Thursday, February 12, 2009

A Bold Fresh Flat Tax Proposal for New Zealand

On February 10, 2009, former finance minister and current finance spokesman for the ACT political party in New Zealand, Sir Roger Douglas, introduced a bold fresh flat tax plan. Sir Roger is a former Labor Party member known for his free-market, low-tax “Rogernomics” policies during the 1980s. Speaking to the Rotary Club of Orewa, he termed his plan a means to achieve a low-tax welfare state by redesigning the tax system in concert with the social welfare system.

Seven political parties occupy 122 seats in New Zealand’s Parliament. ACT holds 5. Along with 5 from the Maori Party, ACT has a confidence arrangement with the current government-led National Party of 58 seats, giving the latter a coalition majority of 68 seats.

Under Sir Roger’s plan, individuals would have the choice to continue to pay taxes and receive benefits in accordance with New Zealand’s current tax system and monopoly-run health, welfare, and retirement services. Or, they could opt in to a new system that works as follows.

An individual’s first NZ$30,000 would be tax free. Above that tax-free threshold, individuals would pay a flat-rate tax, to be reduced over the next 15 years along with the corporate tax, to 15%. The tax-free threshold would be increased to keep pace with inflation, and the threshold would rise with the number of children. Those earning below the threshold would receive a tax credit (cash) to boost their income up to the threshold.

The current personal income tax consists of five rates, 13.9% on the first NZ$14,000 of taxable income, 22.4% between NZ$14,000-40,000, 34.4% between NZ$40,000-70,000, 40.4% above NZ$70,000, and 46.4% for those who fail to complete a declaration form. These rates include a charge of 1.4%, an earners’ levy rate, to cover non-work related injuries. Self-employed individuals are subject to the same rate as employees. Companies pay a standard 30% profits tax. The goods and services tax, a value-added tax, would continue at 12.5%, along with excises on alcoholic beverages, tobacco products, and fuel.

In return for being taxed at a low flat rate, individuals will be required to contribute to a dedicated retirement plan in their own names. For health care, individuals and families will be required to purchase catastrophic health insurance, and risk coverage against injury, sickness, or job loss. The purposes of the plan are to improve incentives to work, save, and invest, while reducing dependence on the government for social services.

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