On a slippery slope: tax policy development in New Zealand

Dr Adrian Sawyer – SJD, M.Com, LLB, FCA, FCPA, Barrister & Solicitor of the High Court of New Zealand, Professor of Taxation, UC Business School, University of Canterbury, Christchurch NZ; Email: adrian.sawyer@canterbury.ac.nz.

Adrian’s research interests include: tax administration and compliance; international taxation; tax policy; and taxpayers’ rights.  He has an extensive publication record, is on numerous editorial boards and is Chair of the Editors of the New Zealand Journal of Taxation Law and Policy. See: https://www.canterbury.ac.nz/business/contact-us/people/adrian-sawyer.html.


Tax policy development, even to the tax enthusiast, does not usually feature prominently in commentary or the headlines.  Tax policy does not have the appeal of the latest tax avoidance scheme or even recent legislative amendments.  However, it is unlikely to be fully appreciated that what frequently leads to a tax avoidance scheme or legislative amendment is directly (or at least indirectly) a product of the tax policy process.  

For many jurisdictions, tax policy development has the appearance of a ‘black hole’ from which legislation emerges as a result of a government’s reform agenda and parliamentary debate.  Transparency of process and public consultation on both the policy development and draft legislation may not feature highly, if at all.  The reality is that the quality of the tax policy process (as measured by the degree of transparency and genuine consultation) has a tangible impact on the quality of the resulting legislation.  Specifically, this includes addressing unintended consequences, compliance obligations and costs, and achieving the intended purpose of the policy.  The contrast is most vivid when the tax policy process moves away from transparency and consultation, to being opaque and having a general disregard for the impact on taxpayers and tax practitioners. 

For those unfamiliar with the New Zealand (NZ) political system, the country has operated under a Mixed Member Proportional (MMP) political system since 1996.  This has served to operate as a partial ‘handbrake’ on government tax policy development, at least until developments following the 2020 general election, where a single party controls parliament.  More about this later.

New Zealand has been held up as a benchmark of best practice for tax policy development through its acclaimed generic tax policy process (GTPP).  So, what is the GTPP?  In 1994, Sir Ivor Richardson chaired a major review into Inland Revenue (Organisational Review Committee, 1994).  Tax policy development was a key feature of this report, including the GTPP.  The GTPP, which is not embodied in statute (rather it is a Cabinet convention), intends to improve the policy development process, with its main objectives to:  

  • encourage earlier, explicit consideration of key policy elements by Ministers; 
  • provide opportunities for substantial external consultation in the tax policy development process, which is intended to increase transparency and improve the quality of advice at both the conceptual and detailed design stages; and 
  • clarify the responsibilities and accountabilities of participants in the process.

It has five key phases:

  1. Strategic phase – the development of an economic strategy, a fiscal strategy, and a three-year revenue strategy; 
  2. Tactical phase – the development of a three-year work programme and an annual resource plan; 
  3. Operational phase – the detailed policy design, formal detailed consultation, and ministerial and cabinet approval of detailed policy recommendations; 
  4. Legislative phase – the translation of detailed policy recommendations into legislation; and 
  5. Implementation and review phase – the implementation of legislation, the post-implementation review of legislation, and the identification of remedial issues.

Wales and Wales (2012, 161) expressed enthusiasm for the rigor of tax policy-making in NZ in particular, but express some concern over potential risks to NZ’s good reputation with regard to tax policy development.  They observe somewhat prophetically (emphasis added): 

“Of these, New Zealand is perhaps the most self-aware and structured in its approach and has been for more than two decades. We suspect that policy-making there is likely to go through a period of change in the very near future and that the changes may already have begun. We felt intuitively, as all-too brief observers in February 2011, that there were policy challenges that the government needed to address and could see that some change in the policy-making environment might be necessary to make that happen.  However, it will be important to ensure that the changes do not damage the country’s established good practices in this area.”

Indeed, I have previously observed (Sawyer, 2013, at 423) that a critical feature of the GTPP is its “… lack of legislative backing [which is] is both a weakness and strength of the GTPP  – it enables it to be easily avoided (without any reference to Parliament) but at the same time removes much of any politicisation that formal regulation may engender.”  This perceived weakness continues to ‘haunt’ tax policy development in NZ. 

