Taxation Principles Reporting Bill

Oh, thank you, Mr Chair. That was a good contribution from the Associate Minister of Revenue. It didn’t quite answer the question as to who called for this. As I said before, I’m not aware of anyone who got the old megaphone out there saying, “We just need to have this information.” So that was one point. The second thing, when she said, you know, “People get scared about tax.”, well, I understand why they get scared about tax. As soon as a Labour Minister stands up and talks about tax, they’re now going to get taxed more, because this is what they’ve done. They’ve taxed businesses more. They’ve taxed people more. They’ve taxed everyone more. No wonder everyone’s sphincters start to move when the Labour Associate Revenue Minister starts talking about tax. Anyway, I’ll come back to the topic.

CHAIRPERSON (Greg O’Connor): I’m a little bit worried about your sphincter, actually, Mr Bayly.

ANDREW BAYLY: Anyway—we shouldn’t go there, Mr Chair. Anyway, the other interesting comment the Minister made was that these are well-known principles. Well, I’ve just got to remind the Minister that these are introducing new principles. Interestingly, when we talk about tax, most people refer back to that well-known person Adam Smith in 1776, when he wrote that famous book The Wealth of Nations. I’m sure the Minister’s read it—I’m sure she has; she’s got that look about her. It sets out four principles—and I know she’s very knowledgeable on tax. The four principles are equity and fairness, certainty, convenience of payment, and effective tax administration. That was written back in 1776, a long period of time ago. We have subsequently had successive tax inquiries—some initiated by Labour by the way. We’ve had the 1982 McCaw review. We’ve had the 2001 McLeod review. We’ve had the more recent 2019 report of the Tax Working Group. In Australia, the 2010 Henry tax review. In the UK, the Mirrlees report 2011. They have all endorsed the same principles, based on the same core values of New Zealand around all those four principles. This bill actually introduced some more. So when the Minister makes that claim, first of all, I’ve got to say I’ll refute that claim. So I’d just like her to explain why she thinks we are ending up in the same concepts and why this is such a great thing.

I think, if I understood the gist of Mr Bayly’s question—it was a little hard to tell—but he wanted to know why there were some principles other than, Mr Bayly, Adam Smith’s tax principles. [Holds up book] I’m happy to lend it to you, if you like. But some additional ones in addition to Adam Smith. I’m just going to direct Mr Bayly to the 2010 Victoria University’s Tax Working Group. Of course, that particular tax working group was set up by the former National Party, a National Government. As well as having the principles from Adam Smith’s The Wealth of Nations in that particular working group, they also looked at revenue, integrity, compliance, administration cost, and, of course, coherence. So these are not just new principles that have been introduced by us.

We look at the principles that are listed in Schedule 1 of the bill. They are horizontal equity, efficiency, vertical equity, compliance and administrative costs, and uncertainty and predictability. Those come to us from Adam Smith and they’ve been endorsed for a long time and—I was going to say discussed—reinvestigated; there’s a whole lot of literature. So we’re not reaching back to Adam Smith and Adam Smith only. Tax research and contemporary tax research endorses those principles of Adam Smith. But if we do look at the ones that are new, there’s revenue integrity, which is ensuring that the tax system is sustainable over time. Now, that’s in the 2010 Victoria University Tax Working Group, so that’s where that one comes from, Mr Bayly, as well as from other research. But if you’re looking for a source relevant to us, that would do the trick quite nicely.

The other one that is comparatively new—as in it wasn’t in Adam Smith—is flexibility and adaptability. That’s quite an interesting one. We found in recent years of course, that our tax system was set up to deal with brick and mortar systems and trade systems where trade didn’t happen in an instant over the internet. Our contemporary systems don’t deal especially well with new forms of commerce. So one of the things we need to start looking at our tax system with and judging it by is just how well it does adapt to or accommodate or can be adapted to meet these new forms of commerce. So I think that flexibility and adaptability came to us—oh, I’m not sure, but it seems pretty sensible to me. So there you are, Mr Bayly.

Just before you start, Mr Bayly, just for clarity for those at home: the question is that Parts 1 and 2, Schedules 1 and 2, and clauses 1 and 2 stand part.

Thank you, Mr Chair. I’m so grateful for the Minister’s help elaborating on that. I would remind her that the third of Adam Smith’s principles actually talks about convenience and payments, and therefore does provide for the flexibility of moving to different systems. So I thank her, but I just draw her attention to it because I know she’s very interested in those things.

The one thing about the principles that are set out: first of all, I find it slightly arrogant that the Labour Party and Mr Parker, in general, is the one who has decided—and he did, except when I asked him the question directly in select committee—that he had a role in actually drafting these principles, even though there have been a number of very substantial tax reviews that have accepted the four principles of tax, and there’s clarity around that since Adam Smith’s time back in 1776 right through to now; it has been the hallmark of a tax principle.

