High Company Income Tax

Recently, the Government’s Tax Working Group (TWG) released its initial recommendations on how the tax system could be changed.

The Government specifically asked the Group to consider the merits of a progressive company tax with lower rates for small businesses. The Group recommends against any reduction of company tax or the introduction of a progressive company tax.

Under a neoclassical economic view, the main drivers of economic output are the willingness of people to work more and to deploy capital — such as machines, equipment, factories, etc. Taxes play a role in these decisions; specifically, the company income tax rate is an important determinant in how much people are willing to invest in new capital, and in where they will place that new capital.

Evidence shows that of the different types of taxes, the company income tax is the most harmful for economic growth. One key reason that capital is so sensitive to taxation is because capital is highly mobile. For example, it is relatively easy for a company to move its operations or choose to locate its next investment in a lower-tax jurisdiction, but it is more difficult for a worker to move his or her family to get a lower tax bill. This means capital is very responsive to tax changes; lowering the company income tax rate reduces the amount of economic harm it causes.

The higher the tax, the higher the cost of capital, the less capital that can be created and employed. So, a higher company income tax rate reduces the long-run capital stock and reduces the long-run size of the economy. Conversely, lowering the company income tax incentivises new investment, leading to an increase of the capital stock, and creation of new jobs.

In recent years, many countries have used tax reforms to lower taxes on businesses with a view to boosting investment, consumption and labour market participation, a continuing trend that started a couple of years ago, according to a new report from the OECD.

The OECD Report on Tax Policy Reforms 2018 describes the latest tax reforms across 35 OECD members, Argentina, Indonesia and South Africa. The report highlights the continuation of a trend towards corporate income tax rate cuts, which has been largely driven by significant reforms in a number of large countries with traditionally high corporate tax rates. The average corporate income tax rate across the OECD has dropped from 32.5% in 2000 to 23.9% in 2018.

In New Zealand, despite cuts in 2008/09 and 2011/12, the company tax rate remains at 28% which is still higher than the OECD average. I acknowledge there is an argument that this rate may not be reduced further because the headline rate does not necessarily tell the full story in terms of the burden of the tax as we have a full imputation system which means shareholders can claim tax credits for company taxes that have been paid, and that leads to a relatively low overall tax rate on corporate profits once they are distributed. That is not the point. My point is that the higher the business tax before any profits are paid out, the higher the cost of capital, the less capital that can be created and employed which disrupts economic growth. This is particularly relevant to SME businesses.

I think there are good reasons to propose reforms to lower taxes on businesses with a view to boosting investment, consumption and labour market participation and avoid the economic harm the high company tax rate causes. But, I accept it all comes down to Government policies and priorities.

Ismail Rasheed, the owner of IR Legal, is a specialist tax lawyer with 18 years’ experience. He also specialises in Immigration Law.

Phone (04) 566 1155 | (09) 299 1155 | Email: office@irlegal.lawyer | www.irlegal.lawyer

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