Abstract
The Land and Income Assessment Act of 1891 introduced both New Zealand’s first income tax and the principle of progression into New Zealand’s taxation system. Its passage through Parliament provided a rare opportunity for Parliament to discuss taxation policy at the level of broad policy, rather than at the level of specific measures. The 1891 Parliamentary Debates provide evidence of the thinking of Parliament on such fundamental issues as the legitimacy of taxation, the focus of taxation, and the question of progression – discussions which continue to this day. This article reviews these parliamentary discussions by discussing the contemporary context, and how the 1891 Bill was defended and opposed. The resulting discussion enhances understandings of the past and provides a basis for further interpretation and application.
Introduction
At half-past seven on 16 June 1891, after the House of Representatives had gone into Committee of Supply, John Ballance, 1 the Premier and Minister of Finance, addressed the Chairman of the Committee:
Mr. Perceval, in asking the attention of the Committee while I place before it a plain unvarnished statement of the finances of the colony, I hope to be as brief as the nature of the subject will permit, and not to weary honourable members by unnecessary detail. (NZPD, 1891a, p.57)
One hundred minutes later, Ballance concluded the newly elected Liberal Government’s first Financial Statement, or what would now be called the Budget address. Whether the honourable members were wearied by his speech we cannot tell; but over the ensuing century generations of taxpayers have been affected by a measure foreshadowed that evening: the replacement of the existing property tax with a land and income tax assessed on a progressive scale. Although the land tax was abolished in 1991 (Reece, 1993), the income tax remains the mainstay of the government revenue system in New Zealand, as indeed in most nations.
Generations of accountants have also been affected by this measure. The requirement to account for income tax has necessitated the calculation and reporting of income, and thus motivated improvements in accounting practice; most taxation compliance work focuses on the income tax; much business advisory work involves evaluating and mitigating income tax consequences; and accountants are often called upon to advise governments on income tax policy. The introduction of the land and income tax thus provides an appropriate focus for accounting historians, since it applies the approach of a historian to a substantive subject recognisable as accounting (Lamb, 2003).
Although the income tax has endured, taxation policy continues to be reviewed and contested. Official reports may suggest a popular consensus regarding the general principles of taxation; 2 yet practical tax policy is subject to regular change. The debates concerning the 1891 taxation measures foreshadowed in the 1891 Budget and the Land and Income Assessment Bill (“the 1891 Bill”) provided a rare opportunity to consider taxation policy at a broader level. After enactment, subsequent discussions tended to shift from the justification or criticism of tax itself, to more focused discussions at the margins.
The objective of this article is to discover the contours of parliamentary discussions at the introduction of the progressive income tax in New Zealand. Napier (1989) argues that “the justification for understanding the past is first intellectual and secondly utilitarian … to understand the past we must first discover the past” (p.239). Discovery must precede interpretation “to avoid the erection of theoretical superstructures on inadequate foundations” (1989, p.239). This article contributes to the discovery of the past by relating the introduction of the land and income tax to the social context within which it was enacted, and then by reviewing archival evidence of contemporary discussions. The resulting narrative seeks to enhance our understanding of the past, as it moves from the historical evidence to a better understanding of past events (Stanford, 1986), facilitating interpretation of those events (Previts et al., 1990; Evans, 1997). While the resulting narrative provides an insight into the past, it inevitably suggests contemporary applications (Napier, 1989), as the issues discussed continue to resonate today. This article also makes a contribution to remedying the relative dearth of historical research on taxation, particularly in relation to New Zealand (Marriott & Fowler, 2007). 3
This article commences with a discussion of the background to the introduction of the “first example of progressive taxation in the Australian and New Zealand Colonies” (Harris, 2002, p.111), and the research method is mentioned. Next, the shape of what Premier John Ballance termed the “comparatively light income tax” on personal income (NZPD, 1891a, p.67) is outlined. Although the income tax was the minor partner in the 1891 Bill, income tax revenue eclipsed that of the land tax during World War One, and would continue to provide the majority of New Zealand’s tax revenue. Following this, the parliamentary discussions on this new progressive tax are reviewed under three sub-headings: the legitimacy of taxation, the appropriate unit of assessment, and the question of progression. The initial reaction of the Colony’s leading newspapers confirms the nature of the tax debate. The article then concludes with areas where the 1891 debates indicate suggestions for further interpretation.
Background and method
Income tax was not a New Zealand innovation. Although types of income tax were levied in antiquity (Thomsen, 1964; Coffield, 1970), the income tax introduced in the United Kingdom in 1798 to finance the Napoleonic Wars is often regarded as the first “modern” income tax (Hooper, 1989; Seligman, 1911). 4 New Zealand’s legislators had almost a century of English experience to draw on, and many of those who would be subject to the tax would have been aware of the English example.
