Wednesday, April 19, 2006

Fran O'Sullivan: Plan to divide and conquer in tax battle

It's taxing stuff, this tax reform business. Particularly around Budget time when the business clamour for outright cuts is always increased, even if this Government has done little to heighten expectations.

Prime Minister Helen Clark and Finance Minister Michael Cullen are once again facing down the business lobbyists.

But the united front they have presented on tax issues may yet develop chinks as the Cabinet finalises the upcoming Budget.

It has been left - yet again - to business groups to push the Government to make the only meaningful reforms that count to them in an internationally competitive sense: outright tax cuts.

Lobby groups representing farmers, employers, big and small businesses have not wasted their time pitching to Cullen alone for some $4 billion of cuts.

They have also painted Clark into their lobbying campaign, reckoning she might be prepared to do a John Howard and exert some influence on her own Treasurer to put policies in place that business wants and remove a future electoral liability.

This is seen as mirroring the way in which the Australian Prime Minister intervenes to ensure the Coalition's policy mix stays electorally viable.

The decision by Federated Farmers, the Business Roundtable and the Chambers of Commerce to write directly to Clark urging her to introduce a lower, flatter tax structure is symptomatic of general Government-business relations.

The lobbyists know that Cullen is their man when it comes to big picture issues, like solving Auckland's problems where he has taken a more influential leadership role than the Mt Albert-based Clark. They also know he is the one when it comes to dealing with some structural issues getting in the way of a stronger transtasman relationship.

They like where he's going with tertiary education trying to match up skills and training with jobs.

He's broadly respected by chief executives associated with the Government's Growth and Innovation Advisory Group.

But they also know that Clark is the longer-term player.

Business has learned from another lobbyist, Labour Party president Mike Williams, that Clark is intent on a fourth or maybe even fifth term as Prime Minister.

They know that Clark, shocked by the narrowness of her victory last September, had signalled a willingness to be more visionary and institute bold changes to get New Zealand pushing up a growth curve.

She opened her doors to a number of chief executives and business lobbyists straight after the election, taking soundings on the appropriate policy mix for her third term as PM.

But Clark needs to make another shove.

After more than six years in the job its become abundantly clear Cullen likes the sort of tax reforms that don't result in any immediate cuts to the top income tax rates at either corporate or personal level.

The lobbyists believe that Clark - whose staffers let it be known that she had favoured outright income tax cuts for last year's Budget - is a softer target.

Cullen's parsimonious offer in last year's Budget to marginally lift the earnings threshold at which taxpayers are hit by higher levels of tax is about as far as he has been prepared to go down this particular route.

Labour paid an electoral price for his obduracy at last year's election when National's John Key promoted tax cuts that won favour with many voters.

It was during the heated election campaign that Clark's own dissatisfactions with the 2005 Budget moves were made known through news stories.

And not long after that speculation over Cullen's own future in the Finance portfolio began.

The rumour-mongering has been fuelled by some imprudent comments by Clark.

But also by some positioning statements by pretenders to Cullen's job. Trevor Mallard, who is now seen as the obvious successor, might be head-down with the Economic Development portfolio, but that doesn't stop him commenting on the issues outside his area like the exchange rate. Or having a view on whether tax cuts promote economic growth as Treasury has repeatedly told Cullen.

Phil Goff, quickly burnishing credentials in trade, has been dubbed as a young pretender by Cullen in a parliamentary aside.

But the betting seems to favour Goff as Deputy Prime Minister and Mallard as Finance Minister in the longer term.

Cullen's not for shifting yet.

He has focused on simplifying the system, playing about with depreciation rates and a myriad other number of imposts that do pose a real cost to business.

He doesn't seem particularly fazed by the lobbying issue or the campaign that Guinness Peat Group's local chief Tony Gibbs is waging for a special case to exempt GPG's many local shareholders from the effects of a punishing capital gains tax on their London-based investment.

Brierley Investments also played that particular lobbying card to huge effect years ago, pressuring a previous Government to protect its shareholders from an upcoming tax change.

But the company lost the confidence of its shareholders anyway and has long departed these shores to be swallowed up by a canny Asian investor.

There's no sign that Cullen is so biddable.

Or, for that matter, that Gibbs will be able to muster GPG's New Zealand shareholders into a fighting force and gain a special exemption from the legislation. But it's a fair bet that GPG will muster considerable support elsewhere in Parliament to push for legislative changes in its favour.

And there is no sign that Cullen intends to use his May 18 Budget to outline the Government's intentions in its review of business taxation.

The only person championing tax cuts even vaguely on his side is Revenue Minister Peter Dunne who secured the review as his party's price for supporting a Labour-led Government.

The business sector will be looking to the upcoming discussion paper to put a distinction between two separate subjects: tax reform and tax cuts.

But already there's speculation that Cullen will promote a payroll tax to offset any tax revenue that might be lost if he lowers the corporate rate from 33 cents.

Business also wants to see if he will go along with the chartered accountants who want to see the top personal and corporate tax rates the same.

Will Cullen buy the argument that doing otherwise simply penalises the large number of sole traders in New Zealand?

Or will Cullen stay mired on the reformist side, defending the Government's family welfare system and tax rebates to the detriment of the so-called wealth creators?

These are serious issues that Clark in particular will want to focus on as she deliberates strategies that could help her propel her way into the history books.

From a business perspective it's economic growth that matters most, not creating more state beneficiaries.

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