Business Tax Review should look at employee savings

A guest comment by CTU Economist, Peter Conway

There is also now considerable speculation about the options for the Government around tax and savings. Unfortunately, it appears as if a major opportunity to boost savings is about to be lost. The outcome of the Business Tax Review is probably going to see a reduction in company tax plus some tax credits. It is true that the tax credits have some merit as they reward investment in R&D, export market development and skills. The CTU submission opposed a direct cut in company tax and gave qualified support to some tax credits. However, comments made by Peter Dunne have confirmed that a cut in company tax is very likely. But both the NZ Institute and the CTU submitted that the Business Tax Review was a significant opportunity to introduce compulsory employer contributions to KiwiSaver.

Say there was a cut in company tax of 3% and on top of that a further cut of 3% linked to compulsory employer contributions to KiwiSaver or exempt schemes. This would not only supercharge KiwiSaver; it would lift savings, boost domestic capital with flow-on effects into the capital account and also take a bit of the load off monetary policy. Business could not complain as they would already be getting a substantial cut in company tax. And it is much easier to do than try to divide a relatively small cut in personal tax into two parts: one for consumption and one linked to compulsory employee contributions. Remember the Australian system is based on compulsory employer contributions.

There is one major technical problem which is that superannuation contributions are based on payroll whereas company tax comes out of profits, so a 3% cut in company tax offset against compulsory employer superannuation contributions would have a variable impact on firms. A softer approach would simply allow firms to offset any employer contributions against a capped level of company tax (say 3%).

However, this is all speculative as the Business Tax Review does not appear likely to address any of this! If the Government can get the right mix of policies around tax, savings, and wages then we will be well on the way to addressing the major structural problems the economy faces. But doing this in a way that meets the tests of political popularity, and impact on monetary policy and maintaining strong support for the public sector is a challenging task!

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