Nor was the 1891 Bill the first attempt to introduce an income tax in New Zealand. As early as 1845, William Brown, a member of Governor Fitzroy’s Legislative Council, proposed radical tax reform involving the abolition of customs duties, and the imposition of “a mixture of a poll tax raised on every adult in the colony, a property tax and an income tax” (Goldsmith, 2008, p.23; Heagney, 2009). An income tax bill was introduced in New Zealand in the 1860s, but was not enacted (Bohan, 1994; McKinnon, 2003). Subsequently, the Grey government proposed a land and income tax in 1879. However, this measure was unpopular; although the land tax was enacted, the income tax was not. Grey’s taxation policy contributed to the fall of his government, and his land tax was replaced by the property tax in 1879 (Harris, 2002).
The 1891 Bill was enacted with a sizable majority of 16 votes in a House comprising 74 members (NZPD, 1891p). This Act introduced two key elements that became a virtual paradigm for the practice of direct taxation in New Zealand. Progressive tax rates became a “cardinal principle of direct taxation” (Reeves, 1950, p.309), which Prebble (1993) suggests has been “taken for granted, rather than recognised for what it is: an instrument of social engineering, rather than a necessary part of the system” (p.63). It also introduced the assessment of what was the “obvious answer” (Oliver, 1963, p.128) as to what ought to be taxed, namely income rather than property, although the income component of the 1891 Act was, at first, relatively minor. Both progression and income taxation gained more than the proverbial “foot in the door” in the 1891 Act; Hooper (1989) speaks of the shift to direct taxation in the 1890s as inaugurating “a taxation policy that lasted for over eighty years” (p.17). Sinclair (1991) concurs, suggesting that the economic and tax reforms of the 1980s were the most significant since the income tax was first introduced in 1891 (p.323).
Why then was the 1891 government able to implement an income tax when previous attempts had been unsuccessful? As is often the case, this new policy was preceded by a change in government. 5 The Liberals had been elected to office in 1890, and the passage of the 1891 Bill reflected, Hamer (1988) suggests, the reasons for the rise of New Zealand’s Liberal Party, namely: the consequences of the collapse or discrediting of Vogelism between 1884 and 1887; the collapse of the “Old Order” or the “establishment”; and the rise of “democracy” (p.24). The first of these factors points to the economy, the second and third to matters of social structure.
The economy
The Liberals came to power towards the end of the “long depression” which commenced in the late 1870s (Sinclair, 1991). 6 The failure of Premier Vogel’s overseas-debt financed public works of the 1870s to sustain economic growth was evident in the depression of the 1880s, which resulted in significant financial hardship and consequent emigration from the Colony.
The property tax of 1879 was widely considered to have exacerbated the difficulties faced by smallholders and merchants. Since it was levied on property (including inventories) rather than income, it was payable even in the absence of profit, and since it was based on the value of improved land, it penalised those who actually improved and worked their land as opposed to the holders of large, unimproved blocks. Prior to the election of the Liberals, when party politics was still in its infancy, the only clear distinction between Government and Opposition was in the area of taxation policy; the Government tended to favour the continuation of the property tax, whereas the Opposition favoured its substitution by land and income taxes (Hamer, 1988).
Social structure
Economic conditions provided the background to the election of the Liberals, but changes to the franchise made their election more likely (Atkinson, 2003). Although universal male suffrage had been introduced for non-Maori males in 1879, plural voting – the ability of a landowner with land in more than one electorate to cast more than one vote – was not abolished until 1889. The 1890 election was, therefore, the first under a true “one man one vote” franchise, with women over 21 receiving the vote in 1893. Country districts did, however, retain an advantage through the country quota until 1945, whereby rural electorates comprised 28 per cent fewer voters than urban electorates. 7
Despite the appearance of party politics in New Zealand at the 1890 elections (Hamer, 1997), the debates at the time of the introduction of the 1891 Bill demonstrate that party lines were far from clearly drawn. This is confirmed by the inconsistent voting on any amendments to the 1891 Bill; although it ultimately passed with a majority of 16 votes, voting on amendments ranged from a net 27 in favour to 12 against (NZPD, 1891o). Just as the New Zealand land and income tax was at an early stage of evolution, so too were both political parties and party discipline.
That the Liberals represented a change in policy direction is evident from the “stiff rearguard action” (Sinclair, 1991, p.170) of the defeated government in appointing additional members to the non-elective Legislative Council of Parliament in an attempt to stack this Upper House so as to impede the passage of “radical” legislation. The Upper House did, indeed, forestall a number of the Liberals’ legislative measures. However, it could not amend taxation measures, but only reject them outright (Jackson, 1972, pp.104ff.) – something it was loath to do, even if the Legislative Council baulked at the Liberals’ proposed “system of experiments” (NZPD, 1891q). Though the “Old Order”, entrenched in the non-elective Legislative Council, objected to the 1891 Bill, it could not reject it. Revenue measures were the preserve of the elected Lower House, a legacy traceable to Magna Carta and the Bill of Rights of 1689; that is, the principle of no taxation without representation. With the democratization of the franchise, neither Parliament itself, nor tax policy, remained the preserve of a social élite.
