I was hoping to write about taxes and tax cuts away from the shadows of the electioneering period. An election period inevitably paints tax cuts as a somewhat unholy scramble for bigger slices of the cake by the various, all eminently worthy, sectors of the New Zealand community. Unfortunately, subsequent debate and discussion still seems to suggest an inglorious clamber over slices of the cake.

At this stage of the New Zealand growth experience, it is critical that our eyes are not diverted from our prime goal. That goal being endeavours to increase the size of the New Zealand cake. In the context of an economy with a sizeable list of deficits (e.g. skills, infrastructure, external, savings, energy, environmental, and social), enviously scrapping over each other’s shares of the short-term cake will, in my opinion, lead to a sour taste as the longer-term cake turns to custard.

In such a context, I hope I will be allowed to add another ingredient into the tax recipe. My suggestion conveniently fits with the “… review of the current business taxation regimes with the view of ensuring the system works to give better incentives for productivity gains and improved competitiveness …” that forms part of the Government’s agreement with both United Future and the New Zealand First parties.

My suggestion is a zero company tax rate. I believe this would form a solid underpinning for an on-going sustainable growth strategy for NZ and its well-being. And no, this is neither a misprint nor a joke. You read it right first. Forget the tentative changes to 30% or, even, 20%. I mean 0% and, yes, this is a serious suggestion.

But, there is a but. This zero tax rate, I propose, would apply only on the business profits that are ploughed back into the firm. That is, funds re-invested in the business and maintaining, or adding to, the capacity of the firm should not be taxed. Profits distributed to individuals would remain taxable, as they should, at the individual’s relevant income tax rate. Similarly, profits distributed to other corporates (whether here or abroad) would also be taxed, at the standard (say, 33%) rate.

The principle driving this suggestion is my view that investment is central to the economic growth process. And such a tax regimen, I argue, would be wholly consistent with the desire for “… better incentives for productivity gains and improved competitiveness”.

I interpret the term investment widely here. Investment includes expenditure that is designed to protect, enhance, improve, maintain and/or expand the resource (wealth) base of a community. Whether it be new machines, equipment, technology, buildings or product development, research and investigation, training courses, or study leave all contribute to enabling better and/or more resources to be devoted to producing higher-value goods and services.

Many point to productivity as being central to growth. But I would suggest investment is a pre-requisite for such productivity. Some may point to labour skills and management as pivotal for economic advance. But, again, investment is required to acquire, develop, enhance and hone such assets. Quality infrastructure and investment spending are clearly closely entwined.

For growth to be sustainable, some highlight that it must not endanger inflation targets. But, as any self-respecting economist should tell you, the long-term inflation fight is only ever won through productivity improvements. Any other inflation-fighting weapon is but a short-term Band Aid covering a wound. And, as I noted before, investment is a pre-requisite for on-going productivity improvements. No doubt there are many (including myself) who would point to the uncompetitive exchange rate and the subsequent parlous state of New Zealand’s external sector. But, again, competitiveness is reflected in productivity, which - in turn - requires investment.

This argument implies New Zealand continues to have major challenges in front of it. Yes, we have halted the 18-year decline between 1974-1992, but there has since been little discernible improvement. The picture shows the starkness of New Zealand’s situation.

From proudly taking our seat at the top table of the OECD in the 1960s we are, to put it bluntly, one of the many also-rans. Consequently, I find it distressing that attention to the aforementioned deficits have been noticeable by their absence from tax policy debates. The very first incarnation of BERL Forecasts was drafted in the backdrop of an impending election. It stated “…Amidst the political uncertainties, however, the businessman can rely on an economic certainty: the new Government will take office faced with a crisis in the balance of payments.” That was in November 1957, nearly 50 years ago. I just hope that the 2057 issue of BERL Forecasts doesn’t have to include, yet again, a similar phrase.

However, there are significant positives in the current economic picture. In particular, the composition of recent growth has been sound. The received wisdom has been that housing and consumption spending have driven the recent expansion. However, the numbers indicate that the primary driver of economic activity has, indeed, been business investment expenditure. In real (i.e. inflation-adjusted) terms this component surged nearly 13% in the year to June 2005, 14% the last year and 10% the year before. That’s a total of a 42% expansion in the last 3 years. In comparison, household consumption spending has grown only 17% over this period.

These spending figures are also reflected in the industrial pattern of growth. Numbers for the infrastructure-focused electricity, construction, transport and communications sectors show growth totalling nearly 22% over the past 3 years compared to overall GDP growth of just under 13%.

Much has been made of our insatiable appetite for imports. However, closer inspection of the numbers suggests the story is not so straightforward. Again, the lead driver is investment spending, with capital imports (again in inflation-adjusted terms) growing by a whopping total of 61% over the past 3 years. In contrast, consumer imports have risen a comparatively subdued 40% in this period, with imports of motor vehicles registering a 43% increase.

The message from these numbers is clear. Businesses are investing in renewing, upgrading and modernising plant, machinery and equipment along with embarking on infrastructure construction developments. This has led, and continues to underpin, our current economic prosperity.

Economists make a lot of the distinction between investment and consumption expenditure. Put crudely, the former is putting something back - i.e. contributing to wealth creation; the latter is taking something out - i.e. using up resources. The case for taxing consumption (or those funds that are destined for consumption expenditure - e.g. distributed profits) is clear. The case for taxing funds that are destined for investment, i.e. taxing those contributing to the creation of wealth, is distasteful.

Thus, let's shift the tax debate away from those trying to get more out of a well-baked, but stale, cake and towards rewarding those actively contributing to increasing the size, quality, and tastiness of New Zealand’s cake.