New Zealand’s tax system is one of the most neutral and efficient in the OECD. Bases are generally broad and rates are moderate. The full imputation system for dividend payments works to reduce tax distortions for corporate financing decisions, while efficiency in corporate investment decisions is encouraged by the low level of targeted tax incentives. The tax system is also more neutral vis-à-vis private saving than in most other countries, in particular because no general incentives are provided to private pension saving. There is hence no immediate need for major tax reform, but several second order issues should be addressed in order to reap the full benefit of an otherwise well-functioning system. The most important improvement would be to broaden the income tax base by including capital gains on a more comprehensive scale as well as introducing a tax on imputed rental income of owner-occupied housing. These two steps would not only reduce horisontal inequities and hence tax shifting incentives, but also contribute to a better allocation of private savings, which is currently biased strongly towards housing. It should be emphasized, though, that tax policy is unlikely to be very effective in raising the level of private saving in New Zealand.
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