The election of the Liberals in 1890 at the end of an economic depression and by an enlarged franchise provided the context for the enactment of the 1891 Bill which introduced several novelties, especially taxation on income, and progression. In seeking to establish the contours of parliamentary, and, in measure, popular discussions at the introduction of the progressive income tax in New Zealand, this article examines two primary data sources: the Parliamentary Debates, and the initial reception of the 1891 Budget by the main centre newspapers. Whilst these sources do not equal the “facts” (Fleischman et al., 1996), they do allow the construction of a narrative that describes contemporary thinking on the new tax measures.
The introduction and shape of the 1891 legislation
John Ballance, the Premier and Finance Minister, announced the proposed land and income tax in his first Financial Statement. Having noted the inadequacy of existing indirect revenue resources, particularly the alcohol excise and stamps revenue, and the unlikelihood of the Railways’ contributing a surplus, Ballance continued, “Direct taxation in the way of a land- and income-tax must remain, with the development of our industries, a fruitful source of income” (NZPD, 1891a). Here the Premier ceased reviewing and commenced prophesying, for at the time New Zealand had neither a land nor an income tax. Direct taxation comprised a property tax, “an annual impost of 1d. per £ on the capital value of every citizen’s possessions, less his debts and an exemption of £500” (Reeves, 1950, p.308).
The proposed land and income tax would replace this property tax, which contributed £357,348 or about 17 per cent of the government’s taxation revenue in 1891. In his Financial Statement, Ballance forecast the revenue from the land and income tax at £369,147. Of this, the land tax was expected to contribute around 72 per cent. Income tax would provide the balance of £102,300, comprising corporate income tax (13 per cent), non-corporate business income tax (11 per cent), and income tax on professions and salaries (4 per cent) (NZPD, 1891a).
Debate on the 1891 Financial Statement lasted from 23 June to 10 July. The land and income taxes themselves were enacted in the Land and Income Assessment Act 1891, which contained the “machinery” provisions (NZPD, 1891l), while the actual rates of tax were then set in the (annual) Land-tax and Income-tax Act 1892. New Zealanders were first assessed for land and income tax for the year commencing 1 April 1892. 8
In discussing the incidence of taxation, Ballance clarified what a land tax was: “the popular and, I believe, the correct answer to the question is, a tax on the value of land less improvements” (NZPD, 1891). However, fiscal pressures prevented the government from reaching this ideal: “The necessity of stopping short of this ideal must be found in the imperative requirements of our finance – the need for providing sufficient revenue to meet our obligations without unduly weighing the necessities of life through the customs” (NZPD, 1891a).
As far as the income tax on salaries and professional incomes was concerned, he noted that:
The comparatively light income-tax under the head of ‘Salaries and Professional Incomes’ will fall only upon those whose positions enable them to contribute it without inconvenience, the exemption of £300 affording ample protection to all those who will come within the limits of the schedule. (NZPD, 1891a)
Although the land tax was certainly the major partner in the 1891 Act, it is the income tax that has endured. Schedule D levied tax on “income derived from business on the full amount of the balance of the profits or gains of such business”, while employment and professional incomes were assessed under Schedule E.
After allowing for the £300 exemption, income was assessed on a progressive basis; Section 2 of the Land-tax and Income-tax Act 1892 provided that:
For every pound sterling of the income of any person derived from employment of emolument … a duty, by way of income tax, as follows: Up to and including £1,000 – Six pence Exceeding one thousand pounds – One shilling.
Aside from the tax rates themselves, this structure bears a resemblance to current taxation. First, it was progressive: as a taxpayer’s income increased, the rate of tax also increased. Second, the scale was stepped, rather than graduated: until 1911, the higher rate applied only to the last tranche, and not to the total income. Yet for all this similarity, there is one significant difference between the original and the current income tax, namely the exemption level: the first £300 of income was exempt from income tax. 9
Historical incomes data are notoriously difficult to obtain (Easton, 1983; Thomson, 1996), but the award wages provided for under the Industrial Conciliation and Arbitration Act 1894 do provide an independent source for blue-collar income levels. Clinkard’s (1919) summary of 22 award wage rates applying in 1911 provides some indication of the significance of the £300 exemption; on an annualised full-time basis, the industrial awards ranged from a low of £119 for boot makers, to a high of £186 for waterside workers. Given the exemption, few, if any, blue-collar employees would have been subject to the income tax. Even high income earners were lightly assessed. A Chief Justice earning £1600 in 1900 would have been liable to income tax of £40, a 2½ per cent average rate. These were hardly days of heavy personal income taxation. The initial rates of income tax remained unchanged until 1910, when a new graduated scale was introduced, peaking at a rate of 1s. 2d. per pound (55/6 percent). At that time Minister of Finance Sir Joseph Ward commented, “I think the maximum amount is as high as we ought to go” (NZPD, 1910).
