RBNZ supports better tax treatment of interest

A move towards a Nordic-style approach to income tax, a more generalised portfolio investment scheme and a social security tax are some ways to boost national savings, says the Reserve Bank of New Zealand in its submission to the Government's Savings Working Group. Inflation-indexing the tax treatment of interest and refining Kiwisaver are other ways to do this.

The RBNZ's reform suggestions come on the heels of Standard & Poor's move to put New Zealand's rating on negative outlook. They thus serve as a reminder that the country has to save to cut its reliance on foreign debt and reduce vulnerability to global financial shocks.

The RBNZ noted that in 2007 the OECD suggested a Nordic approach to income tax in its survey of New Zealand.  A more Nordic-style system, where capital income is taxed at a rate lower than the maximum marginal rates on labour income, would align well with meeting the longer-term growth challenges facing New Zealand, the RBNZ said.

In this context, the RBNZ said, the current PIE regime already recognises the difference between labour and capital income, and could be generalised somewhat. Another option would be to consider ear-marking some of the current tax on labour income as a social security tax.

There may also be opportunities to refine Kiwisaver, said the RBNZ. This would generate the same private savings outcomes at considerably less fiscal cost. This would mean putting a time limit on the eligibility for the tax credits sufficient to allow people to get into a savings habit. It would result in large fiscal savings.