Wellington, Jan 20 NZPA - Personal income taxes and company taxes are the worst for economic growth and consumption taxes are better, according to the Tax Working Group, which put options for a complete revamp of the tax system before the Government today.

The group suggests increasing the goods and services tax (GST) to 15 percent from the current 12.5 percent so that personal income and company taxes can be reduced. It said the top personal and company tax rate should be aligned with each other and trust tax rates and also with Australia.

"All taxes are distorting, the GST is less distorting," the group's chairman Bob Buckle said.

The group regards the New Zealand GST tax system as broad-based and efficient. Increasing GST would affect people on low incomes but they could be compensated by reductions in lower rates of personal income tax and increases in benefit rates and superannuation.

"We see the increase in GST as part of a comprehensive package of reforms," Professor Buckle said.

Taxing consumption and reducing taxes on personal incomes would encourage saving and investment rather than consumption.

The group addressed the politically sensitive issue of capital gains taxes, with the Government having ruled out any capital gains tax on the sale of homes people live in.

If personal income tax and corporate tax rates were aligned and lowered the tax base would have to be broadened by taxes like capital gains taxes.

"The lower you set to align the rates the more base broadening you have to do and base broadening is of course the most politically sensitive issue," a group member said at today's press conference.

The group puts up the option of a risk-free rate of return method for taxing residential rental properties. Under this method if someone owns a $300,000 property with a $200,000 mortgage and has a personal income tax rate of 38 percent they would be liable for $1520 of tax if the annual risk free return is set at 4 percent.

About $200 billion is believed to invested in residential rental properties, costing the taxpayer $500 million in tax breaks.

The report also puts up an option of a low-rate land tax.

The group says that any changes to the tax system would impact on the social welfare system so a comprehensive review of welfare policy was required. The group has flagged that the working for families programme impacts on effective marginal tax rates.

The group regarded itself as independent and said its work had been supported by officials from the Government. It saw value in creating some kind of independent body to advise the Government on tax. Australia has a Board of Taxation to advise on the development and implementation of tax law.

Group member John Shewan, who is chairman of PricewaterhouseCoopers, said he personally saw value in some form of tax responsibility act.

The group was asked if its recommendations could be implemented as early as this year's budget and said there were some measures that could be implemented quickly. Changes could be announced while work on detail continued.

The group said a lot of buildings in New Zealand qualified for depreciation charges, which lower tax, when they were not depreciating in value. Officials were working on this issue.

Loss attributing qualifying companies, used for investment property investment, were seen as a red herring. "The issue is the investment class," Mr Shewan said.

New Zealand's tax system had been undermined by piecemeal reform in the past and also changes made by other countries.

"We would like to see a comprehensive approach to reform," Prof Buckle said.

The report said the status quo was not an option.

"I think we've given a pretty rich portfolio of options. It is up to the Government to make choices," Prof Buckle said.