Despite what to modern eyes may seem low rates and a high exemption level, the initial income tax was not uncontested. Any change to a taxation system invites scrutiny, and the introduction of something as significant as a progressive direct tax certainly did. If a democratic society considers a particular tax to be grossly unfair, it has the option of redress at the ballot box. Yet this did not happen; not only did the Liberals remain in power until 1911, their conservative successors in power did not abolish, but rather increased, the personal income tax. Although contested at its introduction, it did not take long for the income tax to be regarded as normal.
The parliamentary debate
Discussions of what constitutes a good tax have a long pedigree. Perhaps most famously, Adam Smith (1950) had provided four maxims of a good tax to which New Zealand’s Parliamentarians certainly referred. However, Smith’s maxims are general and in measure ambiguous (Musgrave & Peacock, 1958; Lynn, 1976). He was writing in 1776, some two decades before the introduction of the income tax in Britain (in 1798). Moreover, in 1891 the British income tax was not assessed on a progressive scale.
Certain themes in the debate highlight the novelty of Ballance’s proposals. At the broadest level, the legitimacy of taxation, per se, was questioned, and even if it were considered legitimate, the appropriate basis for taxation was contested: should tax be assessed on a quasi-contractual benefits-received basis, or on the basis of ability to pay? Secondly, the debates focused on the relative obligations of various groups in society, rather than on the individual. Thirdly, the Members discussed the question of progressive rates: whereas in the twenty-first century a progressive income tax assessed on the individual is the norm, 10 the propriety of progression was an open question in 1891.
Legitimacy of taxation
For a particular tax to be accepted, taxation in general must be considered legitimate; there must be agreement that taxation does not constitute (legalised) theft (McGee, 1994). In an established society where corruption is minimal and the rule of law is seen to apply, taxation itself may generally be taken for granted.
John Bryce, the Leader of the Opposition, commenced his attack on the Bill by suggesting the illegitimacy of taxation per se:
I should like to say at the beginning that theoretically and constitutionally I am opposed to all taxation. Nothing, in my opinion, will justify the imposition of a tax except the necessities of the State, which requires money or money’s worth to carry on the government of the country. (NZPD, 1891b)
Yet this claim was rhetorical at best, for what he gave in his first sentence – a theoretical and constitutional objection to all taxation, he took away in the second – that taxation is justified by the necessities of state.
Bryce continued, “I came to the conclusion that the property-tax was, on the whole, a fair tax”, since “all property requires the protection of the State, and it appears to be fair that all property should pay for this protection” (NZPD, 1891b). Property, not income, should be the primary tax base.
Bryce’s comments aptly summarise the benefits-received theory of taxation: taxation is the price paid for the protection of life and property provided by government. As the amount of property increases, the quantum of protection provided by the government also increases in proportion. Taxation is thus the cost of the “contract” between the individual and society whereby the latter secures the former in his or her possessions, and the tax base should reflect the use of the revenue. An income tax was different, since “a man must live; and it is ridiculous, as it appears to me, to charge a man a tax on the result of his current industry” (NZPD, 1891b).
Thomas Mackenzie, who later joined the Liberal Party, strongly opposed the 1891 Bill, and argued similarly, “One of the first principles of taxation … is that a man shall contribute towards the management of the State in proportion to the benefit he receives from the State” (NZPD, 1891p). He continued with a quote from Montesquieu: “the public revenues are not to be measured by what the people are able, but by what they ought to give” (NZPD, 1891p). 11 What people ought to give, would, presumably, be based upon the benefits they received in return for the tax.
The justification of any tax, then, depended on the purposes to which it was put. Bryce asked, “What is the tax wanted for? Is it for revenue, or for some other purpose such as punishment? If we are to argue the matter logically, let us keep the two things separate” (NZPD, 1891b).
Similarly, John Duthie, a Wellington businessman who had stood in the 1890 election as a “Conservative Independent” (Hamer, 1988, p.36), argued that taxation should only be levied for fiscal, not for social purposes: “No man can object to taxation if it is necessary for the State, but when, in addition to that, are introduced other objects, it then becomes a species of modified confiscation, and it is grounded on dishonesty” (NZPD, 1891d). To use taxation as a tool of social policy, such as the breaking up of the great estates or for other forms of redistribution, constituted confiscation, which was tantamount to theft. Such taxation could not be ethical, regardless of how it is levied.
The benefits-received view could, however, also be used by the Liberals to justify their measure. Thus Meredith, a Liberal, who justified taxation on what might now be called a user-pays basis, stated:
I hold it to be a fundamental principle of political economy that all those who hold wealth are in duty bound to contribute towards the expense of good government. Good government means the protection of life, liberty and property; so that, in whatever shape wealth or property may be found, I hold and contend that it is the duty of that wealth to contribute towards the taxation of the country. (NZPD, 1891h)
Since the wealthy derive most benefit from government, they should contribute taxation.
