New Zealand is a parliamentary democracy with the British queen as the nominal head of state. It has a unicameral (1 house) parliament with 120 seats; half of these represent constituencies and the other half are "list" seats. In the mixed member proportional (MMP) system established in 1996, each voter has 2 votes: 1 for the constituency member of parliament and 1 for a party. After the constituencies are declared, the list seats are calculated so that a party's representation in parliament is similar to the party vote that they received in an election. In contrast to the "first past the post" system in which 2 parties predominate (as in the United States), MMP has allowed smaller parties to be represented, although they must either have a constituency member of parliament elected or get a minimum of 5 percent of the national party vote to qualify for list seats.
Throughout the 20th century, until 1996, the political system was dominated by 2 political parties: a conservative party called "National" since the 1930s and a liberal/left wing party called "Labour." The first Labour Party government was elected in 1935 and began constructing a welfare state , building state housing, and investing in health and education. New state enterprises were established. From the 1940s to the 1970s the Labour and National parties exchanged control several times, but the welfare state remained intact. Ironically, the election of a new Labour government in 1984 began a movement to weaken the welfare state and to reduce the role of government in the economy (a "monetarist" approach). The reforms instituted by the new government included progressive tariff reductions, privatization of many state enterprises, and cutbacks in some social services. These policies were pursued and, in some cases, strengthened by the National Party government elected in 1990; for example, there were cutbacks in social welfare payments and more privatizations. It was not until the election of 1999 that some of these policies were slowed or reversed with the election of a coalition government led by the "reformed" Labour Party in coalition with the "left-wing" Alliance Party.
The impact of MMP on the political system has been considerable. The 2 governments elected since 1996 have been coalitions, first of "the right" and then of "the left." In each parliament, several smaller parties have held 5 or more seats and, in some cases, have had an influence on coalition government policy. The smaller parties range from the ACT Party, which advocates more radical "monetarist" reforms than those already undertaken, to the Green Party, which has among its parliamentary members advocates for legalization of marijuana and environmentalists of various types.
Income tax is the largest source of revenue for the government, accounting for 46 percent of all taxes in 1998-99 (with an additional 5 percent withholding tax on interest and dividends). A Goods and Services Tax (GST) was instituted in 1996 and currently stands at 12.5 percent on virtually all goods and services; this tax contributed 26 percent of tax revenue. Company tax contributed only 12 percent to revenue in 1998-99 while the other 11 percent of tax came from various duties . There is a 3-layered income tax system, with income up to NZ$38,000 a year taxed at 19.5 percent, then income above this and up to NZ$60,000 taxed at 33 percent, and income above that is taxed at 39 percent. Companies are taxed at a flat rate of 33 percent.