In 2019 the GTPP was enhanced to directly incorporate social policy (Inland Revenue, 2019), reflecting the change in the political environment in New Zealand.  While, in my view, this closer relationship between tax policy and government social policy is a positive step, of concern in this development is the provision allowing for widespread exceptions such that the government is justified from not following the GTPP.  Thus, given the lack of legislative backing, these exceptions reduce the situation to at best a moral obligation for the government to follow the GTPP.  

Indeed, the GTPP has been set aside on a number of previous occasions by Labour (led) governments, reflecting this informal style of application, in 1999-2000, 2010 and most recently during 2020-2021.  These instances involve the previous introduction of a 39 percent marginal tax rate (and associated changes), introduction of the complex look through companies (LTC) regime, and numerous changes from late 2020 onwards.  The most recent occasions include the reintroduction of the 39 percent marginal tax rate, changes to the Commissioner’s information gathering powers, extension of the bright line test for residential property gain taxation, and (gradual) denial of interest deductions, to name the major developments.  

What has occurred is that the GTPP has been set aside, with ministerial announcements made without any prior consultation.  Furthermore, effective dates of legislation are determined ahead of parliament enacting any legislation.  If this is not bad enough, legislative amendments are often introduced via a supplementary order paper (SOP) after the select committee stage of parliament, meaning there is no consultation at all on the policy or legislation before its enactment. 

In a recent paper (Sawyer, 2021), I argue that these recent developments are suggestive of a slippery slope where NZ is moving away from a position of high trust and limited centralised power.  The Slippery Slope Framework (SSF), originally developed by Kirchler et al (2008), effectively differentiates tax authorities’ instruments of regulation into different qualities of power of authority (specifically coercive and legitimate authority) and trust in tax authorities by taxpayers (including both reason-based and implicit trust).  This is intended to shed light on the effect of different uses of power and trust.  Traditionally the power approach relies on frequent audits and fines/penalties in case of deliberate noncompliance, while the trust approach originates from transparency, fair procedures, and the belief that paying taxes honestly is an accepted social norm.  It is the mutual influence, interaction, and dynamic between these two approaches that is seen as important for enhancing overall levels of tax compliance.  Essentially, the SSF can be represented as a three-dimensional concept comprising the dimensions of trust, power, and compliance.  When trust in the authorities and the authorities’ power are at their maximum value, then compliance is at its highest.  As trust and power decrease, taxpayers seek maximize their own gains through non-compliance, and the position is reflected in heading down a slope. Consequently, it is the balance between trust and power that is critical.

In my 2021 paper this concept is further extended in terms of the power and trust relationship in the context of high-level tax policy development.  Here the public (especially those that engage in consultation on tax policy) are equated to ‘taxpayers’, and the government (but not necessarily including the major public sector bodies – Inland Revenue and the NZ Treasury), that develops the tax policy represents the ‘tax authority’.  

Further in my 2021 paper I conclude (emphasis added):

“It would appear we are on a slippery slope.  This is reflected in the movement away from high levels of trust, with the government asserting its power, being rooted in its unprecedented position in the last twenty-five years of being able to control the Legislature.  That said, the people of New Zealand gave it the mandate on election night in October 2020, and in that regard, is the government merely making full use of the position it was provided with by the electors?  Is there a need for those interested in tax policy to reflect that at the end of the day politics will always win over policy?  As Arnold observes, “[t]he reality is that politicians have the ultimate decision-making authority with respect to tax policy, including the tax policy process.”   Pessimism, it would appear, prevails.”

One approach to partially remedying the situation would be to enact the GTPP into statute, requiring parliament to formally set it aside (with reasons) before the government of the day can choose not to follow it.  Related to this, the range of exceptions could be narrowed, with a mandate for reasons to be provided for applying an exception at the time the exception is applied.