But, hey, we’ve got a Labour Government who wants to make some changes. So let’s get into a little bit of specific stuff about it. The first thing is the disaggregation of what’s meant by “equity”, and we’ve got the issue of vertical equity and horizontal equity, and I assume—and I’m pretty certain that Mr Parker actually drafted some of this. There is the one issue that talks about vertical equity, about the need to be progressive—tax is progressive if people with higher levels of economic income pay a higher proportion of their income in income tax.

Now, the first question is there’s been a major, major shift in the language that’s been adopted and incorporated in this bill. Normally, when you talk about tax—and even the Minister will know this from her background—you talk about tax in terms of accessible income. This bill introduced an entirely new concept called “economic income”. If I look at the definition of economic income, “Economic income is the way for [entities] to account for changes in the value of a given asset in the market. It generally recognises unrealised gains, in addition to recognising realised gains. A change in market value rather than cash received is the perfect example of an economic income.” This bill nicely slipped through because no one monitors tax, no one thinks about tax. Unfortunately, not enough people are interested in tax and the only time they think about it, as the Minister said—they get scared they’re going to get taxed more. The pernicious nature of this bill is it introduces a whole new concept around unrealised capital gains. And that is one of the key issues around this bill that the Labour Government has tried to slip through in the dying days of its governance arrangements. I’d like the Minister to confirm whether she accepts “economic income” includes, by definition, unrealised capital gains.

A couple of things: Mr Bayly has claimed that the principle of Adam Smith’s of certainty will in fact encompass the idea of flexibility and adaptability—

Andrew Bayly: No, convenience of payments.

Hon Dr DEBORAH RUSSELL: Oh, I’m sorry, convenience of payment would—OK, so I’m just going to, having Adam Smith right in front of me—I don’t think that’s actually going to manage that at all in terms of flexibility and adaptability. So you levy taxes at the time at which it’s most convenient for the taxpayer, that’s in the way it’s most convenient for the taxpayer. Classic example of this in our system is PAYE which is, you know, very, very convenient and easily paid by the taxpayer—that is, as employees—because it’s deducted at source. So that’s a classic example of convenience. I don’t see how that encompasses the ways that we need to start to think about the new forms of business, the new forms of commerce, and particularly the forms of commerce which are not conducted with bricks and mortar stores any more.

In terms of that flexibility and adaptability, it’s not just to do with taxpayers finding it convenient to pay their taxes; it’s also to do with Governments being able to levy taxes on forms of business which otherwise escape taxation. So there’s a whole set of things that need to be balanced off there by Governments. It’s also about changing our tax systems. So, of course, all these principles work together. One of the principles we have sitting in there is revenue integrity, and, in fact, one of the purposes of a tax system is to collect sufficient tax revenue that Government can pay for all the things that Governments typically like to pay for: health, welfare, education, and so on. As new forms of business arise, new forms of commerce arise, they may not be encompassed by the tax law we already have—that’s the sort of flexibility and adaptability we need. So that principle of convenience is not just about—it is about taxpayer convenience, but flexibility and adaptability concerns both taxpayers, but also the entities levying the taxation. So that’s why we have a separate principle of flexibility and adaptability. It is not comprehended by the principle of convenience.

Mr Bayly—I think I actually need Mr Bayly to clarify a little. He said that when we’re talking about vertical equity, we normally talk about assessable income, but, actually, I think there is a distinction in tax law, it’s very clear, between assessable income and taxable income. Taxable income is the final amount on which you pay your taxes. A whole lot of income is assessable income, but you deduct a whole lot of stuff from that before you get to taxable income. Now, I know Mr Bayly knows that; I think he just used assessable income instead of taxable income. But the real thing we’re worried about there is the difference between taxable income and economic income, and it’s a critical and important distinction.

The fact is that our tax system in New Zealand is not broad base, low rate, because a whole lot of income is excluded from taxation. Now, that may or may not be appropriate—it may or may not be appropriate. But at the moment—except for the major report which Hon David Parker and Inland Revenue carried out to assess how much income very high-wealth people earn—we don’t know how much income New Zealanders earn because of income that is not included in taxable income. Now, whether or not we ought to be paying tax on that is a different matter. This bill does not have an “ought to pay more tax” in it. All it will do is report on that level of economic income and the level of tax paid in relation to that economic income. It will report on that and then it is up to the people involved who are interested in the issue—journalists, members of Parliament, taxation lecturers, people in the street, ordinary New Zealanders—to debate whether or not that’s appropriate. This bill would not give any judgment about whether it’s appropriate; all it would do is report the facts. That’s why we’re looking at economic income, not just taxable income.

Well, thank you. I beg to differ about convenience because convenience can be an online—it doesn’t mean—I don’t know why she keeps talking about bricks and mortar. It’s about the way that taxes can be paid and it could be online, it could be any other business model—seemed a spurious argument to me on that.

