The Taxation Principles Reporting Bill was introduced to parliament on 18 May 2023, and has since been reviewed by the Finance and Expenditure committee. If passed, it will require the Commissioner of Inland Revenue to report on New Zealand’s current tax settings based on specific principles. A hybrid reporting model will be used where a full comprehensive report will be produced three-yearly, with interim reports produced annually. The first full report is proposed in 2025. The Bill proposes seven ‘universally accepted’ tax principles to be reported on, these are horizontal equity, efficiency, vertical equity, revenue integrity, compliance and administrative costs, certainty and predictability, and flexibility and adaptability.
Two of the principles, horizontal and vertical equity, are often central to discussions regarding fairness in the tax system. Horizontal equity refers to the idea that individuals with similar economic income and circumstances should pay similar tax amounts. Vertical equity aims to ensure the tax system is progressive, with the amount of tax an individual pays aligning with their ability to pay. Therefore, those with higher economic income, should contribute a higher proportion of their income to pay tax.
Instead of imposing clear-cut methods and measures for the principles, the Bill focuses on specific categories (measurements) of information which relate to the principles. These measurements are:
- income distribution and income tax paid
- distribution of exemptions from tax, and of lower rates of taxation
- perceptions of integrity of the tax system
- compliance with the law by taxpayers
The intentional focus on categories of information is to avoid restricting the Commissioner’s reporting, empowering them to judge which are the most appropriate analysis techniques. It intends to help to future-proof the reporting framework, allowing for flexibility for new developments and best practices in economic research and data analysis to be used.
The Bill is intended to promote fairness within the tax system throughout changes in Government over time. However, a problem lies in who decides what is fair. It is inherently subjective and a matter of opinion. For example, when referencing horizontal and vertical equity the Bill refers to economic income rather than taxable income. In New Zealand, not all economic income is taxable, such as capital gains and the value of the family home.
The draft legislation states “wealthy people should pay no lower an average rate of tax relative to their economic income than middle New Zealanders”. Given all economic income is not currently taxed, it would not be possible to satisfy this statement. Whether that is fair or not is open to debate and is ultimately decided by the public when voting at the General Election.
It is difficult to see this legislation surviving a change in Government, in its existing form, or at all.