Just six weeks after introducing sweeping tax reforms, New Zealand's free-market visionary has suffered his first major setback. Finance Minister Roger Douglas was reined in last week by Prime Minister David Lange's surprise postponement of the tax changes. For three years, Mr. Douglas has been the chief architect in charge of rebuilding the dilapidated New Zealand economy. He has approached his task with revolutionary zeal, enjoying Mr. Lange's full support - until now.
After a protracted Cabinet meeting on Monday, Lange and Douglas produced a joint statement of commitment ``to the principles embodied in the economic statement [of Dec. 17].'' But the tax changes, originally slated to take effect Oct. 1, 1988, are now expected to be pushed back into next year.
The radical reforms called for:
Adopting a flat tax (of about 23-25 percent) which would halve the current top personal tax rate.
Lowering corporate tax rates from 48 percent to as low as 26 percent.
Raising the 10 percent goods and services consumption tax (introduced in 1986) to 12.5, or perhaps 15 percent.
Eliminating tax write-offs on retirement savings.
In announcing the postponement, the prime minister - allying himself with the Labour Party Left - cited the need for more study of how the tax proposals would affect low-income earners. Lange also expressed concern over carrying out such sweeping changes so quickly.
The Labour Party won a second term last year by promising that economic bullet-biting was over - social reforms would be the priority. Douglas is believed to have pushed for a quick unveiling of the tax changes to forestall any criticism and to calm financial markets.
Lange's decision has ramifications for corporations and workers across the Tasman Sea. When Douglas announced his reforms, economists warned Australia would suffer unless it followed suit. Major Australian companies could relocate to New Zealand to escape the higher taxes here, they said. Australia's top income and corporate tax rates now stand at 49 percent (up from 46 percent in 1985).
The deferral takes some heat off the Australian government, which plans to unveil modest tax changes in May.