In contrast, opponents of the Bill questioned the foundation of benefits-received theory: possession. In terms of land, the influence of John S. Mill (1909), and more particularly the Single Tax ideas of Henry George (1922; cf. Rogers, 1965) were evident in the views of the Liberals such as Ballance and his supporters (Hamer, 1988), who (at least rhetorically) argued for the nationalisation of land (NZPD, 1891p). 12 Even if exertion justified ownership, as John Locke (1988) had suggested, proponents of the 1891 Bill argued that most of the increase in the value of land was not actually due to personal exertion, but rather to the growth in population and the improvements that had been effected, for example, by the Vogelian public works schemes. As this value was socially created, it did not really belong to the legal owner. It was therefore appropriate that it be taxed.
Nor did all Members consider the tenure of property to be inviolable. Far from the unwritten contract with the early settlers being considered sacred and thereby stymieing any attempt to extract tax from the land, some regarded land as the natural property of all. T. L. Buick, a backer of the Liberal government, but who regarded himself as one of a group of ‘labour’ Members of Parliament (Traue, 2007), argued:
How can you prove that land is the common property of all? We can prove it by the simple fact that land is necessary to our life … If the land is not the common right of all, and if there is anything in natural or divine law by which some few individuals may own all the land, then it follows that all the rest of humanity must be only trespassers and vagabonds on the face of the earth … And I say that no government in any part of the world is justified in selling to private individuals that which rightly belongs to the whole people. (NZPD, 1891h)
If the distribution of property were not equitable, taxation need not be neutral or patterned on pre-existing property holdings. 13
The Liberals further justified the income tax on the grounds that it was only levied when a person had the wherewithal to pay it. Half a century before the introduction of Social Security in 1938, and consistent with Liberal Party ideals, Minister of Education William Pember Reeves analogised income taxation to an insurance policy, suggesting that unlike the property tax, income tax only was payable when incomes were high, and the taxpayer was relieved of it in bad times (NZPD, 1891b). Thus, in contrast to the Opposition’s promotion of benefits theory, the Liberals argued on the basis of “equality of sacrifice” based on ability to pay. These two concepts were conflated by Ballance in his reply to the Financial Statement debate:
We say we want justice first … large estates should pay on a principle well known to every economist and writer and thinker on this subject – to make them pay according to the equality of sacrifice. If that be done, justice will be done. We want to do justice in the first place, and that means that these estates should pay their fair proportion, and according to their ability, to the revenue of the country. (NZPD, 1891k)
In this one paragraph, Ballance appealed to both equality of sacrifice and ability to pay, and not to the Opposition’s benefits-received basis. His focus, then, was on the apportionment of the tax charge, and not on the legitimacy of the uses of the tax, as was the Opposition’s.
The 1891 discussions highlighted the difference between the conservative Opposition’s deontologically-based benefits-received theory of taxation, and the government’s consequentialist, ability to pay/equal sacrifice theory. Instead of tax only being justified for revenue purposes and the protection of property, the Liberals argued that taxation might indeed be used for social purposes. The focus thus shifted from what was right (the preservation of private property and a contractual approach to taxation) to what was useful or good (a “fairer” distribution of property and the tax impost). The latter might be considered an early manifestation of the concern for a social “Fair Go”, which became a catch-cry of Australian and New Zealand social policy (Sawer, 2003, p.36). 14 Novelty in taxation policy provided an opportunity to discuss such fundamental issues as the legitimacy of taxation itself and of various types and used of taxation.
Unit of assessment
The enlargement of the franchise altered the social balance, a fact recognised by Liberal Member William Rees who commented that, “This is the first Parliament which has been elected upon any franchise that is approximately equal among the people” (NZPD, 1891e). Trade unionist Tanner went further; in terms more reminiscent of Rousseau and Hegel than of Locke, he exclaimed that the government had “a solid majority behind them, who are the expression of the will of the sovereign people” (NZPD, 1891j). 15 The Opposition certainly did not consider itself included in this will.
Yet both the Liberals and the Opposition were concerned about the incidence of taxation in a context of social change. Although himself a member of the Liberal caucus, Walter Carncross argued that “seeing that the great mass of people have representatives in this House, it is only fair to the country and to themselves that they should contribute more directly to the taxation than they do at present” (NZPD, 1891n). Those voting should also bear the tax. Thus the cry of “no taxation without representation”, heard in the days of a limited franchise, was effectively reversed to one of “no representation without taxation”. Yet although the tax might have been payable by individuals, the debates tended to focus not so much on the relative incidence of taxation on individuals as on a range of groups.
Class
Although the 1891 Bill would only affect those with higher incomes or significant land holdings, Ballance commented that “we have tried to make this Bill apply as fairly as we possibly can to all classes of the community” (NZPD, 1891l). Yet he recognised that:
no new scheme of taxation when first introduced has been absolutely fair apparently to every class of the community. It never was done yet, and never will be done. Such a thing as an absolutely fair tax has never been conceived in the mind of man. (NZPD, 1891l)
Yet fairness between classes was a goal: Henry Fish, a self-proclaimed Independent, commented, “With regard to the income-tax, whilst I approve entirely of its principle, its incidence as between classes must be fair” (NZPD, 1891f). T. Mackenzie demurred: “The tax from beginning to end is essentially a class tax” (NZPD, 1891m).
