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Source: The Conversation (Au and NZ) – By Jonathan Barrett, Associate Professor in Commercial Law and Taxation, Te Herenga Waka — Victoria University of Wellington

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It’s no secret that Revenue Minister David Parker has long been interested in tax reform in New Zealand. In 2022, he announced plans for legislation requiring future tax policy changes to be measured against a set of tax principles, notably fairness.

The Taxation Principles Reporting Bill, just released for public submissions, is the result of Parker’s ambition. But while it is reasonable to support a tax system that is fairer than the current system, I believe the bill is confusing, unnecessary and pointless.

Unlike the Tax Working Group, which clearly and adequately stated tax principles that most people could understand, the bill introduces highly technical ideas that could exclude ordinary people from the debate.

The bill also attempts to tie the hands of future governments by legislating principles that are not accepted across the political spectrum.

My main concern, then, is that the bill appears to close down democratic debate about taxation by claiming certain viewpoints are universally accepted. Secondly, the tax principles, as they are stated, are vague and poorly explained.

Horizontal equity

The bill introduces the concept of “horizontal equity” and defines this as meaning “people with similar levels of income should pay similar amounts of tax”.

But a more accurate way to explain horizontal equity would be to say “people who are in similar situations should be treated similarly”.

For instance, tax systems often view people with young children as being in a different situation from people with adult or no children. The Working for Families (WFF) programme is an example of such a distinction based on a political value judgment.




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The principle of horizontal equity as outlined in the bill is incompatible with the Income Tax Act because people with similar levels of income won’t pay similar levels of tax due to programmes like WFF.

If the principle of horizontal equity needs to be stated, it should be that “taxpayers in similar circumstances should pay a similar amount of tax”.

Revenue Minister David Parker has long been interested in making changes to the New Zealand tax system.
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Time and money

There is also no concept of income that everyone accepts. A standard tax textbook distinguishes between legal, accounting and economic conceptions of income.

According to the bill, “the time value of money matters when considering horizontal equity”. I presume the authors of the bill mean that some will get a tax benefit by deferring their tax liability when others with a similar income can’t.

But the phrasing in the bill makes it difficult to understand. A set of principles that affect everyone should be understandable by as many people as possible.




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The bill also introduces the phrase “economic income”, but again a clear definition isn’t included.

The bill’s authors then appear to endorse a particular conception of comprehensive income – that is, the increase in economic capacity during the tax assessment period.

Understood broadly, this conception of income not only includes increases in wealth that a taxpayer hasn’t received (unrealised gains), but also capital gains and capital transfers. But New Zealand doesn’t currently tax capital gains or capital transfers.

This means there would be a significant gap between the ideas set down in the principles and how most people think of income.

Vertical equity

The bill also states: “The tax system should be progressive. Tax is progressive if people with higher levels of economic income pay a higher proportion of that income in tax.” This is in line with the principle of “vertical equity”, which requires people in different circumstances to be treated differently.

It is not uncommon for countries to lock in the ability to pay tax, which traditionally includes both horizontal and vertical equity, within their constitutions. But the bill is not a constitutional document and represents the opinion of one government – and perhaps just one minister – at a particular point in time.




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Using the word “economic” in the explanation of vertical equity is unnecessary. The OECD defines progression as meaning “an increasing proportion of income must be paid in tax as the income increases”.

The inclusion of “economic” in this context could be seen as an attempt to neutralise debate about a particular theory of income that isn’t universally accepted.

The bill doesn’t solve our tax problems

The bill then states: “A progressive tax system does not mean that every tax should be progressive (e.g. GST is regressive) but the overall system ought to be.”

This is a reasonable and pragmatic approach to including GST in the tax mix. But the following sentence is problematic: “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.”

Why “in practice” and not in principle? The income of so-called “middle-income New Zealanders” is most likely fully taxed under the current provisions of the Income Tax Act.

Certainly, some wealthy people may engage in arrangements to reduce their income tax liabilities. But most don’t pay “enough” tax because successive governments have lacked the courage to tax capital gains, wealth, and gifts and inheritances.

The Tax Principles Reporting Bill does nothing to remedy this.

The Conversation

Jonathan Barrett ne travaille pas, ne conseille pas, ne possède pas de parts, ne reçoit pas de fonds d’une organisation qui pourrait tirer profit de cet article, et n’a déclaré aucune autre affiliation que son organisme de recherche.

ref. Making NZ’s tax system fairer is a good idea – but this proposed new law isn’t the answer – https://theconversation.com/making-nzs-tax-system-fairer-is-a-good-idea-but-this-proposed-new-law-isnt-the-answer-206745

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