lower poll ratings, and to try to rescue themselves from absolute oblivion. The first measure of this incoming National Government, 21 days after being elected, is to introduce on the Table, in front of members now, the Taxation (Urgent Measures and Annual Rates) Bill. It is an absolute pleasure to be speaking and voting for this bill, and to be part of the finance team of this National-led Government, which is committed to putting on the Table an ongoing programme of personal tax cuts. We have waited for 9 long, wasted years to get an ongoing programme, a committed programme, of personal tax cuts back into New Zealand, so as to back New Zealanders. We will not really take as much in personal taxes in the first place; we will leave the money there with people. After 9 long, wasted years we finally have some certainty with regard to personal incomes. After-tax incomes are going up; personal tax cuts are coming in. National members are committed to National’s core policy, and it is an absolute pleasure to be committed to it.

The members opposite who spoke earlier seem to have forgotten what happened a few weeks ago, and why this programme of tax cuts was core, open, public policy. Over 1 million New Zealanders voted for this policy. It is very tempting to repeat the words of the previous finance Minister after the 1999 election. It is very tempting to do so, but I will not. The anger will dissipate after a while—perhaps after the next 2 weeks. I did note the applause the new finance spokesperson for the Labour Party got; I think one person was clapping. The previous finance Minister had rousing applause from his colleagues on that side. I thought that was quite interesting, even though it was a somewhat angry speech.

It is such a pleasure to speak to this bill. After 9 years this bill shows a massive investment in the best part of the infrastructure of New Zealand, which is the people of New Zealand. We want to reward them. We want them to stay here and have a viable future in New Zealand, and we want the young people at varsity who are coming out with student loans to have the ability to pay for those loans. This measure makes it very much easier to give them a chance and an opportunity to choose a viable future in New Zealand. The members on the other side of the House seem to have forgotten—I did not hear this in any of their speeches—that over the past 9 years 70,000 to 80,000 Kiwis have been leaving per annum to go to other countries. Of those, 40,000 have been leaving for Australia because, quite simply, they could enjoy higher personal after-tax incomes there.

Households are suffering and under stress. Household balance sheets are suffering; they are under stress and strain. Many people are suffering from the effects of the higher fixed mortgages that rolled over in the past 18 months to a year, when interest rates effectively doubled under the previous regime. People are struggling, and that is why we need them to enjoy a higher after-tax income. Then at least when they are negotiating with their bank, as they are suffering from the effects of the higher fixed mortgages costs they have had for the last few years, the bank will see that they have a forward track and an ability to fund their mortgage through this tough recession time.

I did note that at the last Budget the previous finance Minister said, I think, “We’ve spent the lot. It’s out. The cupboard’s bare.”, or something like that. What he failed to mention is that not only did he think he had spent the lot but also he had dug a few holes and put a few ticking time bombs in the back of the closet. One of the terms he used, which may have been in the media, was about some kind of “hospital pass” to the incoming National Government. It was actually a hospital pass to Labour’s new finance spokesperson. After his speech—written by whom I do not know—half his colleagues were nodding off to sleep. We are in for a fun time with that new spokesperson.

We talk about Australia and its 7-year programme, I think, of ongoing personal tax cuts. After-tax incomes in Australia are one-third higher than those in New Zealand. There are 500,000-odd Kiwis now living in Australia and enjoying that, and we wonder why they left New Zealand. We have speeches from members on the other side of the House that are static, boring, and stuck in the past. To use the previous speaker’s term, those members are dumb. They lack the vision we are trying to show them here: a commitment by an incoming Government. Twenty-one days after being elected, the first legislation on our timetable is right here. We are rewarding New Zealanders, and we are trying to offer them a better, viable future.

Hon CLAYTON COSGROVE (Labour—Waimakariri) Link to this

Before I get into the cut and thrust of the bill, I recall the member said that people had forgotten what happened a few weeks ago in the election. I recall in this Chamber, some weeks before the election, putting it to Mr English that if he was re-elected—and he was—he would engage in Muldoonism, as Muldoon did by pulling the rug out from under every Kiwi who was saving at the time, in the 1970s. I looked up Hansard and I termed it would be the second-biggest example of economic vandalism that would ever come into this Chamber. I was heckled, even by old hothead over there. He was a hothead in Opposition, and is a hothead in Government. I was heckled by him and his ilk that it would never happen. They said I was telling porkies. Tonight this legislation was confirmed by old tumbleweed and by Mr Foss, whose greatest claim on the Finance and Expenditure Committee was to go before it—as committee members do—and get tax advice from officials. The only problem was that in his case he was asking specific questions about his own personal tax returns.

