Report to the Treasurer and Minister of revenue - by a committee of experts on tax compliance

Bill Birch Treasurer

Report to the Treasurer and Minister of revenue

By a committee of experts on tax compliance

Chapter 16 -
Relationship With Taxpayers
16.1 During its deliberations and while considering submissions made to it, the committee studied several matters that relate to the part of the relationship between the Inland Revenue Department and taxpayers that could loosely be called 'public relations'. For convenience, the committee has gathered its comments on those matters into this chapter.

16.2 Two corporate communications specialists, Mesdames Carole Hartney and Catherine Judd, both of Jacques Martin Consulting, a division of Jacques Martin New Zealand Ltd, kindly advised the committee and assisted with its research for this chapter. The committee very much appreciates receiving this help in what is a rather specialised area. The committee records its grateful thanks to Mesdames Judd and Hartney.

16.3 Since 1995, proceeding from the Organisational Review of the Inland Revenue Department that took place between 1993 and 1994, the department has tried to alter the way in which staff interact with taxpayers. A core aspect of this change has been an instruction to refer to taxpayers as 'customers' with 'needs' rather than as taxpayers with duties.

16.4 The object is to improve the department's service to taxpayers and its relationship with taxpayers. It is hoped that the best-practice private-sector processes and standards that the term 'customer' implies will encourage staff to achieve this improvement. In turn, it is anticipated that improved levels of service to 'customers' will lead to better levels of voluntary taxpayer compliance. The committee sympathises with the department's aspirations, but has some concerns about the process.

16.5 A change from 'taxpayers' to 'customers' entails a significant psychological shift, on the part both of departmental staff and of taxpayers. In commercial terms, the closest analogy involved in the process of moving to a customer focus is perhaps the re-branding of a product or service. It is not inapt to use the term 're-branding' for the department's change from taxpayers to 'customers' because of the implication of private-sector service levels and relationships that 'customer' conveys.

16.6 From its own knowledge, which has been confirmed by advice from private sector corporate communications consultants, the committee would expect that such a significant re-branding of its service delivery methods by an organisation as large as the Inland Revenue Department would have been preceded by extensive research. In the private sector, this research is conducted in the relevant market. For the department, the research would be both among taxpayers and among its own staff.

16.7 The research would try to answer questions such as these: Does the term 'customer' appeal to taxpayers? Does the re-branding proposal seem genuine and sincere, considering that in the end the department's 'customers' first, cannot take their business elsewhere, and secondly, must disgorge cash rather than receive benefits? If despite the very inexact parallel between a true commercial customer and a taxpayer the change of nomenclature is or could be fundamentally sound, how should it be put into effect to achieve maximum benefits?

16.8 Officials told the committee that this re-branding was a result of the Organisational Review and that the department did not undertake preliminary 'market' research before the re-branding exercise, nor has there been research into the effectiveness of the re-branding or into taxpayers' reactions since. This omission is a matter for regret for two reasons. First, as mentioned, the department has not had the benefit of advice on how best to proceed with the re-branding exercise. Secondly, the department has foreclosed the possibility of measuring the results of the change. A commercial organisation engaging in a comparable exercise would ordinarily conduct before and after surveys to determine whether the change had been beneficial.

16.9 Be that as it may, the kind of research that the committee has in mind remains worthwhile now, if less so than if it had been carried out earlier. The department's re-branding is still continuing, and as departmental processes are changed during the implementation of, for example, self-assessment, the department will need to examine the implications of its customer service focus in new circumstances. Research into taxpayers' responses would be worthwhile.

Consideration of the 'customer needs' model
16.10 There appears to be a growing, but still slight, literature on the merits and practicalities of government departments adopting a customer needs model for their relations with citizens. The most penetrating study that the committee has found is an article by Mr Ron Hikel, director and partner in charge of the KPMG Centre for Government, Toronto, Canada, with the title 'Real Customer Service in Government: is it Possible?'263

16.11 Hikel points out the contradictions between the concept of a customer of a private enterprise firm, and the concept of a citizen with rights vis-à-vis a government department. The committee notes that these contradictions intensify when the primary relationship of the citizen to the department in question is one of duties (such as the duties of a taxpayer) rather than of rights.