But I just want to draw back to this vertical equity because you made the assertion it’s just, you know, passive reporting. Well, actually, that’s not what the description says. The description says the “progressive tax system does not mean that every tax should be progressive, but the overall system ought to be. In practice, wealthy people should at the very least pay no lower a rate of tax on their economic income than middle-income New Zealanders already do.” So, do I take it from her comments that the purpose of this particular section of the bill is that the tax department will be going about assessing everyone’s—and obviously the Labour Government went after certain families—she’d like to see this bill and the annual reporting be specific about both, using her terms, “taxable income”, and also unrealised and realised gains is a separate part to that? Is that what she’s saying very explicitly?

No. Just to clarify, the IRD would be using information that is already available to it. So there won’t be an order to—and there are a variety of ways of gathering that information they have, so in fact on that they won’t be going out and trying to assess every single individual’s economic income. Instead, in the way that they already do, and that other entities and people can do, is use the whole suite of data that is available to develop measures, to develop an understanding of all sorts of types of income and tax paid and so on. So that information is already available. It’s just a matter of pulling it together in the reports. And it’s worth noting that, you know, that sort of reporting might actually only come through in the comprehensive triennial report. We’ll see how that develops over time. The idea is just to make sure that we do get that better information about our tax system every three years.

So I just want to ask a very simple, specific question: will this bill require the IRD to go out and make an assessment of the unrealised gains, and that individuals or corporations or trusts will be required to pay tax on?

On an individual basis, no.

Not on an individual basis, for a company, individual, trust—whatever. What would be the—if that’s the answer, no, and she’s saying it’s going to happen at a more global level, how does that take place?

Inland Revenue will develop those systems over time.

OK. So we’re sounding like very much a politician here. Mr Parker’s sitting over there; hopefully he might join in the debate. It was a very specific question. The term “economic income” has been injected into this bill quite specifically. It has a very specific definition which includes unrealised gains, and so the point I’m making: if you are going to put it in, stand by it and be clear about it, because New Zealanders need to know what would be required by the IRD to do it. You’re talking about using other methods of collecting that information; I didn’t ask about that. I’m asking about what will the IRD report on, annually, in terms of both “taxable income”, using her term, and “unrealised gains” as per that definition I talked about before?

As I’ve said, Inland Revenue will be reporting on economic income and that’s gathered from a variety of sources.

Does that include unrealised gains? So, again, I’m going to be very specific, does that include unrealised gains?

Mr Bayly, I believe you answered that question yourself already.

Well, I take it, and I’m just looking around here, I think that’s got to be a confirmation. If I’m making a wrong assertion, because I’d hate to incorrectly interpret the comments from the Minister, but my assertion, my understanding of what she said is that the IRD will be required to go out and assess both taxable income and unrealised gains and look at that in this respect of vertical equity and, at the same time, the same term is used in terms of horizontal equity. This is why it’s such an important aspect to be clear about. So is that proposition—that premise I’ve just said, is that correct, Minister?

Mr Bayly, I’ve lost track of the propositions and premises that you’ve suggested. It’s clear that economic income does include unrealised gains. That’s always been the case with economic income. As I’ve already said, all this bill will do is report on it so that ordinary New Zealanders can actually have a conversation about tax. So the bill doesn’t introduce any new taxes; it doesn’t impose any new taxes, it doesn’t require any new taxes, it doesn’t require unrealised gains to be taxed. All it does is report on them.

Mr Bayly, I’m following this debate and I’m not quite sure whether we can go much further without repetition here. We are hearing this one part and I’ll be very generous, but—

Mr Chair, I’ve got acknowledge, I’m going to thank the Minister for being clear that she’s now explicit that it does include unrealised capital gains. So hopefully the Minister can give me a more substantive question: when she talked about using different mechanisms to determine unrealised capital gains as well as taxable income—which is very obvious because the IRD has that information—how will it go about assessing unrealised capital gains? And she’s saying there are other mechanisms to do that; could she be clear about that?

This is a very detailed question. Inland Revenue will not be assessing individual taxpayers in order to assess this report, they will be using information which is readily available to them already, for their reporting. They will simply be reporting tax paid against economic income, and against income, all the sorts of information they already have. But in terms of then assessing the tax system and so on, which is what this bill will enable—because it will enable reporting on the tax system—they will simply be using the information that is already available to them. In fact, they are going to use very specific measures, they’re sort of sitting there in clause 13 of the bill, saying “income distribution and income tax paid” so they’ll look at that. They’ll have these sorts of measures available, and those measures will then be used to assess how well the tax system—they’ll be used to report against those key principles. So that’s just exactly what’s going to happen, and the bill is simply going to report on them.

The question is that the Minister’s amendments set out on Supplementary Order Paper 414 be agreed to.

Madam Speaker, the committee has considered the Taxation Principles Reporting Bill and reports it with amendment. I move, That the report be adopted.

Motion agreed to.

Report adopted.

This bill is set down for third reading immediately.

Third Reading