One of the most significant Budgets of recent years is to be unveiled on Thursday. Steve Thomas reveals his wish list.
A lot can change in 10 years.
Hard as it may be to remember, just a decade ago, New Zealand's tax system was well respected for its low rates and efficient way of raising revenue.
Fast-forward to now, and a series of incremental changes have eroded that efficiency, slowing New Zealand's economic growth.
Making some positive adjustments to the tax system over the medium term is crucial for our wellbeing.
Unfortunately, the country seems to be divided on this issue.
The OECD's 2009 Taxing Wages report has revealed the good news that New Zealand has the second-lowest "tax wedge" - the second-smallest difference between the costs of employing a worker and their take-home pay - in the OECD.
Green Party co-leader Dr Russell Norman takes this small tax wedge to mean the Government does not need lower taxes in Thursday's Budget.
However, while the tax wedge is an important issue it is not the only factor that needs to be considered.
New Zealand needs to do more than just tread water.
We need to start growing the economy and the tax system is a barrier.
We are regularly reminded by the OECD of the multiple factors we need to consider if our ecomomy is to improve.
Low personal income taxes, entrepreneurship, and productivity are all crucial for our growth.
The tax wedge alone cannot show us how we are tracking in these areas.
In fact, the tax wedge will be smaller when wages are lower.
When Treasury released its financial statements a few weeks ago, it pointed out that the tax take has been falling.
New Zealanders are paying less tax partly because many have been working less.
When the array of other pieces that indicate the health of our tax system are also considered it is clear that some change is crucial.
As the Tax Working Group has said, the Government relies too heavily on the least growth-friendly taxes - personal and corporate income taxes.
They also advocated for base-broadening and recognised the need to drop the corporate rate to a more internationally competitive level.
While the Government has remained coy about its exact intentions, options like raising GST and a lower corporate tax rate appear to be on the table.
How far these changes will go will be seen in the Budget.
The Tax Working Group was restricted by its mandate to make revenue-neutral recommendations.
This mandate assumes that the size of government is appropriate and necessary.
It is not.
The Government should look to establish a benchmark for its spending, at around 30% of GDP, to which it would be held accountable every election.
So long as government size is set as a percentage of GDP, spending would remain affordable.
While it would be painful to restrict or pull back some current spending to reach the benchmark, the short-term discomfort may well be necessary.
We need to make tax changes over the next decade which will put the economy on a surer path.
The Government should seriously consider simplifying and lowering personal income tax rates by introducing a two-step scale, with a bottom rate of about 10% for those earning $27,000 or less, and a second rate of about 27% for everyone else.
We should follow the path mooted by the Tax Working Group and raise GST slightly to 15%, which would help to fund that drop in income tax.
While there would be transitional issues that would need to be worked out, relying more on GST would enhance growth, as consumption taxes do not detract from savings and investment.
Many of the changes we need to make are not popular, yet they are both justified and crucial.
While the Government must pay careful attention to public opinion, it is also charged with the responsibility to do what is best for the country as a whole.
We can only hope that the Government will demonstrate a strong commitment to lowering taxes and restructuring the tax system to make it more growth-friendly so that New Zealand is not left treading water any longer.
Steve Thomas is a researcher at the Maxim Institute.