16.12 As Hikel explains, great problems arise in transferring the ideal of customer service to the public sector. In most public sector areas, there neither is nor can there be a true equivalent to such fundamentals of customer relations as 'satisfaction or your money back' or 'the customer is always right'. In the private sector, true customers are always individuals, but in the public sector, governments must deal with people as categories, according to the stipulations of the law.

16.13 Private sector concerns make large and continuing investments in reading (as Hikel puts it) potential and actual customers, and then re-designing their products to make them more appealing. The ability of public sector organisations to conduct the same exercise is severely constrained, because major modifications of operating systems require changes in policy, regulations, or legislation. Hikel explains:

No one doubts the need for governments to improve service delivery. But the central trouble with this 'citizen as customer' image is that it rests on a fundamental misunderstanding of the present role of government in society. The customer image implies that, in effect, governments wish to please - much as any private retail business. But this is obviously wrong. At their most fundamental, governments exist to use the authority ceded to them by each citizen, to establish and enforce rules of conduct. Further, these rules are backed - at least in Canada [and we would add New Zealand] - by a more or less exclusive monopoly on the use of armed force and other sanctions.

To equate the concepts of 'citizen' and 'customer', is to both diminish and misunderstand the obligations of citizenship and the role of government.

Many government 'consumers' come to be across the counter from public servants because they are compelled by laws, backed by the threat of retribution. For example, they are required to obtain a license before driving, register any motor vehicle they own, and pay a variety of related taxes. Failure to comply with these laws can result in legal punishment. This compulsion exists because citizens have permanent obligations. Customers shop in a more or less free market. Citizens do not. Few of our relationships with government are purely voluntary, contrary to the norm between consumers and private sector services. ...

[M]any public servants do not in any sense serve 'customers.' Standing before a ... Customs Inspector, you are in no sense a customer. The purpose of the encounter is to ensure that you are paying tax or duties on any taxable items being brought into the country. Government is not a business. It may go bankrupt, but it won't hold a fire sale, cancel the lease, take down the sign, and shove off for Palm Springs.

Government claims of concern for 'clients' often aren't credible because, as long as their mandate lasts, we cannot withhold our patronage. Customers by definition have no permanent obligations - except to pay for what they wish to use or own. Satisfying them is the key because otherwise their business is lost. Mostly, as a recent study has shown, customers don't complain; they go elsewhere. But in much of our dealings with government, we cannot go to another provider. ...

There is, in short, a severe limit on the use of the customer model to define the actual nature of the relationship between government and citizen. 'Customer' is an incomplete, faulty and essentially deceptive description of the typical transaction between governed and government.

16.14 Hikel's article concludes:

Eventually the preferences of citizens as individual 'customers' coming to government for services will clash with routinized and authorized responses, sanctioned by Parliament, Legislature or Council. How far can the public sector go using customer preference data to reform delivery systems, without running into constitutional issues about the relative importance of satisfying individuals, as against compliance with collective norms and rules set by legislation? The answer is that no one knows because no one has yet taken the notion of customer service far enough to find out.

The 'customer needs' model in action
16.15 Hikel's article is not wholly pessimistic. He allows that if governments are able to bring the customer paradigm into their delivery of services, citizens' satisfaction with the government certainly should improve. He points out, however, that in order to make this change effective, major institutional changes are required within government departments. Depending on their functions, some departments are better placed to make these changes than others. For example, a postal service can more readily adapt to the customer mode than a tax department. The list below of necessary changes adapts and paraphrases Hikel's article:

Real customer service needs local autonomy, shorter decision lines, and reorganized delivery units set up for the convenience of customers, if necessary with changed hours of operation and office lay-out.

Better backup to support the front line.

Good monitoring to enforce service standards.

Quicker response times to resolve issues.

Direct supervision of those dealing with customers.

Better training by people who know something about service.

Local budgets and some autonomy in spending them.

Rewards/compensation for those who are the better service providers.

All of which will ordinarily entail major departmental reorganisation and reconceptualising of the department's relationship with citizens.

