How we develop tax policy
How tax policy is developed
Since 1995, tax policy has been developed using the Generic Tax Policy Process. This is a process designed to ensure better, more effective tax policy development through early consideration of all aspects – and likely impacts – of proposals, and increased opportunities for public consultation.
What the policy process is intended to achieve
The process has three main objectives. They are to:
- encourage early consideration of key policy elements and trade-offs of proposals, such as their revenue impact, compliance and administrative costs, and economic and social objectives;
- provide opportunities for substantial external contribution to policy formulation;
- clarify the responsibilities and accountabilities of participants in the process, particularly those of the Policy and Strategy, and the Treasury.
From broad option to detailed proposal
A major reform may pass through the five distinct phases of the policy process, moving from the conceptual to the concrete. The stages are:
- Strategic: which involves the development of an economic strategy, fiscal strategy and three-year revenue strategy. Broad policy proposals may be publicised through channels such as Budget documentation.
- Tactical: which involves the development of a three-year work programme and an annual resource plan to implement the revenue strategy. The process allows the initial scoping and development of broad policy options, and may involve external consultation at this point, often by means of a high-level 'green' paper, or discussion document.
- Operational: which consists of detailed policy design, detailed consultation, and gaining Ministerial and Cabinet approval of recommendations. Again, discussion documents, or 'white' papers in this case, may be used for purposes of consultation. Proposed reforms may be revised in light of the submissions received. This phase culminates in Government approval of practical tax policy initiatives that are ready to be introduced into Parliament and implemented.
- Legislative: in which the detailed policy recommendation is translated into legislation. This occurs in parallel with the operational phases described above, which speeds up the process by ensuring legislation is ready for introduction into Parliament once all policy issues have been resolved. It also ensures the proposed reforms can be expressed clearly in legislation. External consultation takes place through public submissions to the select committee considering the bill.
- Implementation and review: which include the post-implementation review of new legislation, after it has had time to 'bed in', and identification of remedial issues that need correcting for the new legislation to have its intended effect. Opportunities for external consultation are also built into this stage.
Who's responsible for what
The Generic Tax Policy Process does not specify the precise roles to be played by Inland Revenue and the Treasury in developing tax policy. Rather, it allows these roles to be determined in accordance with the comparative advantage of each department.
Inland Revenue is primarily responsible for the detailed design, implementation and review of tax policy – in other words, for the operational, legislative, and implementation and review phases of the process. We do, however, also take part in the strategic and tactical phases of the process, along with the Treasury.
The Policy and Strategy group within Inland Revenue strengths lies in its ability to strategically manage tax and related social policy issues from identification through to implementation. This involves a variety of activities:
- Identifying tax and related social policy issues through our links with the rest of Inland Revenue, other government departments and the private sector.
- Developing detailed policy proposals to deal with those issues, and planning how the proposed reforms will be managed through to implementation and review.
- Managing the process of consultation.
- Managing the process of obtaining Ministerial and Cabinet approval of the proposed reforms.
- Drafting legislation to give effect to them, and managing the passage of legislation from introduction into Parliament through to enactment.
- Reviewing the effectiveness of the reform after it is implemented.
The policy result
The Generic Tax Policy Process means that major tax initiatives are subject to public scrutiny at all stages of their development. As a result, we have the opportunity to develop more practical options for reform by drawing on information provided by the private sector and the people who will be affected. The process also gives us greater opportunity to explain to interested parties the rationale underlying proposed reforms, thus improving their long-term sustainability.