The Tax Principles Reporting Bill received the Governor General’s signature on 30 August 2023 and has come into law. All law, to be “good law” not just needs a majority to pass it in Parliament, but needs buy-in by the whole House, or at least a significant majority of minor parties. And the public.
The motion to read the Bill for a third time (and thus pass it) was 75 For (Labour, Green Party and Te Pāti Māori), and 41 Against (National and Act). That doesn’t bode well for the future of the Act, nor for the officials that have to report under it. Part of the problem is that the Act has been promoted as bringing “fairness” to the taxation system. We would argue that your perception of “fairness” may be vastly different, but both equally valid. One may argue that the taxation system should have no ability to be anything but fair to all – it would be unfair to treat one person different to another, yet our whole taxation system and benefit system (the ‘transfer system’) is based on unfairness at many levels.
The Act contains certain measurements to enable the evaluation of tax settings. The measurements are:
- income distribution and income tax paid,
- distribution of exemptions from tax and lower rates of taxation,
- perceptions of integrity of the tax system, and
- compliance with the law by taxpayers.
A couple of concerns we have with these measurements. First, “perceptions of integrity” will be an almighty tiger to wrangle. “Perception” can be defined as: the way in which something is regarded, understood, or interpreted. “Integrity” can be defined as: the quality of being honest and having strong moral principles. So, what is the perception of integrity of the tax system? Can my perception be affected by lobby groups, politicians, media, the highlighting of one fact and the negation of another? Nah, surely not.
Secondly, “compliance with the law”, which is really just based on what the Inland Revenue find during investigations (plus a guestimate of non-compliance based on current results). The trouble with this latter one is it assumes that the measurement (the ‘snapshot’) is across all taxpayers and all industries. If the Revenue concentrate on plumbers v lawyers, there may be differences on the type of compliance (or lack of it) and the amounts involved, which is likely to affect their report.
The measurements are intended to align with the “taxation principles” that are set out in schedule 1 of the Act. These principles are:
- horizontal equity
- efficiency
- vertical equity
- revenue integrity
- compliance and administrative costs
- certainty and predictability, and
- flexibility and adaptability.
Again, we have ‘fairness’ described as ‘equity’ and ‘integrity’.
No doubt tweaks to the Act will be made. But this Act, along with many that we live under should not be the political football it is at risk of becoming, if the main opposition parties disagree with it.
The Act will be administered by the Commissioner of Inland Revenue, and she has an obligation to provide an annual interim report, with a full report three-yearly. With the first report due out later this year it will take enormous effort to produce a fair and balanced report in time. You will recall the Revenue earlier this year published the “High-wealth individuals research project” which looked into the level of tax 311 of New Zealand’s wealthiest families. That report and its findings is likely to affect how you look at horizontal equity and vertical equity. And ultimately, it will likely form the basis of reporting on the fairness of our current taxation system and the public’s perception of the integrity of the taxation system. Interesting reading assured.