16.16 It is fair to say that following its Organisational Review in 1994, the New Zealand Inland Revenue Department has adopted, at least in part, most of this list. However, there are several sticking points. First, the department's duty is to collect tax that is lawfully owing. Rewarding officials for being effective tax collectors is not an unreasonable proposal, but could taxpayers be persuaded to see such rewards as 'compensation for those who are the better service providers'? Secondly, the department is subject to budgetary constraints that are imposed on the civil service as a whole, which limit scope for local budgetary autonomy. The committee considers these constraints later in this report. 264

16.17 Thirdly, as Hikel points out, the whole customer needs paradigm makes sense only when there really are customers, that is, people who themselves can initiate a request for some service, perhaps pay a fee, are able to express some judgment over the quality of what they receive and exercise some action if they do not like it. It is true that within the operations of the Inland Revenue Department there are a number of situations that, taken in isolation, exhibit some or, at a stretch, all of these features. But they are hardly endemic to the role of a tax collecting agency. Although retailers can hope that their customers will be completely satisfied, this complete satisfaction is an improbable state of mind for a taxpayer.

The committee's concern
16.18 The committee's major concern with the customer needs model is that the Inland Revenue Department's excellent intentions could rebound. Indeed, in the absence of something in the nature of market research we cannot know whether taxpayers' reactions are favourable or unfavourable.

16.19 The inherent contradictions between the status of customer and the status of taxpayer are unlikely to be lost on taxpayers. In claiming to treat taxpayers as customers, tax inspectors risk encouraging expectations that cannot be fulfilled. They risk seeming to be insincere. Who would not look sideways at a 'provider of customer needs' who points out that if taxes are not paid by the due date, there is an automatic penalty, followed by non-negotiable interest, no matter how politely and sympathetically this message is communicated?

16.20 The committee cannot emphasise too strongly that it sees great merit in the department's efforts to minimise taxpayer compliance costs, to eliminate as much frustration and unpleasantness as possible from the experience of being a taxpayer, to make telephoning for information easier and more rewarding, to train front-line officers so that they can increasingly operate as one-stop suppliers of information, and so on. What the committee does question is the merit of using the terms 'customer' and 'needs' to refer to a process that is ultimately coercive. A velvet glove on an iron hand is commendable, but calling the iron hand by another name is not so clearly a good idea.

16.21 Among Inland Revenue staff, too, the customer needs model could lead to an uncertainty of role. How can an official deal firmly with a taxpayer who is reluctant to pay tax or to disclose relevant information while at the same time trying to satisfy the 'needs' of that taxpayer as a 'customer'?

16.22 For both taxpayers and Inland Revenue staff, is it desirable or possible to achieve the improvements of relationships and methods of working that the department seeks without using the term 'customer'? Intuitively, the answer should be yes. At least theoretically, it is possible to treat the taxpaying public with care and solicitude without calling them customers, useful shorthand though the word may be.

16.23 The logical consequence of the committee's concerns is to recommend that the department discontinue the use of 'customer' to mean 'taxpayer'. However, the committee is not sufficiently informed to make that recommendation. As mentioned, no marketing-like studies have been done among either taxpayers or Inland Revenue staff to identify and evaluate the merits and demerits of the customer needs model. Accordingly, the committee recommends that thorough surveys should take place, to determine whether the department should continue to use the model and, if so, whether any measures are necessary to deal with the contradictions between the roles of taxpayer and customer that the committee has identified.



'It's our job to be fair'
16.24 Some years ago, the Inland Revenue Department adopted the motto 'It's our job to be fair'. On the face of it the motto is unexceptionable. In practice, it creates difficulties. The problem is that the motto is inevitably understood differently by two groups of people: on the one hand lawyers and officials who act under the law, and on the other hand taxpayers in general.

16.25 To a lawyer, the motto means: 'The department must observe and enforce the law, and must not allow personal or other non-legal considerations to interfere.' The committee agrees with this point of view. Many people, on the other hand, would take the motto to mean something else. Although they might not formulate it in this way, they would take the motto to mean that if the result of applying the Income Tax Act is to impose a burden on a taxpayer that appears to be harsh from the viewpoint of a bystander (or, possibly, even from the subjective viewpoint of the taxpayer in question), then it is the job of the department to reduce that burden.

16.26 This conception of the task of the Inland Revenue Department is incorrect. Moreover, it should never be correct. The general principle that government administration should operate according to the rule of law is nowhere more important than in the tax system. The Commissioner's discretion to make allowances for hardship is appropriately limited. It is true that the rigidities of tax law lead to complaints, but these complaints are nothing to the dissatisfaction and disaffection that would be the result of a flexible system with discretionary adjustments according to taxpayers' personal circumstances.