Town vs country
The interests of the town versus the country were a major concern of politicians and the general public, as population, wealth and influence were shifting from the latter to the former. The 1891 Bill was criticised for “taxing the country for the benefit of the towns” (NZPD, 1891i). Rural landowners tended to favour the property tax, which had included (urban and rural) inventories and improvements in the tax base, over the land tax, and which lacked the redistributive intent of the progressive land tax. Hence, T. Mackenzie lamented that “if you remove the property tax and put on land- and income-taxes we shall certainly have to pay what we paid before, and, as many city men will perhaps escape, we shall have to make up the difference” (NZPD, 1891m). The demographic and thence political shift from country to town clearly concerned him: “the towns are influencing the legislation of this country, and, if country interests are to be represented at all in Parliament, then we must have a country party” (NZPD, 1891m).
Balancing was also required, however, between different groups of country voters: the interests of present landowners had to be balanced against those of future landowners. The Liberal government was committed to breaking up the great estates, and progressive land taxation was a means to this end. For Ballance, “pauperism and poverty depended on the state of the land laws of any country”; given that the land, he suggested, had been illegitimately “monopolized and stolen from the people” (NZPD, 1891p), it was only just that taxation be used to reclaim it for the people.
Maori vs Pakeha
The 1891 Bill exempted Maori, as had the 1879 Property Tax Act. Some argued that it was inconsistent that “there are a number of Maori leaseholders who do not pay taxation, but who derive considerable incomes from their land. These persons are not touched under the proposals of the Government – neither under the land-tax nor under the income-tax” (NZPD, 1891i). In other words, they were not taxed on the benefit of the “unearned increment” that arose from state-funded development expenditure (NZPD, 1891n), and also contributed but little through the Customs. Benefits theory suggested that Maori should also be subject to tax:
Surely if the Maoris are sufficiently advanced in civilisation as to be returned as members to the House of Representatives, and hold seats in the Legislative Assembly … they surely ought to pay towards the support of the State and local bodies, as the struggling settler has to. The Natives enjoy the same protection as regards life and property … (NZPD, 1891n)
However, there were reasons why this might not be practicable, including the Treaty of Waitangi, to which Ballance alluded in his Financial Statement: “Whatever is done, the rights of the native under treaty, in accordance with the principles of justice, must be strictly maintained” (NZPD, 1891a).
Questions as to the legitimacy of the alienation of Maori land, and the absence of individual title among the Maori, complicated their assessment. Ballance concluded that, “I can assure the House that it would be quite impossible to bring the Native lands under this Bill” (NZPD, 1891n).
Absentees
The taxation of absentees also exercised the mind of Parliament. Absentees paid no indirect tax. If they owned land in New Zealand they would be subject to the land tax. However, if they owned financial instruments, they would be exempt from tax, unless subject to the income tax. Two issues arose in this regard, the one ethical, the other pragmatic. Firstly, government stock had been issued tax-free. Could the government retrospectively tax the interest, or was it ethically (and contractually) bound not to?
Secondly, would such taxation result in a flight of capital from the Colony? Bryce noted that “of course [any tax] tends to drive capital from our shores” (NZPD, 1891b). Despite Ballance’s claim that the 1891 Bill addressed the absentee evil (Hamer, 1988), the taxation of absentees has continued to exercise legislators.
Moral characteristics
Taxation policy recognised certain personal characteristics. Ballance considered that settlers who improved their land were “a good class of settler, and we should adapt our tax to make it fall as lightly as we can upon him” (NZPD, 1891l). He further argued that “it will be recognised that possessors of [incomes from professions and salaries] should not be asked to contribute the same proportion as those who derive their incomes from property” (NZPD, 1891a). In part this was because such incomes were more precarious in a pre-social security society.
Sir John Hall, the “leading ‘conservative’ politician in nineteenth century New Zealand” (Gardner, 2007), noted that, “I think it would not be fair to tax incomes derived from professions to the same extent as incomes derived from trade” (NZPD, 1891m), since they were derived entirely from personal exertion, and not partly from the passive return on property employed in a trade. Somehow active income was considered to be morally superior to passive income.
The 1891 Bill certainly assessed the incomes of individuals; however policy discussions made distinctions based on the characteristics of various groups in society. The abstract notion of income, divorced of personal reference, did not function as an independent criterion by which to assess tax policy. Income taxation was still in its infancy, and the seminal works of Seligman (1911) and Simons (1938) were still in the future.
Progression
The 1891 Bill introduced progression in both the land and the income tax. Progression was not universally accepted; indeed, at the time proportion rather than progression in taxation was the received wisdom (Stamp, 1921). 16 To some New Zealand Parliamentarians the progressive principle was simply objectionable. Duthie was adamant that “the main objection to the proposed system is that it is progressive taxation” (NZPD, 1891d). His concern was not only that a progressive tax might result in a redistribution of resources, but also that such a tax was not proportioned on the benefits received by the taxpayer.
