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Prime Minister John Key says the government is considering raising GST up to 15%, but says the effects on people's pockets will likely be offset by across the board cuts to personal tax rates.
Key, in his opening address to parliament on Tuesday, outlined the government's agenda for the coming year. As flagged by Key on Monday, tax was the centrepiece.
"We have a tax system that taxes labour and investment income at relatively high rates, taxes consumption at a relatively low rate, and generally gives money back to people when they invest in property," he says.
Key says GST is an efficient method of collecting tax as it can garner returns from all sectors of the economy. It has been estimated that for every percentage point GST is lifted, the government collects an extra $770 million.
A 2.5% lift in GST would generate a further $2.3 billion each year for the government.
However, Key says the effect of a rise in GST will be offset by its proposal to cut personal tax rates across all income earners.
He says debate has focused on the top personal tax rates, but the government had always been looking at the entire personal tax structure.
There would also be up-front increases in benefits, superannuation and Working For Families payments.
These tax cuts, together with a rise in GST, will encourage savings and investment rather than consumption, Key says.
"Their take-home pay would increase and they could use that increase to save, or pay off their mortgage, without being taxed on it," he says.
Key says the entire package could raise up to $4 billion allowing for significant reform.
"We think the package is potentially somewhere in the order of $3-4 billion so it gives us quite a lot of room to move in terms of personal tax cuts and potentially corporate tax cuts (which) we haven't ruled out."
He says details would be outlined in the budget, but the aim was to get a more balanced tax system.
No capital gains tax
Property investors will be breathing a sigh of relief, at least in part, with Key saying a capital gains tax is off the table.
So, too, is a land tax.
Key says the aim of the government's tax reform is "fairness" and that a land tax would unfairly create cash flow problems for landowners, many of whom hold all their wealth in land assets.
And, he says a complex capital gains tax would only make the tax system more complex.
However, the government will look to fix up loopholes in taxation on investment properties, though Key says no details would be released until the Budget in May.
Mining on conservation land
In a bid to drive economic activity forward, Key also outlined a number of cross-sector changes such as pushing hard for developments in trade, science and investing in capital markets.
However, one of the most controversial proposals is likely to be its bid to open up mining on conservation land.
Key says there is "extraordinary economic potential" in the minerals on Crown land which is currently protected under the Crown Minerals Act.
He says the export value of land is around $175,000 a hectare, yet mining in New Zealand uses just 0.015% of total land area.
In order to unlock these resources, the government is considering making changes to that Act.
"I know some people have expressed concern about increased mining but I can assure New Zealanders that any new mines on conservation land will have to meet strict environmental tests," Key says.
Key did not detail these tests but did say some royalties from mining on Crown land could go to a new Conservation Fund. This money would then be used to fund other conservation projects in New Zealand.
The government will release a discussion document on changes to the Act for public consultation.
Read the list of the main proposed changes to the tax system and the government's direction for 2010.
What do you think about the proposed changes? Have your say on our messageboard below.
Add a Comment:
Post new commentgazzacanta said on 2010-02-22 @ 23:42 NZDT: Report abusive post
I agree with the board thrust of the government. I think they are not going far enough. I would like to see higher GST and much lower personal taxes. Perhaps no personal tax on income up to $15,000, 20 cents per dollar on income $15 - $60k, then 30 cents for income over $60k
hkim129 said on 2010-02-12 @ 20:10 NZDT: Report abusive post
I have one question regarding the proposed GST increase. Given that general public is concerned about the inevitable increase in consumer product prices and its impact, I wonder whether increasing the GST rate to minimum (e.g 13% instead of the proposed 15%) yet decreasing the GST rate for businesses may be able to solve the problem to a certain degree (allowing businesses to offer their goods at lower prices)? or is there no chance at all this would work?
Shined said on 2010-02-12 @ 16:05 NZDT: Report abusive post
Yet another example of a government that breaks its promises and lies through its teeth, why am I not supprised. This country although less hard hit by the recession was still hit and is still coming into a recovery phase. I feel the economy needs to grow by at least 2.5% to say we are there. Increasing GST is not going to help at all its simply going to stall the economy again, come on Mr Key - get a clue. My wife and I would bother suffer severely if GST increased as would a plethora of others
icons said on 2010-02-12 @ 00:10 NZDT: Report abusive post
Goodbye Mr Keys. If you even attempt to increase GST you will destroy the lives of middle NZer's and like myself a lower income person whom as a fmaily we struggle enough now.. I can see a snap election on the cards. what do ther think?? I know for sure he won't be back in.. I only can pray that labour can undo the damage caused by greedy sly national party members
Mare1 said on 2010-02-11 @ 23:09 NZDT: Report abusive post
We are a small business still establishing ourselves in the market place, if GST is increased we dont want to increase our pricing as we know people out there dont have alot of money to get by as it is. This means we will end up with less net profit which us barely enough for us to live on as is and therefore struggle to stay afloat.