Well Being Budget 2021: Securing our Future was predictably devoid of new tax measures. 

And that's actually a good thing as surprise tax announcements have to a large extent been regulated to the past.

A stable and certain tax system supports investment and long-term decision making which help drive economic performance.

The good tax news in Budget 2021 is that core Crown tax revenues are predicted to lift strongly over the four-year forecast period rising from just under $100 billion this year to $120b in 2025, tracking economic growth and holding at about 30% of gross domestic product.

If this proves correct, then we have got through the economic hit of the global pandemic with only a very light impact on the tax revenues that fund the government.  

This probably reflects the success of the government's fiscal support and the Reserve Bank's monetary support for the economy.  

And it's in stark contrast to the Global Financial Crisis (GFC) where tax revenues took a huge hit and took several years to recover to pre-GFC levels. The government may rightly claim that as a success in economic management.

Making it fairer

However, deep in the budget's fiscal strategy are some bread crumbs that once digested eventually lead eventually to being a bit lost in the woods.

Inland Revenue has been given $5 million over two years to fund increased data collection on the level of tax paid by high wealth New Zealanders. 

The information will be used to develop research to better understand the distribution of income and wealth in New Zealand.  

This is a welcome development and picks up on recommendation 66 of the 2018/19 Tax Working Group (TWG).

The TWG identified that while New Zealand has quite good data on income distribution, we lack good data on wealth distribution and this hampers policy development and analysis.

But as you go deeper into the woods of the revenue section of the fiscal strategy report the tax crumbs become more confusing.

The government expresses a commitment to a tax system that is progressive, reduces inequality and delivers horizontal equity. These are great principles but difficult to reconcile with recent tax announcements.

The government will argue the new 39% tax rate is progressive and that's true, for labour income, but it's not progressive for many types of capital income, or income earned in companies or trusts – so it's selectively progressive.

The government will argue that the 39% tax rate reduces inequality but I think the evidence for that is weak, and indeed in the absence of a capital gains tax the TWG noted the NZ tax system is not very redistributive by OECD standards.

The government states it's committed to the principle of horizontal equity, which, simply put, means that each $1 earned is taxed in a similar way despite what it is or who earns it. 

That's hard to reconcile with a $1 being taxed at 0% if it's certain forms of capital gain, 28% if you earn it in your company or KiwiSaver, 33% if you earn it in your trust or 39% if you earn it as labour income and you already earn over $180,000.

Later in the fiscal strategy the government states neutrality in the tax treatment of different investments promotes economic efficiency and productivity. That's true, but a bit hard to reconcile with a recent press release containing scant detail but promising that it will eventually legislate to retrospectively disallow an interest deduction for one specific class of investment – residential rental property.

Finally, it states it is (with the unassuming but powerful qualifier "if practicable") committed to New Zealand's world leading Generic Tax Policy Process. The GTPP is a voluntary process that has run for the last 25 years under which complex tax policy is developed into legislation with consultation to iron out the imperfections and unintended consequences before the law is passed.  

But that commitment to the GTPP is difficult to reconcile with reality sometimes, for example, when the government recently legislated extensions to Inland Revenue's already extensive information gathering powers under urgency in a single day with no consultation and no select committee scrutiny.

So, it's great to see in Budget 2021 our tax system sustainably gathering the revenues the government needs to deliver the services we expect as a nation. 

And great to see a clear statement of sound principles for a coherent, fair and sustainable tax system. But let's follow them.