Progression undermined the social contract. Holders of large estates had lawfully acquired their holdings. On what basis should they now be deprived of these holdings? If a redistribution of land were required, the proprietors should be paid the legitimate value of the lands so taken. While the Liberals would resort to a progressive tax, to the conservative Opposition the use of a progressive tax for this purpose appeared “to savour of confiscation rather than of justice to the holders of these lands” (NZPD, 1891g).
Sir John Hall suggested that progression had been attempted and rejected as unworkable in the United Kingdom (NZPD, 1891i). Citing the Home Country’s history, M. J. S. Mackenzie, a staunch opponent of the Liberal government (Brooking, 2007), spoke of “the downrightly pernicious policy” of progression as leading to “confiscation” and “the very worst of all kinds of tyranny” (NZPD, 1891l). Reflecting a concern for property rights, conservative Member Buchanan argued that the progressive principle would mean “nothing short of confiscation and spoliation by a majority as against a minority” (NZPD, 1891n). Changes in the franchise created a risk of the (less wealthy) majority using the tax system for personal or class benefit.
Conversely, proponents of progression argued that it was necessary to ensure equality of sacrifice. Echoing John S. Mill, 17 Harkness clearly stated their position:
Now, having direct taxation, you cannot possibly make it bear with equal pressure on all classes of the community if you have what is called a proportionate tax; but to make it bear with equal pressure upon all – to use an expression which has been used by those who have given the subject much consideration, to have equality of sacrifice – you must have progressive taxation, for this reason: When a man possesses only the necessaries of life, taxation to him is a positive sacrifice, but when men are asked to give out of their luxuries or hoards there is no sacrifice in the truest sense of the word if you have proportionate taxation. (NZPD, 1891n)
Progression was thus necessary to ensure equality of sacrifice. Practically, it was also needed to accomplish certain social objectives. Concerning the graduated land tax, Reeves listed three such objects: to discourage monopolies and to encourage subdivision, to get revenue, and to charge those who had benefited from the public works (NZPD, 1891m).
Attitudes towards progressive taxation reflect attitudes towards the taxation itself and the limits of the role of government. If taxation is justified only in terms of the benefits it confers on the taxpayer, progression is unlikely to be favoured. Conversely, where taxation is justified in terms of ability to pay/sacrifice theories and as a means to social ends, progression may be a more effective means to this end. Further, progression shifts the focus of taxation fairness discussions away from the group to the level of the individual.
Response of the press
The initial reception of the 1891 Financial Statement in the Colony’s newspapers reflects the variety of opinions canvassed in Parliament. Contemporary newspapers reflected, but also informed, public opinion, while certainly also reflecting the views of their publishers and the interests of the regions that they served.
On the day following the delivery of Ballance’s Financial Statement, the New Zealand Herald, published in Auckland, considered the “proposals with regard to the change in the incidence of taxation” to be the most important part of the statement, and initially noted that it was “not extreme in any direction”. While judging the Financial Statement as in many respects an excellent one, the Herald suggested that although the income tax and land tax would not affect the working man, it might cause an exodus of capital, to be followed by “bone and sinew” (17 June 1891). While noting the potential for class conflict, the Herald indicated the need for stability in the tax system: “we cannot afford to be perpetually discussing changes in the incidence of taxation” (18 June 1891).
Wellington’s Evening Post noted that the Financial Statement had been well received, with a feeling of relief that the proposals were not of a more extreme and revolutionary character. While the proposed changes to the incidence of taxation required “greater and graver consideration” than had yet been possible, “the general direction of the changes proposed seems to be the right one and the proposals themselves based on sound principles”, though the writer went on to express doubt that such foundations had indeed been established (17 June 1891).
The Press in Christchurch recognised, but did not welcome, the proposed introduction of the principle of graduation as the great feature of the Budget, with New Zealand being the first part of the British Empire to sanction this principle. It feared that the Budget was far from the final intended result, and that it was likely to cause a panic in the Colony, would result in an outflow of capital and people and economic contraction, and would punish farmers. Under Ballance’s “pick-your-pocket policy”, investors would “find themselves harassed and persecuted at every turn” by the government’s “exceptional and punitive” treatment (17 June 1891).
Dunedin’s Otago Daily Times was also critical. The Financial Statement involved “some rather serious changes in the incidence of taxation”, and constituted a very direct blow at the large landholders of the Colony – something “doubtless received with acclamation by the adherents of the party now in power”. Yet although heavy, the tax was “not so severe in its ratio of increase as many people had feared”. As regards the income tax, the Times indicated a concern for the wealthy, noting that the worst feature of the income tax was “its glaring unfairness to many of its victims”, since those with children paid as much as bachelors; here the editor ignored the fact that those on low to medium incomes paid no income tax at all. Yet although evidently unsupportive of Ballance or his tax proposals, the Times did congratulate him on “the production of a remarkably lucid and cleverly compiled budget” (17 June 1891).
Like the Financial Statement debate itself, the newspapers focused on matters of principle rather than detail, partly because the detail was not immediately available, but perhaps more so because of the novelty of the proposed changes to taxation. The issues of progression, the incidence of taxation, and the economic and social effects of this change in tax policy on a Colony that had been struggling to attract and retain settlers and develop economically, reflected the social, political and economic issues of the day.
