Keynote Address to EMA Annual Payroll Conference
Rendezvous Hotel, Auckland
9.15am, Tuesday 9 April 2013
Thank you for inviting me to join you once again.
It is a pleasure to be here as I always find your conference programme very informative.
There is a direct link between tax policy and the work that you do and this gives me confidence in the way that we develop tax policy in New Zealand.
The policies that I announce as Minister of Revenue will (all going to plan) in due course become law and people come together here to discuss their implementation.
So you are clearly interested in getting to grips with tax legislation.
In fact, I see that the session immediately following my address is concerned entirely with tax changes, though I venture to suggest that you should probably update the programme to exclude mention of car parks!
But that raises an interesting point: how does the Government develop tax policy?
What safeguards are in place to ensure that the tax policy we develop is in the best interests of the New Zealand taxpayer?
I would like to explain to you today, the process whereby an idea becomes a proposal and then makes its way into law.
My starting point is perhaps the obvious: the Government has a keen interest in ensuring that we have good tax policy and all New Zealanders have an important role to play in the process.
At the same time, New Zealand must prepare itself to deal with economic shocks — whether they arise from offshore as in the case of the Global Financial Crisis or domestically as with the Christchurch earthquake and the current drought.
For example, the Finance Minister has estimated that the cost to the economy of the drought could be as much as $2 billion.
To absorb such blows it is important that the government maintains a strong balance sheet, which means we must have a robust revenue base to finance government spending.
It is also important that taxes are levied as fairly and efficiently as possible.
We achieve this by raising taxes in ways which do as little as possible to discourage sensible decisions by individuals and businesses.
In New Zealand that means a tax system that has a broad-base, low-rate framework, where taxes are applied at a low rate, but widely and evenly.
Now, fuelled no doubt by some recent events, some political commentators have suggested that the Government is scraping the bottom of the barrel trying to get every last dollar.
Nothing could be further from the truth.
If that were the case, the Government would simply raise tax rates and introduce exotic new taxes, such as the financial transactions tax which some Euro zone countries and others are contemplating.
But we are not doing that.
Instead we are addressing inequities and anomalies in the tax system to strengthen the system while also continuing to collect revenue efficiently.
In other words, our focus is on ensuring that the taxes which currently exist are applied fairly and equitably.
It is in this context that officials develop tax policy which supports the Government’s objectives.
By and large, our tax policy formation process is widely recognised as good, open and consultative.
But it has not always been the case.
It used to be that the tax policy development process was not formalised.
Some tax policy was effectively designed in a vacuum, while other proposals were extensively consulted on; the introduction of GST springs to mind.
Businesses were sometimes taken by surprise by tax proposals — the infamous entertainment tax announced on Budget night 1992 is a prime example of this.
It came as a surprise and I would venture to suggest not a pleasant surprise either.
That type of approach understandably left the business community in quite some uncertainty as to the direction of tax policy and even the thinking behind policy changes.
I imagine payroll people had to scramble to keep up with tax changes.
This patchy approach to consultation was inefficient and consequently produced tax policy of variable quality.
The Review chaired by Sir Ivor Richardson, and known thereafter as the Richardson Review – not to be confused with the Minister of Finance of the time – was formed in reaction to these concerns.
It recommended a more formalised approach to the way that tax policy is developed in New Zealand.
Firstly the Review addressed the issue of practicality of tax proposals and recommended that the tax collection agency have a more prominent role in developing tax policy.
It meant that tax policy could be developed in the context of real world considerations for the practicalities of implementing law changes.
Along with that change came the introduction of what is known as the Generic Tax Policy Process (or GTPP to insiders).
The principal feature of GTPP is public consultation – allowing the public to have a say on proposals early in the development process to try to ensure that tax policy is workable and that compliance costs are kept to a minimum.
The new approach recognised that the best policy was produced when there was adequate consultation.
There are times when certain tax policy proposals are not subject to consultation prior to any amending legislation being introduced into Parliament.
For example, on occasion the Government may need to act swiftly to close a loop hole however businesses will usually have the opportunity to express their views through the select committee process.
Looking back since that period, I would say that the tax landscape has had a sense of continuity about it, across successive governments.
Of course each new government has its own aspirations for the country and the economy and the tax system is a means for achieving that, yet despite that, we have had remarkable stability, and I think that your contribution has been a part of that.
Today New Zealand’s generic tax policy process is upheld as an example of how to do good tax policy and is emulated by other countries.
Even so, very few countries today run as open and transparent a process for developing tax policy, where taxpayers can have real influence over the design of a policy.
