Freedom to Earn

ACT's plan for a simple, fair tax system that grows jobs, wages and the economy

ACT will:

  • Implement a flat income tax rate, and a company tax rate, of 17.5 per cent
  • Simplify the tax system for individuals and business, improve fairness with a single rate of income tax, and boost economic growth by reducing harmful taxes
  • Fund our plan by reducing wasteful and unnecessary government spending.

ACT's goal is to make New Zealand the most attractive place in the world to work, save and invest. We want economic growth and opportunity for all New Zealanders and having the best tax system is part of achieving that goal.

Weak productivity growth is a major problem for New Zealand. Compared with the rest of the developed world we suffer from both low productivity and low growth in productivity. Low productivity has a range of impacts from skilled workers leaving to attain better incomes to New Zealanders missing out on new life-saving pharmaceuticals.

Both major parties have supported progressive taxation for generations. The previous National Government even boasted that it had made the tax system more progressive when in power. For too long, the tax system has been used for political vote buying and social engineering.

ACT says it's wrong to use the tax system as a tool of social engineering. There is no fairness in five percent of taxpayers paying a third of all income tax, as is currently the case. We believe it is wrong that if you double your income from $50,000 to $100,000 your tax bill triples.

Currently, someone earning $100,000 pays $23,920 in income tax. Three times as much as someone earning $50,000. Under ACT's flat tax, someone earning twice as much pays twice as much tax. Someone earning half as much pays half as much tax. In other words, everybody pays no more and no less than their fair share.

The current system is not only unfair, it has been ineffective at achieving its goals. Ministry of Social Development data shows that the real driver of inequality over the past thirty years has been the cost of housing, but that cannot be fixed through tax policy. If it has had any effect, progressive income taxation has made the housing situation worse by encouraging housing speculation that is not taxed.

Meanwhile, the tax system sends a bad message to all New Zealanders about effort and reward. If you upskill yourself, work, save, and invest to increase your income, the government will take more of it off you. On the other hand, if you drag your feet, you'll pay much less tax and even be given money for free. This social engineering has been very damaging.

ACT believes that the social engineering in the tax system is one of the reasons that productivity growth is so weak. Under our tax and welfare system, a family can pay 33 per cent tax and lose 25 per cent to abatement. If you only keep 42 cents out of your next dollar, working, saving and investing looks less attractive.

In addition, having four different income tax rates, and a company tax rate that is different again leads to enormous complexity in the tax code as people attempt to declare income in lower tax brackets by holding it over for another tax year when their tax rate is lower, or keeping money in trusts and companies. This activity does not make New Zealanders wealthier overall. In fact, fighting with the IRD over tax is a distraction from getting wealthier.

Instead, ACT's Freedom to Earn plan will mean there is only one tax rate – 17.5 per cent. All income will be declared at this rate sooner or later so there will be little point in tax avoidance. The message will be clear: you must make a contribution on every dollar, but your money is primarily your own. We will not take progressively more of your money as a punishment for success. ACT's plan would shift New Zealand from being a country where people try to vote themselves rich, to one where working, saving and investing will make you rich.

A low company tax rate of 17.5 per cent will make New Zealand one of the most competitive jurisdictions in the world for investment. Reducing the tax levied on businesses by $5 billion per year instead of handing our corporate welfare is one of the most powerful things we could do to boost investment, productivity, and, ultimately, wages.

ACT will push any future government to implement a flat income tax rate, and a company tax rate, of 17.5 per cent.

How we'll do it

We show below how we could reduce wasteful spending to balance the Budget with a 17.5 per cent flat tax. We estimate that a flat tax of 17.5 per cent would reduce personal income tax revenue and company tax revenue by $5 billion each. However, additional spending would boost GST receipts by $1 billion.

The Government's 2018 operating surplus of $5 billion and $4 billion dollars of spending reductions would lead to a balanced budget. We would fund our plan by ending handouts for businesses by cancelling the Provincial Growth Fund and for well-off families through Fees-Free tertiary education. We will also gradually raise the retirement age to 67, cap Working for Families to only two eligible children and abate the scheme faster for higher income earners, end KiwiSaver contributions, and return the government's surplus to taxpayers.

In reality, the boost to economic activity from making working, saving and investing more attractive would lead to a significant increase in economic activity. This would increase the tax take above what is forecast above, making it possible for Government to spend more or repay debt.

Tax Revenue

 

2018 Actual ($billions)

New ($billions)

Difference

 

Income Tax

36

31

-5

 

Company Tax

13

8

-5

 

GST

21

22

1

 

Other Taxes

15

15

0

 

Other Revenue

25

25

0

 

Total

110

101

-9

   

 

 

 

Expenditure

 

 

 

 

 

Cancel Provincial Growth Fund

1

0

-1

 

Raise Age of Superannuation

 

 

-0.4

 

Remove Fees-Free

0.4

0

-0.4

 

Cancel Winter Energy Payments

0.4

0

-0.4

 

Cap Working for Families

2.7

2.1

-0.6

 

KiwiSaver Contributions

1

0

-1

   

 

 

 

 

Total

104

100

-4

   

 

 

 

Surplus/Deficit

 

5

0

-5

Figure 1: Government revenue and expenditure figures in billions of dollars for 2018

What it means for individuals

ACT's Freedom to Earn plan is the aspirational policy of an achieving society. It means that

every full-time worker and most part-time workers will keep more of their next dollar. People who work, save, or invest will keep more for their efforts.

Someone on the median wage of $51,844 currently pays $8,573. Under ACT's plan they would pay $9,072, or $10 more per week in tax. However, under the current plan they lose 30 cents of their next dollar to tax. Under ACT's plan they keep 82.5 cents of every extra dollar they earn.

A married couple receiving New Zealand Superannuation will nominally pay more tax, but they will be compensated with higher payments. Neither they nor the Crown will be any better or worse off. Net Superannuation payments would remain the same.

A couple earning $80,000 each with two dependent children currently pay $34,640 in tax. Under ACT's plan, they would pay a total of $28,000, leaving them $6,640 a year better off. Importantly, the tax on their next dollar would nearly halve. Instead of paying a third of any extra income they earn in income tax, they would keep 82.5 cents of every extra dollar they earned.

What it means for business

Currently, New Zealand's imputation system means that the cost of investing in business is the individual's final tax rate, normally 33 or 30 per cent. For outsiders not subject to New Zealand income tax, the rate is the company rate of 28 per cent.

All around the world, governments are dropping their company tax rates. The most significant recent reduction was by the United States Federal Government, from 35 to 21 per cent. Even allowing for imputation, New Zealand now has one of the highest effective company tax rates in the OECD. We need to do better at attracting investment, and one of the best ways we can do that is to have a competitive business tax rate. ACT's 17.5 per cent business tax rate would make New Zealand an investment magnet, boosting productivity growth and creating opportunity for all New Zealanders.

A flat tax rate would also greatly simplify tax compliance. As the IRD has remarked: “a variety of arrangements…allow taxpayers to avoid the intended taxation of dividends on the distribution of income or assets from companies to their shareholders.” Businesses would find that taxes for their business and their employees would be greatly simplified, freeing up time to work on competitiveness and productivity.

What it means for New Zealand

New Zealand is a pioneering society. Each one of us or our ancestors moved here for a better life. We did not move here to be socially engineered by politicians and we are not served by an overly complicated taxation system that sends the wrong message about working, saving and investing. ACT's flat tax would promote a culture of achievement and aspiration. It would make New Zealand a magnet for investment and raise productivity for New Zealand workers. Having the political courage to promote such a policy is one of the most powerful things New Zealand could do to secure a prosperous future in the 21st century.