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Summary - Principles of Taxation (HBA21C)
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Principles of taxationI. FUNDAMENTAL QUESTIONS OF TAXATION
WHAT IS A TAX?
I The fundamental questions of taxation
• Police Stopping you for speeding and gives you a II Income Tax
fine - NOT A TAX • Personal income tax (PIT)
• Robbing a bank, is that a tax - NO • Corporate income tax (CIT)
• When I make a payment for unemployment • Capital gains tax
benefits, is that a tax ??? – NO III Compliance, procedure & sanctions
• Military service - unequal tax IV Value Added Tax – General Sales tax
• Environmental levy on plastic bottles - TAX V International Taxation
• VAT on gas – TAX VI European principles of taxation
• Paying for a passport - not a tax. VII Social security <-> taxes.
• PIT charged - tax
• Social Security - NOT A TAX !!! (there is no link
between your contribution and your benefits of
social security because it is on the basis of need)
Tax: A mandatory, non-contractual, and non-tort payment to public authorities that always has a legal
basis. A tax is a payment without consideration (without quid pro quo). Tax is a unilateral contribution to
the budget of the public authority which is entitled to spend it for any public purpose.
- EX: a taxpayer has neither the right to claim some form of personal compensation for the amount
of tax paid, nor the right to decide how the payment of his tax is spent by public authorities.
- When the government spends money on the military, police force, education - THAT IS FROM
TAXES
- Social security / health care are not included in that.
No taxes:
• Payments on the basis of a contractual obligation. That includes contractual payments
between private parties, and contractual obligations between private parties and public
authorities.
• Payments on the basis of a non-contractual liability of tort vis à vis private parties or
public authorities
• A gift or donation, or voluntary payments to public authorities. Cfr. Voluntary gifts to
the treasury in India, voluntary payment of tax, “not legally due” by Starbucks in U.K.
• A payment imposed or enforced by public authorities without a legal basis is not a tax but
“extortion”.
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, A tax is
a) a mandatory contribution
b) in accordance with the rule of law
c) imposed by the public authority on its subjects
d) for the purpose of public spending
e) without any personal compensation.
A. Mandatory Contribution:
A tax is a mandatory contribution which can be enforced by the public authority. The taxpayer
has no choice but to pay the tax, even when the taxpayer totally disagrees with the way the
government is spending his money.
From the moment he falls within the legal conditions that the tax is due, the tax can be
imposed by force. The only way to avoid the tax is to put yourself in a factual or legal condition
in which the tax is not due
B. In accordance with the rule of law:
A tax can only be levied in accordance with the rule of law - it needs a legit legal basis.
NO TAXATION WITHOUT REPRESENTATION. Magna Charta (1215) – UK Bill of rights 1689
– US Bill of Rights 1776 - Déclaration des Droits de l’Homme (1789). PRINCIPLE OF
LEGALITY.
• The law requires that the person, subject to the tax, gives not his individual, but his collective
consent for the authority to levy the tax, i.e. the essential elements of the tax: scope, tax base,
tax rate, administration & procedure.
• Part of the history of taxation is the history of how to give this collective consent Þ history of
democracy.
C. Levy Imposed by the Public Authority on its subjects:
The ultimate foundation of a tax is the authority a government uses over its subjects. In order
to be a taxpayer, you are subject to a government, central, regional, or local level of
government.
Governments exercise authority in two ways: (the two nexus for taxation)
1. Over persons
2. Over territory.
Historically, the ultimate symbol of political authority was the fact that a vanquished community
paid tax to the victor. Cfr. Feudal taxes.
D. For the purpose of Public Spending:
Taxes cannot be reserved for particular expenses. The spending of taxes is a political
discretionary decision, subject to political arbitrage in parliament. Some taxes are often
motivated by specific goals (climate, health taxes), but equality between a tax and the amount
spent on a specific goals is very rare. The public authority is sovereign in spending the taxes
collected from the taxpayer. Control on spending by the public authority is exercised by
parliament.
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,E. without any personal compensation:
A tax is a unilateral payment based on the relationship of being subject to a personal or
territorial government authority.
