Making NZ's tax system fairer is a good idea – but this proposed new law isn't the answer

• In 2022, he announced plans for legislation requiring future tax policy changes to be measured against a set of tax principles, notably fairness.
• 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.

Horizontal equity

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

Time and money

• 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”.
• 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

• 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.
• Read more:
  Forget a capital gains tax – what New Zealand needs is a tax on inherited wealth

  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 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.
• The income of so-called “middle-income New Zealanders” is most likely fully taxed under the current provisions of the Income Tax Act.
• But most don’t pay “enough” tax because successive governments have lacked the courage to tax capital gains, wealth, and gifts and inheritances.