Notwithstanding the benefits of the GTPP, the approach to consultation in NZ has scope for considerable improvement.  A recent article by Lisa Marriott offers an insightful and compelling argument for changing the approach to consultation.  This follows her comprehensive review of submissions on recent tax bills, focusing on the degree of meaningful consolation with Māori (the indigenous people of NZ).  Her study draws attention to who is consulted and who submits through the GTPP.  The results suggest a homogeneous group of submitters, and while there is a wider group of voices (than the submitters themselves), Māori are not well represented among either the group of those consulted or those who are submitting on tax bills. 

Another suggested approach is to remove some of the political aspects of tax policy making and to ground the process in a more detached and reasoned approach through establishing some form of semi-autonomous tax policy body.  In this regard I have previously proposed the New Zealand Tax Review Commission (NZTRC) (Sawyer, 2020, 120, emphasis added), which can be summarised as follows: 

“Essentially the NZTRC would be established as a New Zealand Crown entity, with the NZTRC preferably developed as an ‘independent Crown entity’, meaning that it would be generally fully independent of government policy.  That said, it could be instructed to undertake specific reviews from the responsible minister but setting its own terms of reference and scope of the review following best practice.  Nevertheless, it would be naïve to expect that a review that has been initiated by the NZTRC and is not in line with the political direction of the Government at the time (as has been the case with many of the tax committees), then its reviews will most probably be ignored.  This may be less likely where the minister initiates the review (but still possible).”

The NZTRC would need to reflect best practice, being consultative and transparent in its activities as far as is practical. It could be one of the key external inputs to the GTPP.  The independent nature of the proposed NZTRC in part is designed to take the ‘politics’ out of the policy development process.  Specifically, I have proposed (Sawyer, 2020, 121) the following structure for the NZTRC as set out in Figure 1:

Figure 1: New Zealand Taxation Review Commission

Writing this piece in late 2021, the future remains bleak in NZ in terms of whether the GTPP will be restored, and if so, in what state. What was once described as a ‘jewel in the crown’ (Vial, 2021), is now gathering dust and effectively removed from display.  Nevertheless, should it be restored, (with statutory support and reduced exceptions), it needs refinement to not only regain its lustre, but to more reflective of society (such as through more representative consultation approaches, and widespread education of the benefits to society generally from its application and use).  Perhaps some of the ‘politics’ needs to be removed, such with the establishment of the NZTRC.  Beyond this, integration of the NZ Treasury’s latest iteration of it living standards framework (LSF) needs to be undertaken to more closely link taxation with wider social and economic policies (NZ Treasury, 2021).  This is a subject for another day. 

Click here for bibliography

Inland Revenue, (2019), Tax and Social Policy Engagement Framework (August).  

Kirchler, Erich, Erik Hoelzl, and Ingrid Wahl, (2008), “Enforced versus voluntary tax compliance: The “slippery slope” framework”, 29 Journal of Economic Psychology 210–225.

Marriott, Lisa, (2021), “Crown Consultation, Māori Engagement, and Tax Policy in Aotearoa New Zealand”, 27(2) New Zealand Journal of Taxation Law and Policy 143-172.

Organisational Review Committee (1994), Organisational Review of the Inland Revenue Department”, Report to the Minister of Revenue and the Minister of Finance, (Wellington, 1994).

Sawyer, Adrian (2013), “Reviewing Tax Policy Development in New Zealand: Lessons from a delicate balancing of ‘Law and Politics”, (2013) 28(2) Australian Tax Forum, 401-425.

Sawyer, Adrian (2020), The Effectiveness of Tax Reviews in New Zealand: An Evaluation and Proposal for Reform,(Centre for Commercial and Corporate Law Inc., University of Canterbury Christchurch).

Sawyer, Adrian (2021), Tax Policy without Consultation: Is New Zealand on a ‘Slippery Slope’?, Working Paper.

The Treasury, (2021), The Living Standards Framework 2021 (NZ Treasury, 28 October). 

Vial, Peter (2012), “The Generic Tax Policy Process: A “Jewel in Our Policy Formation Crown”?, 25(2) New Zealand Universities Law Review 318-346.

Wales, Christopher John and Christopher Peter Wales, (2012), Structures, processes and governance in tax policy-making: an initial report, Oxford University Centre for Business Taxation, (December).