O'Connor Greg; Bayly Andrew; Russell DeborahCHAIRPERSON (Greg O'Connor): Just before you start Mr Bayly just for clarity for those at home: the question is that Parts 1 and 2 Schedules 1 and 2 and clauses 1 and 2 stand part.ANDREW BAYLY (National—Port Waikato): Thank you Mr Chair. I'm so grateful for the Minister's help elaborating on that. I would remind her that the third of Adam Smith's principles actually talks about convenience and payments and therefore does provide for the flexibility of moving to different systems. So I thank her but I just draw her attention to it because I know she's very interested in those things.The one thing about the principles that are set out: first of all I find it slightly arrogant that the Labour Party and Mr Parker in general is the one who has decided—and he did except when I asked him the question directly in select committee—that he had a role in actually drafting these principles even though there have been a number of very substantial tax reviews that have accepted the four principles of tax and there's clarity around that since Adam Smith's time back in 1776 right through to now; it has been the hallmark of a tax principle.But hey we've got a Labour Government who wants to make some changes. So let's get into a little bit of specific stuff about it. The first thing is the disaggregation of what's meant by equity" and we've got the issue of vertical equity and horizontal equity and I assume—and I'm pretty certain that Mr Parker actually drafted some of this. There is the one issue that talks about vertical equity about the need to be progressive—tax is progressive if people with higher levels of economic income pay a higher proportion of their income in income tax.Now the first question is there's been a major major shift in the language that's been adopted and incorporated in this bill. Normally when you talk about tax—and even the Minister will know this from her background—you talk about tax in terms of accessible income. This bill introduced an entirely new concept called "economic income". If I look at the definition of economic income "Economic income is the way for [entities] to account for changes in the value of a given asset in the market. It generally recognises unrealised gains in addition to recognising realised gains. A change in market value rather than cash received is the perfect example of an economic income." This bill nicely slipped through because no one monitors tax no one thinks about tax. Unfortunately not enough people are interested in tax and the only time they think about it as the Minister said—they get scared they're going to get taxed more. The pernicious nature of this bill is it introduces a whole new concept around unrealised capital gains. And that is one of the key issues around this bill that the Labour Government has tried to slip through in the dying days of its governance arrangements. I'd like the Minister to confirm whether she accepts "economic income" includes by definition unrealised capital gains.Hon Dr DEBORAH RUSSELL (Associate Minister of Revenue): A couple of things: Mr Bayly has claimed that the principle of Adam Smith's of certainty will in fact encompass the idea of flexibility and adaptability—Andrew Bayly: No convenience of payments.Hon Dr DEBORAH RUSSELL: Oh I'm sorry convenience of payment would—OK so I'm just going to having Adam Smith right in front of me—I don't think that's actually going to manage that at all in terms of flexibility and adaptability. So you levy taxes at the time at which it's most convenient for the taxpayer that's in the way it's most convenient for the taxpayer. Classic example of this in our system is PAYE which is you know very very convenient and easily paid by the taxpayer—that is as employees—because it's deducted at source. So that's a classic example of convenience. I don't see how that encompasses the ways that we need to start to think about the new forms of business the new forms of commerce and particularly the forms of commerce which are not conducted with bricks and mortar stores any more.In terms of that flexibility and adaptability it's not just to do with taxpayers finding it convenient to pay their taxes; it's also to do with Governments being able to levy taxes on forms of business which otherwise escape taxation. So there's a whole set of things that need to be balanced off there by Governments. It's also about changing our tax systems. So of course all these principles work together. One of the principles we have sitting in there is revenue integrity and in fact one of the purposes of a tax system is to collect sufficient tax revenue that Government can pay for all the things that Governments typically like to pay for: health welfare education and so on. As new forms of business arise new forms of commerce arise they may not be encompassed by the tax law we already have—that's the sort of flexibility and adaptability we need. So that principle of convenience is not just about—it is about taxpayer convenience but flexibility and adaptability concerns both taxpayers but also the entities levying the taxation. So that's why we have a separate principle of flexibility and adaptability. It is not comprehended by the principle of convenience.Mr Bayly—I think I actually need Mr Bayly to clarify a little. He said that when we're talking about vertical equity we normally talk about assessable income but actually I think there is a distinction in tax law it's very clear between assessable income and taxable income. Taxable income is the final amount on which you pay your taxes. A whole lot of income is assessable income but you deduct a whole lot of stuff from that before you get to taxable income. Now I know Mr Bayly knows that; I think he just used assessable income instead of taxable income. But the real thing we're worried about there is the difference between taxable income and economic income and it's a critical and important distinction.The fact is that our tax system in New Zealand is not broad base low rate because a whole lot of income is excluded from taxation. Now that may or may not be appropriate—it may or may not be appropriate. But at the moment—except for the major report which Hon David Parker and Inland Revenue carried out to assess how much income very high-wealth people earn—we don't know how much income New Zealanders earn because of income that is not included in taxable income. Now whether or not we ought to be paying tax on that is a different matter. This bill does not have an "ought to pay more tax" in it. All it will do is report on that level of economic income and the level of tax paid in relation to that economic income. It will report on that and then it is up to the people involved who are interested in the issue—journalists members of Parliament taxation lecturers people in the street ordinary New Zealanders—to debate whether or not that's appropriate. This bill would not give any judgment about whether it's appropriate; all it would do is report the facts. That's why we're looking at economic income not just taxable income."