“you are also assuming away distance, add transaction and transport costs to the mix and you get a different set of results. once location is included it is the global rate of return, as observed from NZ”

Yes. The rate of return required for capital to come to NZ is higher. But, it is still a flat supply curve.

“In fact because of the increased transport costs and transaction costs (related to distance) for a firm based in NZ, our corporate rate should be even lower than Aus to have the same observed global rate or return.”

This does not necessarily follow. We aren’t trying to set it up so that the implied rate of return is the same as other countries per see – we are trying to raise income for our nations preference for government spending at the lowest cost.

In reality, if the “demand for capital” is sufficiently different in NZ, then our corporate tax policy should be different.

Sorry for the delay replying, I missed the comment earlier and only found it again when I was looking up corporate tax on google 😛

Hi Andrew,

Very true, good comment.

“So perhaps we shouldn’t be looking as closely at Australia as the rest of the OECD, where effective rates of corporate taxation are quite a lot lower.”

I see this part as key, as it is the global tax situation that helps establish the equilibrium risk adjusted rate of return which will lead to investment.

“For this reason capital income taxes as a fraction of total taxes are higher in Australia and NZ than anywhere else in the world (Australian ranked 1, NZ 2), and taxes on labour (as a fraction of the total tax take) are lower than almost anywhere (Australia ranked 3 to bottom, NZ ranked 2 to bottom, Korea 1).”

When it comes to looking through tax policy I expect to see the following steps:

1) Look for taxes that increase efficiency,
2) Once that’s done, try to establish a tax system that treats all factors equally,
3) Once that’s set, adjust relative tax rates based on elasticities,
4) Once that’s done, think about equity (in essence this should occur separately through the welfare system).

I get the feeling that, outside of the land tax discussion, the third point sort of got lost. I lack of willingness to engage on this point could be behind the lack of discussion on a social security tax.

There is a different perspective on these matters. A large fraction of investment is funded from the reinvested profits of firms. Thus factors that change firm profitability will change investment. If you tax firms more highly, they have fewer profits for reinvestment. Thus
(a) if Australia has a lower corporate tax rate than NZ, it may have more investment in industry. Moreover, the most profitable firms will expand at a faster rate than the less profitable firms, leading to a “slow elimination of the least fit” evolutionary dynamic.
(b) NZ firms may choose to locate in Australia as a way of preserving their profits and thus investing more and expanding more quickly.

Of course this argument depends on the effective rate of tax, not the headline rate of tax. Jurisdictions with lots of tax deductibility exemptions etc which lead to low effective average corporate tax rates are likely to do well in these circumstances.

According to the excellent Australian Tax Working Group paper, “Taxing Capital income – options for reform in Australia” (by Sorensen and Johnson)in 2004 corporate taxes as a fraction of total taxes were higher in NZ than any other OECD countries….except for Norway and Australia. So perhaps we shouldn’t be looking as closely at Australia as the rest of the OECD, where effective rates of corporate taxation are quite a lot lower.

As an aside, and as someone with only a very loose attachment to the working group (I attended one session) I find it strange that the group appears to have ignored the possibility of dedicated social security taxes. Australia and NZ are the only two OECD countries not to have them. For this reason capital income taxes as a fraction of total taxes are higher in Australia and NZ than anywhere else in the world (Australian ranked 1, NZ 2), and taxes on labour (as a fraction of the total tax take) are lower than almost anywhere (Australia ranked 3 to bottom, NZ ranked 2 to bottom, Korea 1). We are noticeably different here, but no-one in the TWG seemed to think that this was worth examining. These taxes normally only apply to labour income, and thus mean the incentives to save and invest are not distorted as much as capital income is less highly taxed.

Andrew