Taxation Principles Reporting Bill

I present a legislative statement on the Taxation Principles Reporting Bill.

💬 DEPUTY SPEAKER: That legislative statement is published under the authority of the House and can be found on the Parliament website.

I move, That the Taxation Principles Reporting Bill be now read a second time.

I wish to begin this speech by acknowledging the vision and insight of the chief architect of this bill, the Hon David Parker. We are fortunate to have someone with such intellect in this House. This bill is an historic one for a tax bill: it imposes no taxes. It also makes no changes to obligations on taxpayers, but it improves taxation in New Zealand. It is a bill for our times.

Its genesis stretches back in history, yet it prepares future Governments to face future challenges. We are all aware of just what types of challenges those could be. In just this parliamentary term alone, this bill has passed legislation to respond to some major crises, crises which have made heavy demands on the public purse—from the effects of Cyclone Gabrielle and the Auckland anniversary weekend floods to the arrival on our shores of COVID-19 and the global cost of living crisis. In a globalised world and with our globalised economy, we have to be prepared for overseas events to have a ripple effect on our economy. And with the effects of climate change, we have to brace for ever more frequent weather events. The calls on taxpayer dollars will continue.

Meanwhile, we’re staring down the barrel of some major threats to the integrity of the tax system, the longer-term sustainability of tax revenues, and future Governments’ ability to respond. We know a crunch is coming, with more New Zealanders living longer and associated health costs rising, even as the tax burden falls on the shoulders of a smaller group of earners. There is a limit to how much Governments can tax those earners.

Our tax system is a national asset. Like any asset, it needs to be invested in, maintained, and adapted to suit changing times. Without a properly functioning tax system, our government, our economy, and our society would quickly grind to a halt. We need to ensure that people continue to comply with the tax laws, knowing what they need to do and being able to comply at a reasonable cost. Our focus must be to ensure that the tax system is as efficient as possible, that it supports our economy, and that it upholds fairness, transparency, and integrity—and those are principles of taxation. It’s not a new idea: in 1776, Adam Smith in the Wealth of Nations set out four maxims of taxation. Broadly speaking, these were that all should contribute a proportional amount according to their means, that there should be certainty and transparency about tax, that compliance costs should be minimised, and that the administrative cost of collecting tax should be as little as possible over and above the amount of tax paid. These were good ideas then, and according to the various tax reform committees we’ve had in this country, these principles continue to be good ideas.

The 1981-82 McCaw committee, for instance, was appointed because the tax system was increasingly seen by the public as unfair and lacking integrity. Economic commentators saw high tax rates and uneven rules as significantly contributing to New Zealand’s poor economic performance. The committee recommended a more transparent tax system where tax rates were lower but applied more consistently in practice. The aim was a more honest system that would lead to economic decisions being made more on economic merits rather than being determined by the pursuit of tax advantages.

The 2001 McLeod review was of the view that a framework of tax policy principles is needed to guide the reform of a complex tax system and to avoid ad hoc changes. In their view, the key focus of tax policy was to enhance the overall economic wellbeing of New Zealanders by seeking ways to reduce the costs of imposing taxes—or making the tax system more efficient—while promoting fairness and continuing to raise revenue. They also argued that the absence of a coherent approach to tax policy made for instability and uncertainty and higher costs for both administration and compliance.

The committee recommended that tax design should be guided by generally accepted principles of fairness—that is, people in the same position should be treated similarly, people should contribute in accordance with their ability to pay, and tax reform should be transparent and prospective.

In 2010, the Victoria University of Wellington Tax Working Group stated tax principles that were similar to those of their predecessors, and it noted that the tax system lacked coherence, integrity, and fairness. They found that compliance was likely to be affected by perceptions that the system is unfair. Their report recommended six principles for a sound tax system: efficiency and growth, equity and fairness, revenue integrity, fiscal cost, compliance and administration cost, and the coherence of the tax system as a whole.

So we have long known that fairness and transparency are desirable. We have always known that compliance is jeopardised if the public view the tax system as unfair. To improve fairness, our tax reform committees have recommended various changes using similar tax principles.

Now, of course, members of this House have different views on this elusive beast called “fairness” and how to achieve it. But a good place to start any debate on the fairness of the tax system is with some facts. This bill will require Inland Revenue to produce reports that provide facts about the tax system in relation to these tax principles. Then members can get on with the work of actually building on those facts and making changes to make the tax system fairer—or more efficient or less costly, depending on the particular trade-offs that members want to achieve.

This was something that the select committee looking at this bill emphasised: tax principles should be seen as a package rather than individually because they overlap or can conflict, and so require trade-offs to be made. Any proposal for a change of tax policy is likely to be a blend of various tax principles, improving on some grounds and lessening on others. The trade-offs that are made speak to the state of the tax system currently and to the value and focus of whoever is making the proposals.

If New Zealanders can see for themselves how the tax system works and understand that trade-offs are required, we stand a better chance of maintaining our tax base and, crucially, maintaining Government’s ability to continue providing the services that New Zealand relies on. I think that New Zealanders want that transparency. Submitters to the select committee were generally supportive of the objective of the bill. Many were supportive of the notion of tax principles and the obligation on officials to report to New Zealand on the performance of the tax system against those principles.

I am immensely grateful to the Finance and Expenditure Committee for their work on the bill. They have listened to all the submissions that made some sensible recommendations for improvement. These include changes to the descriptors of the principles themselves. The changes will help ensure that the principles are more enduring. They have also recommended a later commencement date to avoid retrospective application. The commencement date now proposed is the date of Royal assent.

I do intend to make two small changes to the descriptions of the principles in Schedule 1. The first is to link coherence more closely with the principles of certainty and predictability, and the second is to clarify what is meant by “middle New Zealanders” in relation to the principle of vertical equity.

I also want to thank the officials from Inland Revenue who worked on the bill and the many people and organisations who contributed to it through the select committee process. As I said at the start, this bill does not propose any new taxes or change any tax obligations, but it is for the benefit of ordinary taxpayers. It brings much-needed transparency and understanding to the inner workings of the tax system. It sets the grounds for a principled debate. I commend this bill to the House.

I congratulate the member on her sense of timing. The time has come for me to leave the Chair. The House is suspended until 9 a.m.

Sitting suspended from 11.55 p.m. to 9 a.m. (Thursday)