The document models and analyzes several tax reform scenarios for New Zealand, including: 1) Scenario 2B which aligns top personal and trust tax rates at 27% and increases the GST rate to 15% with compensation. This results in a $2.89 billion fiscal cost. 2) Scenario 5 which reduces the top personal and trust tax rates to 30% and the company tax rate to 20% while removing imputation credits. This results in a $3.21 billion fiscal cost. 3) Both scenarios are analyzed in terms of their impact on various principles of an effective tax system like revenue, equity, efficiency and coherence. Base broadening measures are also discussed which could improve sustainability.

1. A TAX SYSTEM FOR NEW ZEALAND'S FUTURE 1 December 2009 Afternoon Session 2 Scenarios Geof Nightingale, Partner, PricewaterhouseCoopers New Zealand

3. Principles of an effective tax system Coherence Fiscal revenue Compliance & admin Fiscal integrity Efficiency & growth Equity

4. Scenarios modelled: Scenario Fiscal Cost ($m) Equity measures EMTRs Gini coeff. 80/20 ratio % with rise % with <10% fall % with >10% fall Status quo 0 0.34 2.84 - - - 1A – align at 30% 1,610 0.34 2.87 - 26% - 1B – align at 30% GST increase to 15% (with compensation) 1,410 0.34 2.83 <1% 99% - 1C – align at 30% semi-universalisation of WfF ($2000 p.a. per child) 2,250 0.35 2.89 - 24% 4%

5. Scenarios modelled: Scenario Fiscal Cost ($m) Equity measures EMTRs Gini coeff. 80/20 ratio % with rise % with <10% fall % with >10% fall Status quo 0 0.34 2.84 - - - 2A – align at 27% 3,090 0.35 2.89 - 15% 11% 2B – align at 27% GST increase to 15% (with compensation) 2,890 0.34 2.85 <1% 89% 11% 3A – align at 25% 4,060 0.35 2.91 - 15% 11% 3B – align at 25% GST increase to 15% (with compensation) 3,860 0.35 2.87 <1% 89% 11%

6. Scenarios modelled: Scenario Fiscal Cost ($m) Equity measures EMTRs Gini coeff. 80/20 ratio % with rise % with <10% fall % with >10% fall Status quo 0 0.34 2.84 - - - 4 – top personal and trust rates at 30% company rate to 25% 2,340 0.34 2.87 - 26% - 5 - top personal and trust rates to 30% company rate to 20%, remove imputation 3,210 0.34 2.87 - 26% -

9. Status Quo TAX RATES

10. Status Quo – av. tax rate

12. Status Quo – EMTR’s

13. Status Quo – distrib. of households

14. ‘ Property’ excludes owner-occupied housing ‘ Other’ includes other categories that would be liable to CGT Status Quo – asset holdings

17. 2B: Disposal Income Change *Total income and disposable incomes exclude WFF tax credits and capital income not currently taxed

18. 2B: Equality measures Change from status quo shown in parentheses; n/c = no change Numbers may not add due to rounding errors

19. 2B: EMTR impact

20. 2B: Capital Gains Tax +$3,880m Capital taxation excludes owner-occupied housing Assumes 4.2% nominal gain on property, 2.6% on financial assets and 5.4% on net business assets Revenue figures are for steady state after full implementation

21. 2B: RFRM on rental property +$700m Immediate impacts on households:

22. 2B: Land tax 0.5% +$2,130m

23. Scenario 2B – impact? Fiscal revenue Compliance & admin Fiscal integrity Efficiency & growth Equity Coherence Excluding Base Broadening

26. 5: Disposable income change Total income excludes WfF tax credits and capital income not currently taxed, disposable income excludes untaxed capital income

27. 5: Equality measures Change from status quo shown in parentheses; n/c = no change Numbers may not add due to rounding errors

28. 5: EMTR impact

30. Scenario 5 – impact? Fiscal Compliance & admin Fiscal integrity Efficiency & growth Equity Coherence revenue Befor Base Broadening