Tonight is a very, very serious evening for this country. It is a pity that Mr Hide did not take a call, because I will pick up on a comment that was made before. I read page 10 of the explanatory note of the bill, which states: “However, due to the timeframes involved, the RIA consultation requirements have not been met.” I looked over, in front of Sir Roger Douglas, and I saw something akin to a—

CHRIS TREMAIN (National—Napier) Link to this

Tihei mauri ora. Whakataka te hau ki te uru, whakataka te hau ki te tonga. Kia mākinakina ki uta, kia mātaratara ki tai. E hī ake ana te ata kura, he tio, he huka, he hauhunga. Tēnā koutou. E te Kaikōrero o te Whare, tēnā koe. Kei te mihi ahau ki a koe. Ki ngā mema Pāremata, tēnā koutou, tēnā koutou, tēnā tātou katoa.

[Behold the sneeze of life. Cease the wind from the west, cease the wind from the south. Let the breezes blow over the land, let the breezes blow over the ocean. Let the red-tipped dawn come with a sharpened air, a touch of frost, and a promise of a glorious day. Greetings to you collectively, and to you, Mr Assistant Speaker of the House. Greetings. To members of Parliament, greetings to you, greetings to you, and greetings to us all.]

We have just heard a speech from the ex-honourable Clayton Cosgrove. It was an angry speech. He started his speech by saying that this bill—

Hon TREVOR MALLARD (Labour—Hutt South) Link to this

I do not intend to spend much time dealing with that speech from Chris Tremain. It was the typical bumbling incompetence that we have seen from the National Party. I would like to refer to an earlier speech, one which I found much more disappointing.

As much as Sir Roger Douglas and I have, over the years, grown to disagree on many issues, I have always thought that he was a person of principle. I thought he would have carefully examined this tax package, but if he had done that, he could not possibly vote for it. I will soon refer to Hone Harawira, and the fact that I am getting a call because the Māori Party has chosen not to take one, but the very people whom he says he cares about—those people who are on not much more than the minimum wage, those people who have got kids—are the people whose taxes are increased as a result of this package. It is unfair. It is inequitable. At a time when some people get a $500-a-week tax cut, there are other families that, when the KiwiSaver changes and the tax changes are combined, will get a $60 or $70 tax increase—when the packages are compared—in 2011. That Sir Roger Douglas, who says he cares about marginal tax rates, can vote for a package that puts them up by as much as that shocks me, because it goes against everything that he has said over the years about fairness and equity.

DAVID BENNETT (National—Hamilton East) Link to this

Mr Assistant Speaker, congratulations on your appointment to the role and welcome to a new Parliament. I also thank the people of Hamilton East for re-electing me to this role.

Today’s tax cut legislation was one of the strong points of the National Party campaign, and it is essential to rebuilding this economy. The New Zealand economy is in a state such that it needs some serious help. The serious help is on its way, through the National Government and through the 100-day plan that we will bring into play over the next little while.

The key part is the tax cut programme. It is important because it will give the right signals and incentive to hard-working New Zealanders. It will give hard-working New Zealand families some relief. It will give individuals some relief. That is just part of what this Government and this country need to see happen.

This Government intends to go out there and look after the New Zealanders who are in work and who see the right things and the good things they need to do to make their country and their families stronger. This programme of tax cuts is the first step that this Government will introduce in order to send that signal and provide that incentive.

It is tough out there. New Zealanders are in a tough situation. The previous Labour Government has left us the legacy of an economy that is down the tubes. This Government will have to turn round that situation, and this package is the first part of that turn-round. [Interruption] The Labour members sitting over there are all so prim and proper. They have all come out to fight, have they not? Well, it is too late.

In a few days’ time, on Thursday night, the new members of this House will see only four or five Labour Party members in the House, because they will have given up the ghost. They know it is all over. I see Michael Cullen over there—the sight of his face! It is not as red as it used to be before the election campaign, but he will not be in the Chamber on Thursday night. Most of those members will not be sitting there and fighting on Thursday night. This is the last fight of the Labour Party, and they know it. This is the old guard who have come out to show what they are made of. Well, it is too little, too late. It will not work, because there is a new plan, a new agenda, and a new direction for New Zealand. That is what the public wanted. The public of this country voted for that, and the public of this country will get that. I say to New Zealanders that we will deliver, not what you did for 9 years, sitting there looking at yourselves, trying to make yourselves look better, and going—