A Brief History of Taxation
The concept of income tax dates back to the Napoleonic Wars, when it was introduced in the United Kingdom from 1799 to 1802 and again from 1803 to 1816, as a temporary measure to fund the war effort. In 1842, the tax was reintroduced, but this time it became permanent. In New Zealand, income tax was first introduced through the Land and Income Assessment Act of 1891, and later consolidated through amendments in 1900. Additional consolidating Acts were passed in 1908, 1916, 1923, and 1954, broadening the range of taxes. Over time, income tax emerged as the dominant source of government revenue, overtaking land tax.
Tax Principles
The Taxation Principles Reporting Act 2023 was enacted briefly, only to be repealed in December 2023. This Act established a framework for the Commissioner of Inland Revenue to report annually on New Zealand’s tax system in relation to core tax principles. It was intended to publish a comprehensive report every third year. The key principles that guided the New Zealand tax system included:
- Horizontal equity
- Efficiency
- Vertical equity
- Revenue integrity
- Compliance and administrative costs
- Certainty and predictability
- Flexibility and adaptability
The Act also introduced approved measurements for evaluating tax settings, such as income distribution, compliance with tax laws, and perceptions of the tax system’s integrity.
The Importance of Taxation
Income tax is a crucial element for two main reasons: first, it serves as the government’s primary source of revenue. According to Inland Revenue’s “Annual Report 2023,” 70% of revenue in the 2022–23 year came from income tax, 25% from GST, and 5% from other indirect taxes like excise duties on tobacco, alcohol, and petrol. These funds support New Zealand’s welfare system.
Second, income tax directly impacts people’s standard of living. Most adults pay income tax, and those who do not would be financially better off without it. Businesses, particularly larger ones, often view income tax as a cost that needs to be minimized. This focus on tax efficiency has shaped the tax system, resulting in a large administrative body tasked with enforcing compliance and frequent legislative amendments aimed at closing loopholes and expanding the tax base.