On 31 January 2022 the OECD published the New Zealand Economic Survey 2022. The report notes that more consolidation measures are necessary to stabilise the fiscal position, and emphasises the need to increase productivity, increase the housing supply, enhance the digital skills of the population and reduce greenhouse gas emissions. The survey also includes some recommendations on tax changes.

Tax on labour

The report notes that reforms are needed to reduce barriers to work. The tax wedge, which measures the extent to which the tax on labour discourages employment, is relatively low in New Zealand. However, means-tested benefits and tax credits are withdrawn quickly as earnings rise above 65% of the average wage, and the OECD considers that the loss of earnings through reduced benefits and tax credits may discourage entry into the labour market.

The largest means-tested benefit in New Zealand is Working for Families, a package of four tax credits for families with children. The OECD recommends that the abatement thresholds for these benefits should be increased; and the abatement rates should be reduced, so that the credits would phase out more gradually as income rises. The abatement thresholds should be adjusted systematically to reflect inflation in living costs.

Enhancing productivity

The report suggests that capital investment has been held back by high effective corporate taxes that reduce the attractiveness of New Zealand as a location to expand business. Corporate tax rates are higher than in other OECD countries and this encourages companies to relocate elsewhere or to shift profits abroad. The high marginal effective tax rate also discourages firms from investing more in New Zealand. The corporate tax rate could therefore be reduced to align it more closely to the rates in Australia and in other small, advanced economies. This would encourage investment in tangible and intangible capital that could lead to more productivity growth. This could also reduce incentives for profit shifting.

The position needs to be considered carefully because lowering the corporate tax rate to a level further below the top personal tax rates could encourage wealthy individuals to shift their income to companies purely for tax reasons, to reduce their tax burden.

Research and development tax credits

The report points out that research and development (R&D) spending is low in New Zealand, despite support from the government in the form of R&D tax credits that are close to the median for OECD countries. The report considers that R&D tax credits should be accompanied by targeted grants that would take into account the need for focused innovation support in certain sectors of the economy. The impact of such grants should be assessed using a transparent and independent monitoring system and the grants should be withdrawn if they are found to be unsuccessful in achieving their objective.

Environmental taxes

In relation to environmental tax, the report notes that transport fuel taxes are mostly lower than in other OECD countries and generally fossil fuel use outside the transport sector is not taxed. There is scope for more environmental tax in sectors not covered by New Zealand’s emissions trading system.

Taxes on fuels used in the transport sector could be increased, to cover the hidden costs from congestion and air pollution caused by the transport network. Congestion charging when feasible could become a better method of covering these costs. A parliamentary committee has recently recommended the introduction of proposals on congestion pricing.