In principle the government doesn't owe the taxpayer anything on the basis of the payment of
tax. The government provides law and order, administration, and other public services. But
not in function of the amount of taxes paid, but because it has authority on all citizens and
persons on its territory.
Social Taxes and Social Security:
- In most EU countries social protection (unemployment, illness & accidents, old age,
childcare) is provided by semi-public institutions, based on mandatory social contributions
imposed by law as a condition to access to benefits.
- Unlike taxes, social contributions are subject to spending for specific social purposes & are
not unilateral, but entitle the contributor to specific social benefits.
- There is no direct proportional link between contributions and benefits. Benefits are
distributed on the basis of need (principle of solidarity).
What if the government doesn’t spend the money they way they promised (EX: they say the money is
going to an environment, however it is not actually being spent on that)
- The government is allowed to do this because it is hard to determine how much money they
will actually need for a tax.
- So what is done with the extra money?
- They can stop the tax
- They can keep it and spend on other things.
What are some examples of taxes?
Past:
- Beard Tax
- Poll tax
- Poll tax as a condition for voting
- Sexual Intercourse Tax
- Droit de relief: levy on the transfer of feudal fiefdoms paid by the vassal to the Lord, in
order to be reinstated in his rights to the fiefdom. At that time the vassal would swear loyalty
and recognise his overlordship.
- Feudal levy on chattel (personal property): the privilege of the Lord to take part of the
personal property (best beast) upon death.
- These feudal levies are the predecessors of the current inheritance and estate
taxes upon death and the transfer taxes on real property.
- Corvées: Taxes paid in kind by providing services for free (ancient Egypt, feudal system, Russia,
Chinese empire)
-
Present: Look at the non-exhaustive list in the slides.
- Church Tax (Germany, Scandinavia)
- Stamp Taxes
- Taxes on petrol, alcohol, tobacco, sugar, fast food…
- Sales Tax, VAT, General Sales Tax
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, - Import / export duties
- PIT
- Payroll Tax
The difference in taxes is determined by the taxable situation or event. Any situation or event may be an
occasion to levy a tax: growing a beard, death, the sale of goods or services, making a gift, establishing a
deed etc.
Whatever the name or the taxable situation or event, practically all taxes in modern society must be paid
in legal tender (cash), i.e. all taxes in the end are paid from either income or wealth (assets). All taxes in
the end are charges on income or wealth.
WHAT ARE THE FUNDAMENTAL PRINCIPLES OF TAXATION?
1. WHY DO WE TAX?
1.1. The benefit principle justifies taxation on the basis of the use made or the benefit derived by the
taxpayer from government goods and services
- EX: those who make most use and derive the most benefit from the government
action should pay the most taxes.
- Can be compared to the market principle - however taxes are not determined by
supply & demand and the government is not in the business to make a profit.
Taxes are the way we pay for a civilised society.
- However, the government doesn't act as a market and the benefit
principle can’t be compared to the market principle in that way. A citizen
is entitled to government services not because he pays taxes, but because
he is a citizen.
1. Why do we tax: the principle of sovereignty
- Principle of Sovereignty: Justifies taxation on the basis of the relationship of
subordination between the taxpayer and his government.
- No taxation without representation - levying taxes and spending tax revenue is
subject to democratic consent and control of the taxpayers. Otherwise there is
arbitrary taxation.
- Not absolute because the POS results in taxation of nationals, or non-nationals
under the territorial jurisdiction of the government.
2. How do we tax: the ability to pay and the equality principle
a. The ability to pay principle is the expression of an equitable distribution of the tax
burdens in accordance with a person’s economic capacity to bear a tax burden relative to
other taxpayers.
i. Tax must always be paid out of income or wealth. This means they are the
financial source of taxation and therefore measure your ability to pay.
b. The ability to pay principle should be considered together with the equality principle
(equals are taxed as equals and unequals are taxed unequally) The main question is with
respect to which criteria taxpayers are considered to be equal.
c. There are two types of equitable distribution of charges
i. Horizontal equity: means that persons who are in a comparable situation
(with respect to income or wealth) should pay the same tax (absolute amount of
tax or proportional tax rate)
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