The Government is being urged to lift GST to 15 per cent and impose a property tax to create room for big cuts to personal income and company tax rates.

In a report labelling the current tax system broken, a Government ordered inquiry into the tax system says the burden for paying tax is falling disproportionately on workers who don't receive working for Families benefits while the wealthiest earners are avoiding tax by shifting income into trusts, rental properties and other savings vehicles.

But its recommendations are likely to be controversial and include:

* Raising GST from its current 12.5 per cent rate to 15 per cent;

* Collecting more tax from rental properties by setting an assumed rate of return which would stop investors claiming big losses as they do currently;

* Introducing a land tax, to be levied on all property

* Removing the 20 per cent depreciation loading on plant and equipment

* Removing tax depreciation on buildings if evidence shows they do not depreciate in value

* Changing the rules surrounding tax on foreign owned companies.

The measures would be balanced by lowering the top rate of tax to at least 33 per cent - down from 38 per cent currently. There would also be compensation to beneficiaries and superannuitants for the higher cost of buying products and services due to the rise in GST.

The Government has so far been lukewarm on the prospect of a property tax but has not ruled out a rise in GST and seems certain to proceed with measures targeting property investors.

The Government delayed its second round of tax cuts last year because of the recession but today Finance Minister Bill English raised expectations when commenting on the recommendations out this afternoon.

"The Government certainly has an interest in them (cuts)," Mr English told reporters.

"We need a package that raises about the same revenue as it does now. We don't have the luxury of the previous tax package where you could give away revenue, so if we give any away it has to come from somewhere else."

He also signalled lowering the company tax.

"The ideal is (Australians) are following us - not us following them - so let's see if we can achieve that."

TAX WORKING GROUP

The Tax Working Group, headed by academic Bob Buckle, was set up with the support of the Government to look at ways to bring the top personal, corporate and trust rates together.

Professor Buckle said the group's initial intention had been to put out a short report on its findings but "it grew".

Its final report today is more than 70 pages long.

He said the group had concluded New Zealand's tax system was broken and urgently needed fixing.

"The group's strong view is that reform is necessary if New Zealand is to have a fair tax system that minimises the costs of raising taxes, reduces barriers to productivity and growth and positions it well for future challenges."

It found that:

* New Zealand relied heavily on the taxes most harmful to growth, particularly corporate and personal income taxes; there was a major hole in the tax base concerning the taxation of capital and Working for Families created very high effective marginal tax rates.

*The tax system also lacked coherence, integrity and fairness - the income tax burden was disproportionately borne by PAYE taxpayes since many with wealth could restructure their affairs to shelter income from taxes or to enable people to receive social support

*There were significant risks to its sustainability because of international competition for capital and labour, especially from Australia.

CAUTIOUS RESPONSE

Mr English and Revenue Minister Peter Dunne responded cautiously to the major recommendations in the report.

"The Government's focus in 2010 is increasing New Zealand's economic growth and productivity," Mr English said. "There is no doubt that good tax policy can play a role in that."

"For ordinary New Zealanders, we're particularly keen to ensure that our tax system rewards effort, encourages savings and helps families to get ahead. "

The Government also wanted a tax system that helped move the country away from its recent preoccupation with borrowing and consumption.

But any changes would have to be "fiscally neutral" - meaning that revenue would have to be found somewhere else within the tax system if personal taxes were cut - because the Government still faced several years of budget deficits.

Mr English said the group's report was one of several reviews the Government would be considering in the lead-up to the May budget.

Mr Dunne said he shared the working group's concerns about the incentives for wealthier individuals to shelter income in trusts and companies.

"This is inherently unfair to the wage and salary earner who is then left to bear a disproportionate share of the personal tax burden."

He was also concerned about the manipulation of family income in some instances to obtain Working for Families tax credits.

"There is growing evidence that trusts and companies, and highly geared residential rental properties, are being used to reduce taxable income and so qualify for Working for Families.

"Such abuse potentially places an unfair burden on the 60 per cent of families who do not receive Working for Families tax credits."

TAX BALANCE

The top 10 per cent of income earners now pay 44 per cent of all personal income tax, the working group has found.

The group says the burden on high income earners is even higher once those on Working for Families, New Zealand Superannuation and other benefits are included. Under that scenario, the top 10 per cent of taxpayers shoulder 76 per cent of the tax burden.

It said that the effect of Working for Families, which distributes state-funded benefits to families with children, was that many who received it effectively paid no income tax at all.

Personal income tax makes up the lion's share of revenue collected by the Government - income taxes account for $28.5 billion or 53 per cent of all tax revenue, company taxes make up 17 per cent, GST raises 21 per cent of all tax revenue and excise duty such as petrol and tobacco taxes raised a further $4.8 billion or 9 per cent of all tax revenues.

- with NZPA