Typically in New Zealand, formal consultation runs for six weeks.
After that period officials assess feedback received and will, if necessary check back with submitters to clarify points.
Frequently the draft proposal is amended in response to feedback.
The proposal is then written into draft legislation.
Once it is referred to the Parliamentary select committee, submitters have a second opportunity to comment by providing evidence directly to the select committee.
The vast majority of tax proposals go through the generic tax policy process and by the time they reach Parliament as draft legislation, interested parties such as payroll professionals, the general public and tax professionals have been consulted and had an opportunity to comment and provide input.
Major concerns will have been considered and reported on to Ministers.
While there will always be areas of disagreement on policy changes, there will have been ample opportunity for the legislation to have been modified to take account of concerns that have been raised in consultation and to ensure that the proposals are more workable.
So GTPP has transformed the tax policy process and provided certainty and good, fit-for-purpose tax policy.
However, the process is only as good as the response to it – it is a bit like the old story of leading the horsed to water, but not being able to make him drink.
If businesses and taxpayer groups do not take advantage of the GTPP, it becomes a little difficult to sustain subsequent complaints and criticisms about the policy that emerges.
And to provide extra certainty and remove surprises, every 18 months the tax policy work programme is published on Inland Revenue’s tax policy website.
I encourage you to have a look at that website and familiarise yourself with the work programme.
This work programme is not dreamed up by officials in an ivory tower.
The private sector is consulted and much of the programme comes from the private sector.
I encourage you to have a look at the tax policy website and familiarise yourself with the work programme.
I would like to announce an important consultation process today that ties into the use of Inland Revenue information for some very real public good.
This morning, I am jointly announcing with my ministerial colleagues, Hon Judith Collins, Minister of Justice, and Hon Anne Tolley, Minister of Police, a discussion document seeking feedback into a proposal for Inland Revenue to share information as appropriate where it can help catch serious criminals.
While privacy concerns will remain at the heart of any and all decisions, and while secrecy around tax information is a key value in taxation, we are looking at how we can perhaps also use that information appropriately to fight crime.
And we are talking about serious crime – that which would have a term of imprisonment of four years or more.
It could include offences from violent crime, to wildlife smuggling to immigration fraud.
Inland Revenue is scrupulous in maintaining taxpayers’ privacy, but this has to be balanced against the greater good for the community in certain other areas.
I think society is ready to express its views on these issues and balance their priorities and concerns.
We will be running both an online and standard consultation process until May 21.
If you have a view on whether or not this should proceed, then I encourage you to express it.
You can find the online consultation at www-targetingseriouscrime.ird.govt.nz [site no longer available - see Internet Archive for archived version]
Reflections on the process
Let me return for a minute to the GTPP.
I think that it generally works well, but there is always room for improvement with any process.
The process is intended to ensure that adequate consultation occurs, and that the voice of the public is heard.
Ideally, information should come through as early as possible in the consultation process.
This means that all views are considered and assessed.
Any tax policy proposal is a balance between conflicting considerations.
Reasonable people can have different opinions depending on the weightings they give to different priorities.
It is probably also a useful reminder for officials to achieve a balance between what is good for the revenue and what is good for the tax system.
Officials need to consider what is desirable from a tax policy perspective (for example, fairness and efficiency across the tax treatment of employee remuneration), administration and compliance costs.
Our tax system relies on voluntary compliance.
In New Zealand we have a very high rate of compliance with the tax laws because people believe that the laws are generally fair.
I want to ensure that we continue to have that trust in the tax system and the GTPP has an important role in building that trust.
While I believe that GTPP provides huge benefits to tax policy formation in New Zealand, I am always keen to improve processes and would be interested in any suggestions that you have on this matter.
What the Generic Tax Policy Process provides is certainty for businesses and better quality policy by allowing business input into the development of tax proposals.
For the process to work, all parties have to see advantages from taking part in it – if they do not see that they can affect outcomes, the process is damaged.
This then, is the approach we have developed for consultation on tax and tax-related policy proposals in New Zealand.
In our experience, the Generic Tax Policy Process has proved a useful tool for developing good tax policy and for assisting government decision-making, as well as ensuring a large degree of public or sector buy-in or at least an understanding of the policy objectives and what trade-offs the Government has made.
Because of the part you play in helping to implement tax law changes, it is crucial that you express your views on tax proposals.
I hope my talk today has given you an insight into how tax policy is formulated.
I thank you for the opportunity to discuss this with you.