Reason for misconception
16.27 Taxpayers' misconception of the meaning of 'it's our job to be fair' is an example of a common error that comes about from mixing the relative certainty of legal norms with the subjective flexibility that is characteristic of people's attitudes to morality. Law is heavily influenced by morality, but non-lawyers often fail to appreciate that while both are normative systems they are separate normative systems. The leading American jurist, Richard A Posner, explained the problem in his Oliver Wendell Holmes Lectures in 1997. Judge Posner said:

A potent source of confusion is the law's frequent borrowing of moral terminology, of such terms as 'fair' and 'unjust' and 'inequitable' and 'unconscionable,' a borrowing that reflects in part the ecclesiastical origins of the equity jurisdiction, and that [misleads people] into believing that law is suffused with moral theory. Holmes warned long ago of the pitfalls of misunderstanding law by taking its moral vocabulary too seriously; it is the major theme of his great essay The Path of the Law. 265 ... The law uses moral terms in part because of its origins, in part to be impressive, in part to speak a language that the laity, to whom the commands of law are addressed, is more likely to understand - and in part, I admit, because there is considerable overlap between law and morality. 266

16.28 Posner's remarks are addressed to lawyers who are trying to grapple with the vexed question of the degree to which law embodies morality. But at least that debate takes place, as it were, within the parameters of law as a discipline. The New Zealand Inland Revenue motto, 'It's our job to be fair,' gives rise to a much more frustrating discussion, where the participants cannot even engage one another in a sensible dialogue, because officials must speak of legal duties while taxpayers understandably believe that the motto shifts the dialectic into some over-arching realm of fairness. To a lay person, the motto brings into play a whole matrix (albeit an ill-defined matrix) of norms that are not necessarily legal at all.

16.29 In practice, as the officials advised the committee, 'it's our job to be fair' is often a focus of taxpayer complaint. How, taxpayers ask, is the department acting fairly when the application of the law to their circumstances is so manifestly unfair? People use the motto to give complaints a legitimacy that is spurious. The situation is further inflamed because complainants are ignorant of this spuriousness. As Posner reminds us, Holmes warned 100 years ago against lawyers taking the moral vocabulary of law too seriously. How much more seriously does the aggrieved non-lawyer taxpayer take the moral vocabulary of the Inland Revenue motto.

Conclusion on the motto
16.30 Having inherited 'it's our job to be fair,' the Commissioner is in a cleft stick. Although the motto misleads taxpayers and although it is more apt to inflame than to satisfy complainants, the department can hardly be criticised for adhering to it. This kind of motto is much easier to adopt than to abandon. It is for this reason that the committee has explained the motto's logical and philosophical problems at some length.

16.31 The committee emphasises that the motto is simply not appropriate for a tax department that has the task of applying the law. This inappropriateness cannot be remedied by operational adjustments here or there. It is dangerous to encourage officials to take the motto more seriously, in case they interpret the encouragement as licence to exercise unauthorised discretions. It is impractical and would no doubt be counter-productive to try to explain to disgruntled taxpayers the true jurisprudential meaning of 'it's our job to be fair' in the context of a modern government that is administered according to the rule of law. The only solution, albeit a difficult one, is to abandon the motto. The committee so recommends. If consideration is given to adopting a replacement motto, the committee recommends that it should be tested carefully, not only by research to discover taxpayers' reactions, but also by measuring the motto against the legal and administrative duties of the Inland Revenue Department.

16.32 A number of New Zealand government agencies engage extensively in media campaigns that are designed to influence the behaviour of citizens. Campaigns against dangerous driving and the misuse of drugs come to mind. The Accident Rehabilitation and Compensation Insurance Corporation runs safety campaigns on a lesser scale. The committee raised with officials the question of whether such campaigns would be useful for the Inland Revenue Department.

16.33 The department already conducts some campaigning, notably to encourage people to file their returns and to pay due tax on significant dates. However, the committee had in mind deeper campaigns designed to encourage overall taxpayer compliance and to engender a sense of responsibility and duty when it comes to paying taxes.

