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Summary Principles of Taxation
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Principles of taxationOverview
1. The fundamental questions of taxation
2. Income taxes
• Personal income tax (PIT)
3. International taxation
4. Value added tax – general sales tax
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,Part 1: The fundamental principles of taxation
Overview
• What is a tax?
• What are the fundamental questions of taxation?
• What are the essential elements of a tax?
What is a tax?
• A tax is a payment in cash or in kind to a public authority (=by law)
o But payments on the basis of a contractual obligation are not taxes
• That includes contractual payments between private parties, and contractual
obligations between private parties and public authorities
o But payments on the basis of a non-contractual liability of tort vis à vis private parties or
public authorities are not taxes
• A tort, in common law jurisdiction, is a civil wrong that causes a claimant to suffer loss
or harm, resulting in legal liability for the person who commits the tortious act. It can
include intentional infliction of emotional distress, negligence, financial losses, injuries,
invasion of privacy, and many other things.
o But gifts, donations, or voluntary payments to public authorities are not taxes
o A tax is a mandatory, non-contractual and non-tort payment to public authorities –
not that simple!
o But: a tax must have a legal basis
o And: some mandatory, non-contractual, non-tort payments are fines (e.g. financial
sanctions for crimes or misdemeanors are not taxes)
• A tax is a payment without consideration, i.e. without quid pro quo
o Tax is a unilateral contribution to the budget of the public authority, which is
entitled to spend it for any public purpose
o The taxpayer neither has the right to claim some form of personal compensation for
the amount of tax paid, nor any right to decide how the payment of his tax is spent
by public authorities
o The public authority is sovereign in spending the taxes collected from the taxpayer
• Control on spending by the public authority is exercised by parliament
• A tax is
1. a mandatory contribution
2. in accordance with the rule of law
3. imposed by the public authority on its subjects
4. for the purpose of public spending
5. without any personal compensation (for the tax payer)
1. A mandatory contribution
• A tax is a mandatory contribution which can be enforced by the public authority
o The taxpayer has no choice but to pay the tax, even when the taxpayer disagrees
with the way the government spends the money
• From the moment a taxpayers falls within the legal scope of application of the tax, the tax
can be imposed by force
o The only way to avoid the tax from being due is to place oneself in a factual or legal
situation in which the tax is not due
e.g. Buy car: VAT on purchase, road tax (to drive on public roads), taxes on fuels (excise taxes)
e.g. some countries are so rich that they have other recourses than tax to finance
2
,2. In accordance with the rule of law
• A tax can only be levied in accordance with the rule of law, i.e. the tax needs a legitimate
legal basis
• No taxation without representation
o Magna Charta (1215); UK Bill of rights (1689); Déclaration des Droits de l’Homme
(1789); paying 1/10th of income/agricultural revenue to the church; work on publicly
available services because you live on someone’s land e.g. working on a road;…
à Principle of legality
(requires the essential elements to be laid down in tax code ‘who is tax payer, what is taxed, tax base
(on what amount), tax rate (% on base), set of rules to enforce tax bills)
• The “essential elements” of a tax must be laid down in the tax statute (tax codes) voted by
parliament, i.e. scope (who and what to tax?), tax base, tax rate, administration & procedure
à on those matters, all citizens must give their (collective) consent though the election of a
parliament = basic principle of democracy
o But only individuals vote; legal persons do not vote (companies don’t vote)
• Part of the history of taxation is the history of how to give this collective consent (= the
history of democracy)
3. Levy imposed by the public authority on its subjects
• The ultimate foundation of imposing a tax is the authority which a government exercises
over its subjects
o In order to be a taxpayer, one must be subject to a government (central, regional, or
local level of government)
• Governments exercise authority in two ways: over persons (form of residence) and over
territory (territory source of the income irrespective of where the person resides, i.e. also
foreign income due to worldwide tax liability)
o = the two main nexuses, i.e., a sufficient connection, for taxation
4. For the purpose of public spending
• In principle taxes cannot be reserved for particular expenses
o Subject to parliamentary control on expenses, the government is free to determine
for which public purposes taxes are to be spent
o The spending of taxes is a discretionary decision, subject to political arbitrage in
parliament
• In practice some taxes (climate, health taxes) are often motivated by specific goals
(dissuasive taxes; so high they become prohibited to buy e.g. tobacco or diesel), but
equality between a tax and the amount spent on a specific goals is very rare
5. Mandatory payment without personal compensation
• A tax is a unilateral payment based on the relationship of (personally or territorially) being
subject to a government authority
• That government does not owe the taxpayer anything on the basis of the payment of tax
(no quid pro quo)
• The government in charge does provide law and order, administration and other public
services. But that is not in function of the amount of taxes paid; it is because it has authority
on all citizens and persons on its territory
3
, • Social security contributions?
o Like taxes public social contributions are generally mandatory payments imposed by law
o In most EU countries social protection (1. unemployment, 2. illness & accidents, 3. old
age & retirement, 4. child care) is provided by semi-public institutions, based on
mandatory social contributions
o But unlike taxes, social contributions entitle the contributor to specific social benefits
(e.g. there is some form of compensation: only contributors have access to benefits)
• Social contributions are not unilateral but entitle the contributor to specific social
benefits (i.e. there is some form of compensation: only contributors have access to
benefits)
• However, there is no direct proportional link between contributions and benefits:
benefits are distributed on the basis of need (principle of solidarity and insurance)
• Tolls and fees?
o User fees and toll charges are payments for services or goods provided by public
authorities (e.g. toll for driving on roads; bridges, for docking in ports, etc.)
o They are not taxes, because there is a clear and specific compensation for the payment
o You can avoid them by not making use of the service or by not buying the good
o However, the price of the service is not a market price, but a price unilaterally
determined by the public authority
Why do we tax and how do we tax?
1. Why: the benefit principle
2. Why: the principle of sovereignty
3. How: the ability to pay & the equality principle
4. How: the principle of legality
5. How: efficiency
1. Why: the benefit principle
• The benefit principle justifies taxation on the basis of the use made or the benefit derived by
the taxpayer from government goods and services
o Those who use (and benefit from) government services should pay taxes
o + those who make more use (and derive most benefit- from government action
should pay more taxes
• “Taxes are the price we pay for a civilized society”
• However the benefit principle ó the characteristic of a tax as a unilateral mandatory
payment without any personal compensation
o The citizen is entitled to government services like general administration, police
protection, national education, health service and roads because he is a citizen of
that government, not because he pays taxes to that government
2. Why: the principle of sovereignty
• Sovereignty is the right for a State to regulate its affairs (through its governmental
institutions – parliament/executive power/judiciary) in the most suitable way and allow a
State to impose/enforce rules on/against persons who have a connection with the territory
of that State)
• Sovereignty is limited by the territory of a State and the persons who have a connection with
that State (e.g. nationality, residence – which are the two most important nexuses for income
taxation)
• The sovereignty principle justifies taxation on the basis of the relationship of subordination
between the taxpayer and his government
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