ACT leader David Seymour says simpler tax system would encourage a culture of success

ACT leader David Seymour is on a mission to convince his coalition partners to make a flatter, simpler tax system the centrepiece of this year's Budget, arguing "you can leave everyone better off".

Finance Minister Nicola Willis has promised tax cuts in the May Budget, but she has yet to detail the way in which they will be delivered.

National campaigned on a proposal to adjust the existing tax thresholds, but as part of coalition negotiations with ACT last year, it agreed to consider whether the "concepts" of ACT's tax policy could be incorporated "subject to no earner being worse off than they would be under National's plan".

In a sit-down interview with RNZ, Seymour said the key concept of his party's plan was a flatter tax system, that is, removing some thresholds altogether and then giving targeted support to those on lower incomes through tax credits.

"If you introduce ACT's concepts, you can leave everyone better off in the short run," Seymour said. "In the long run, you leave the whole society better off, because we have a more unified society."

Treasury officials had been tasked with investigating ACT's proposal and would report back before the Budget, he said.

"If they show that these concepts can work and deliver better policy, then we hope our coalition partners will seriously consider adopting it.

"On the other hand ... if the maths are difficult to stack up, then, look, we're prepared to put forward an idea that's occasionally rejected.

"If you never have an idea rejected, you're probably not thinking ambitiously enough."

ACT's tax concepts

ACT campaigned on flattening the current five-tiered tax system down to three rates by 2026/27.

In simple terms, ACT would immediately axe the lowest tax threshold of 10.5 percent, meaning the government would collect more revenue from all income earners.

Some of that extra revenue would then be returned to low-and-middle income earners through a targeted tax credit to ensure they were not worse off.

The money left over would allow the government to reduce the higher tax rates at the top of the income scale - dropping the 33 percent rate to 30, and the 39 percent rate to 33.

"Suddenly, you're closer to a world where everyone pays the same rate of tax," Seymour said. "That's a world which is a bit fairer. We're all in the same boat, we're all in this together."

Seymour told RNZ that a simpler tax system with fewer rates reduced people's incentives to try accountancy tricks and encouraged a culture of success and achievement.

"When people look at the current rates, they say, should I take on an extra contract? Should I save and invest? Should I go for that promotion? Should I do extra study?

"When people see that you're going to lose 39 cents in every extra dollar ... there will always be some people that say, you know what, it's not worth it."

'There are a lot of options'

National's election tax policy proposed a simple adjustment to income brackets, alongside an extension to existing tax credits and new childcare support.

Under National's proposal, the tax rates would remain the same, but the thresholds at which they kicked in would increase.

In late December, Willis told Parliament the government was still taking "detailed design and implementation advice" on the tax relief package's final shape.

"We are having detailed discussions. We're taking a range of advice. There are a lot of options," Willis said.

"It is our view that, in principle, where we can, we should allow New Zealanders to keep more of their own money."

Willis would not elaborate on what elements of ACT's income tax policy were on the table, but she ruled out reducing the 39 percent top tax rate.

During Parliament's question time, Labour's Grant Robertson asked: "Do the concepts of ACT's income tax policy as a pathway to the delivery of tax cuts... include the reduction of the 39 percent top tax rate?"

Willis replied with one word: "No."

Opposition response

Labour finance spokesperson Grant Robertson told RNZ ACT's pitch to overhaul the tax system was "not a recipe for a fairer society".

"The fact that David Seymour believes there is some great injustice being wrought on those on the highest incomes shows where he is really coming from here," he said.

"This is not about supporting low-income people."

Robertson said the tax credit system could very easily be eroded in future, punishing those most in need.

"The fact that you have to make a system where the only way of making it fair on low-income people is to pay them a tax credit back shows that the [idea] is not fair in the first place."

Robertson said Willis had a big challenge keeping her coalition partners satisfied when it came to tax.

"Nicola Willis is flailing around trying to work out how to make her Budget add up... David Seymour thinks he's helping, but I suspect he's not."

'We need a bit more transparency'

Speaking on Morning Report, Council of Trade Unions chief economist and Labour Party policy council member Craig Renney expressed scepticism at Seymour's push.

"We need a bit more transparency here," Renney said.

"There's good reason to be concerned about a system where we would make the tax system more regressive rather than more progressive."

Renney - who previously worked for Robertson - queried whether the proposed tax credit exchange would adequately compensate those on the lowest incomes.

"Does it apply to those on benefits? How does it interact with the in-work tax credit system? With the family tax credit system?

"It may well be that, actually, you gain on one side with a tax credit, but then you lose on the other side in other forms of other tax credits.

"For families that are doing it tough, they actually end up worse off."

Renney said "even bigger tax cuts" were not appropriate at a time of rising need for public services.

New Zealand already had one of the lowest levels of income lost to tax among OECD countries, Renney said. Australia and the United Kingdom each had a top tax rate at 45 percent.

'It's not the worst idea in the world'

Tax consultant Terry Baucher told RNZ there was merit to ACT's idea of a simpler, flatter tax system, alongside credits, similar to New Zealand's tax structure between 1989 and 2008.

He noted that the Tax Working Group - set up by Labour - favoured tax credits over threshold changes as a way of delivering assistance to low-income households.

"It's not the worst idea in the world, but it really comes down to the devil being in the detail," Baucher said.

"[Are the tax credits] going to be available to everybody? Or are they going to exclude groups such as beneficiaries? What about pensioners? That's the nub of it, really. How comprehensive is it going to be?

"If it's completely comprehensive across the board and everybody gets it, then, yes, it's certainly worth considering as an alternative."

But Baucher said neither National nor ACT were adequately addressing the problem of "fiscal drag" whereby inflation had pushed people into higher tax brackets over time.

"You can talk about these tax credits. Conceptually I can see where you're going, and I think they're good ideas, but you have to address this question of inflation.

"Otherwise, you're going to have the same problem just emerging in two or three years all over again."

Under the previous leadership of Simon Bridges, National proposed automatically indexing income tax brackets to inflation to end "bracket creep", but the policy was later abandoned in favour of a one-off threshold adjustment.

National's coalition agreement with ACT makes clear there is "no ongoing commitment" to income tax changes beyond those delivered this year.

However, National's separate agreement with New Zealand First promises to assess the impact of inflation on average tax rates by or before 2026.

Baucher said, ultimately, most New Zealanders were unlikely to care how tax relief was delivered - whether via National or ACT's model - as long as they received it.