16.34 The committee understands that the department has done preliminary work in this area, but has not yet made a decision whether attitude-forming campaigns in the tax area are a good idea. One difficulty is that promoting positive attitudes by this kind of campaigning is a relatively difficult exercise, with the risk that even a well-planned campaign can inadvertently intensify existing negative attitudes.

16.35 Officials advise that the department is at present collating information about attitude-forming media campaigns from other tax administrations, and is finding what it can from other New Zealand government agencies about their knowledge and experience in the area. In due course, the department will decide whether to embark on this activity.

16.36 The committee endorses the department's decision to investigate the possibility of attitude-forming campaigns, and believes that the department is correct to approach the idea cautiously. However, the committee recommends that the department should make progress in the area more rapidly than is currently proposed. If attitude-forming campaigns prove to be feasible, even minor changes in taxpayer attitudes and behaviour could have significant impacts on tax collections and on the department's workload, impacts that will be increasingly important with New Zealand's move to self-assessment. Secondly, the committee re-commends that the department obtain consultants' advice. Attitude formation is a difficult art, and one would not expect the necessary knowledge or experience to reside permanently within the government sector. It is a task where engaging consultants is not only justifiable but advisable.

16.37 During the term of the committee, several cases arose involving complaints about the Inland Revenue Department that received extensive media coverage. Much of this media coverage tended to be highly critical of the department and presented only one side's view because the secrecy requirements in the Tax Administration Act 1994 place constraints on the department responding publicly.

16.38 If the Commissioner cannot respond publicly in cases where the taxpayer goes to the media with complaints about the department, the public perception of what occurred in the particular case may not necessarily be correct.267 It seemed to be a common feature in these highly publicised cases that they were initiated by the taxpayer going to the media with complaints about the department.

16.39 Highly publicised complaints about the department which are not in fact correct can adversely impact upon the integrity of the tax system, because public perceptions play an important role in maintaining the integrity of the tax system. To allow unfounded allegations to go without response could adversely affect taxpayers' perceptions about the tax system, and thereby undermine the system's integrity.

16.40 The committee considers that the Commissioner should be entitled to respond publicly in serious cases when publicity threatens the integrity of the tax system in terms of section 6 of the Tax Administration Act 1994, which requires that the best endeavours of the Commissioner must be used to protect that integrity. Importantly in this regard, this concept includes taxpayers' perceptions of that integrity. Section 6 should allow the administration exception in the secrecy provisions in section 81(1) of the Tax Administration Act 1994 to apply, because 'carrying into effect the Inland Revenue Acts', which is the formulation of the administration exception in section 81(1), should include the Commissioner protecting the integrity of the tax system under section 6 of the Tax Administration Act 1994. Obviously, any decision of the Commissioner to respond publicly requires a careful balancing of the need to protect the integrity of the tax system against unfounded allegations, and maintaining confidentiality of taxpayers' affairs, an important value in New Zealand's tax system, and one included in the definition of the integrity of the tax system in section 6(2) of the Tax Administration Act 1994.

16.41 The committee recommends that section 81(1) of the Tax Administration Act 1994 should be amended to clarify that the administration exception in that provision permits the Commissioner to disclose taxpayer affairs for the purpose of responding to publicity about the department's activities when the Commissioner considers in good faith that such disclosure is necessary to safeguard the integrity of the tax system.


  1. Available at, originally published in the KPMG periodical Executive's Digest. See also Will Hutton, The State We're In, Vintage, 1996.
  2. See chapter 18
  3. (1897) 19 Harvard Law Review 447 at 457-464
  4. Posner R A, 'The Problematics of Moral and Legal Theory' (1998) 111 Harvard Law Review 1637 at 1695
  5. The main secrecy provision is contained in section 81(1), Tax Administration Act 1994 which imposes an obligation on officers of the department (including former officers) to maintain and aid in the secrecy of all matters which come to their knowledge relating to the Inland Revenue Acts (and certain other Acts). Section 81(3) gives officers of the department immunity from having to disclose in any judicial proceedings any matters that come to their notice in the performance of their duties. Section 81(1) and (3) are subject to what is commonly termed the 'administration exception', which allows disclosure by officers of the department when it is necessary for the purpose of carrying into effect the Inland Revenue Acts (and certain other Acts).