Mon, 08 Feb 2010 1:00p.m.
Opinion by Duncan Garner
John Key has been Mr Nice Guy for a year - but now the rubber hits the road. His leadership, his ideas, his ability to be bold is about to be tested.
Tomorrow he sets out his Government's agenda for 2010.
This is his most important speech since he entered Parliament in 2002.
Key must show his Government will answer the massive challenges laid down by the Tax Working Group.
He campaigned on wanting to close the gap with Australia. He campaigned on economic growth. He campaigned around ambition. Now he has the chance to actually show he is a Prime Minister with a plan - a PM with a purpose.
He must show he has some big and bold ideas - rather than be a Prime Minister who always wants to be liked - and who wants to get away with incrementalism.
And this is his challenge. The tax experts found that 'the current tax system is incoherent, unfair, lacks integrity, unduly discourages work participation and biases investment decisions".
The working group continued, saying; 'the tax system is inappropriate, New Zealand relies heavily on the taxes most harmful to growth, particularly corporate and personal taxes on capital income".
So Key's challenge is to make fundamental changes. Plodding along the way we are is not good enough.
The experts say the corporate tax rate of 30% must change if we are to compete with Australia's which by all accounts is heading towards 25%.
The top 10 percent of all income earners in New Zealand now pay 76% of all net tax.
The experts agree such a top heavy system, reliant on the few - discourages growth and investment.
So what can Key do?
Every time he cuts a tax - like the top personal rate of 38c for those earning over 70k a year - he then has to balance the ledger by getting the revenue from somewhere else.
Remember the aim of the changes is tax neutrality - so he can sell the whole package as being fair.
So if he cuts the top rate for the rich and perhaps aligns it to the company rate - he must raise revenue from somewhere else - by hiking up a current tax, or introducing a new one.
He can either increase GST or bring in property taxes - or both.
Increasing GST is problematic. How do you compensate the working poor? They already don't pay tax - because of the Working for Families scheme. About 40% of the country pays no tax at all - largely because of this scheme introduced by Labour.
But not everyone in the Working for Families Scheme is poor.
Within it there are some massive rip-offs and tax dodgers.
Almost 10,000 people claiming Working for Families also have claimed tax write-offs for owning a second property - or an investment property. How poor are they really? If you own a second home - should you really be receiving a state welfare transfer? No way. Key must close this loophole - and immediately.
It's a giant rip off and it's not fair to hardworking, ordinary Kiwis who pay tax and don't structure themselves to shaft their fellow taxpayers.
And then there's property taxes.
The experts on the working group say they support a low rate land tax of say 0.5%. Of course this is hard to sell politically. But I do think there will be some changes in the property area. The other options are a capital gains tax on investment property - and an end to LAQCs - that see wealthy people getting massive tax write-offs.
So it's all in front of Key and his wing-man Bill English. Some of the changes may come immediately, some will be signalled for down the track.
But tomorrow and the next few months leading into the May 20 Budget could well shape how Kiwis view Key and his Government in the years to come.
Key's choice is clear. He could squander this opportunity - or be bold, ambitious and slightly risky. My money is on the latter option.