Analysis
The 1891 Financial Statement introduced progression and the income tax to New Zealand, and, despite significant modification, both endure to this day. Whilst the debates were phrased in the terminology and set in the context of the day, the issues that were debated continue to resonate.
The legitimacy of taxation per se certainly continues to be contested at a philosophical level (Murphy & Nagel, 2002). The practice of taxation is also far from static; the introduction of Goods and Services Tax in both New Zealand (in 1986) and Australia (in 2000) and the push for carbon taxes suggests that income may no longer be considered the “obvious answer” as to what ought to be taxed, while the flattening of the tax rates scale since the 1980s suggests that rogression may no longer be considered normative for an income tax system. The debates of 1891 were far from the final word on income taxation. Yet the discussions are far from irrelevant in the twenty-first century.
This is evident in the report of the Tax Working Group (TWG) (2010) entitled A Tax System for New Zealand’s Future. Whilst the TWG did not question the legitimacy of taxation per se, it did consider the relative incidence of taxation between various groups, as well as the appropriateness and degree of progression that are desirable in a tax system. The relationship between the tax structure and economic development or efficiency – a trade-off between efficiency and equity – was a major concern. So too were the international implications of domestic tax policy. Yet whereas current discussions tend to be in respect of amendments to an existing structure of taxes, the discussion in 1891 was at the broader level; the 1891 Bill was not a mere tinkering with an existing tax, but rather a substantial change in New Zealand taxation policy that put in place the contours of a system that endured at least until the reforms of the Fourth Labour Government (1984–90). The debates of 1891 thus highlighted differences in taxation principle at the policy and not merely the practical level.
In particular, whereas the TWG can take for granted a context and general acceptance of income tax and progression, this was not the case in 1891. Subsequent discussion of such fundamental questions as the legitimacy of taxation is rare, often limited to a statement of “Principles of a Good Taxation System” (Tax Working Group, 2010, p.15). Yet at a time of crisis or major change such issues may come to the fore. The 1891 debates provided such an occasion. Whilst the debates necessarily occurred in a political context, the discussion did extend beyond mere detail; the records of these debates do provide more than merely an insight into a past event.
While this article seeks to discover the past, it does suggest several implications which also point to questions for future research. First, despite the contrasting opinions expressed in Parliament, the progressive income tax was not only implemented, but endured; in fact the conservatives who had opposed the tax in 1891 extended it upon gaining power in 1910. Does this suggest a pattern for taxation change in a democracy: is occasional radical and contested change in policy usually followed by policy co-option by the Opposition?
Secondly, although Parliament is supposed to protect the populace from tyranny, it was Parliament that in 1891 enacted what subsequently became an increasingly extensive and expensive taxation on the populace. Does Parliament (and indeed the parties represented in Parliament) actually affect the formation of tax policy, or are other institutional factors, not to mention crises (constitutional change, war, economic depression, international competitive pressures), the real drivers of such policy, to which Parliament merely provides a veneer of accountability and responsibility?
Thirdly, tax policy did alter significantly in 1891 in response to economic and social change. Are there certain preconditions for taxation change to occur? A detailed look at a number of contemporary sources that discuss a specific event in a nation’s taxation history may not only enhance understanding of past and present taxation policy formation, but also provide insights into the process of taxation change and indeed understanding of the society itself.
These considerations suggest an important role for the study of taxation history in discussions of taxation policy. Accountants and accounting academics are well placed to engage in such discussions. The Chairman of New Zealand’s 1967 Taxation Review Committee commented that, “the accountant must also acquire an authoritative voice in the formation of policies”, before suggesting that “on matters of fiscal policy, there is no body better qualified to comment than our [accounting] profession” (Ross, 1970, p.1). An appreciation of past discussions should better equip accounting academics and practitioners to contribute to future policy.
Conclusion
The 1891 Financial Statement provided an occasion for Parliament to discuss taxation policy at the level of general policy. Unsurprisingly in such a political environment, there was a lack of consensus on such matters as the legitimacy of and justification for taxation, who should be subject to taxation, and the practice of progression in tax. As the elected deputies of the people, representing a range of voters, politicians articulated the arguments made by their constituents as well as their own beliefs and interests. Similar arguments continue to be raised today; taxation policy is always a work in progress, reflecting and reacting to the social and economic needs and norms of the day.
Yet the 1891 debates provide a reminder that there was a time when there was no income tax and no progression, and when these had to be promoted, contested, defended and justified. These debates raised basic questions about taxation that have not been finally answered: whom to tax, why to tax, what to tax, and upon what basis. Such questions may come to the fore at times when the revenue system is being radically changed, but are always relevant to discussions of taxation. The debates of over a century ago challenge the implicit acceptance of the status quo and raise the question whether the tax paradigm that developed after 1891 – income as the primary revenue source and progression as normative – is still the best approach.