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[HBA21c] Principles of Taxation: summary 2023/2024
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[HBA21c] Principles of Taxation: summary 2023/2024. Written using notes from classes and the book.
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What is a tax?Definition of taxation
In many countries, there’s not a precise definition of a tax included in the law, leaving the
courts to identify the characteristics of what constitutes a tax.
1. Nonetheless, irrespective of its formal name, a tax is a compulsory payment that is
usually made in cash to support the functioning and activities of the government.
a. Such a definition has practical importance because there are a number of legal
principles that apply only to contributions qualifying as taxes (ex: principle of
legality).
2. Taxes can come in many forms (ex: income, sales and property taxes) and are usually
paid in cash, but can sometimes be paid in kind (ex: in Flanders, you can pay your
taxes by giving a painting you inherited to the government).
a. In the 1600s, so-called tithes were a mandatory contribution in the form of
1/10th of something.
b. In the Roman Empire, citizens could perform public works instead of paying
taxes (so-called opera publica).
c. In Rwanda, Umuganda is a national holiday where all adult citizens must take
part in mandatory community work.
Not all payments made to the government are considered taxes:
1. Contractual obligations.
a. For example, if an individual rents an apartment from a public authority, the
rent owed by the individual isn’t a tax because it’s paid to the government as
part of a contract.
2. Non-contractual liability (tort, criminal law).
a. For example, fines and penalties serve as a punishment for wrongdoing or
compensation for damages, and as such aren’t considered as taxes that support
the government.
3. Voluntary payments.
a. For example, you might decide to voluntarily give money to the government
and, since these payments are made out of generosity and not as a legal
obligation, they can’t be considered as taxes.
, General characteristics of a tax
Taxes generally have 5 characteristics:
1. A mandatory contribution.
a. Whether or not the taxpayer agrees with the government’s spending or
policies, he has no choice but to pay taxes.
i. The only way you can (indirectly) impact the way tax revenue is spent
is by electing the leaders who (in your opinion) will spend the money
in the best way.
b. This criterion can be explained by several economic concepts:
i. Public goods are subject to market failure, because without mandatory
contributions and enforcement, taxpayers wouldn’t have any incentive
to pay taxes, thus leading to market failure.
ii. Centralising certain government tasks can lead to economies of scale,
which requires the payment of taxes to finance these tasks.
c. From the moment a taxpayer falls within the legal scope of application of the
tax, it can be imposed by force (fines, interest for late payments, seizure of
assets and legal action).
i. This is an essential characteristic that distinguishes taxes from other
types of contributions.
ii. The only way to avoid paying the tax is to put yourself in a factual or
legal situation in which the tax isn’t due (ex: if you don’t want to pay
all the taxes related to owning a car, you could buy a bike).
2. In accordance with the rule of law.
a. A tax can only be levied in accordance with the rule of law, meaning that it
needs a legitimate legal basis (i.e. legality principle).
b. The principle of “no taxation without representation” states that citizens have
the right to participate in the taxation process and that they shouldn’t be
required to pay taxes unless they have a say in how they’re collected and
spent.
i. This principle is rooted in many important legal documents such as the
Magna Carta, the UK Bill of Rights and the French Déclaration des
Droits de l’Homme et du Citoyen.
3. Imposed by the public authority on its subjects.
a. The government can only tax subjects (natural persons and corporations) that
have a sufficiently close connection (or “nexus”) to its territory.
i. This means that a government can only tax the income of residents or
nationals of the state, not the income of those living abroad and have
no link with the state.
b. With the rise of the digital economy, questions have emerged on the taxation
of companies operating from abroad but offering services in the country (ex:
Google).
i. In the US, a Supreme Court ruling allows states to collect sales taxes
from online retailers that don’t have a physical presence in their state.
, 4. For the purpose of public spending.
a. The allocation of tax revenue is a difficult task, because the government must
consider the evolving needs of society, its priorities and the political/economic
context when deciding to allocate tax revenue.
i. Of course, the money collected is never enough to meet all of society’s
needs.
b. Although the government is “free” to decide how to spend the tax money, it’s
subject to legal and constitutional constraints.
5. Without any personal compensation.
a. A tax is a unilateral payment imposed by the government on individuals and
entities based on the relationship of being subject to a government authority:
the government doesn’t owe you anything in return for the payment of taxes
(i.e. no quid pro quo).
i. The government provides many services, but those aren’t proportional
to the amount of taxes paid.
b. Nonetheless, the amount of taxes paid may be used as a means of determining
eligibility for certain government services/benefits (ex: eligibility for social
welfare benefits is determined based on taxable income).
Taxes vs other types of contributions
It’s important to distinguish taxes from other types of payments to the government:
1. Social security contributions.
a. In most EU countries, social protection (unemployment, illness and accidents,
retirement, childcare) is provided by semi-public institutions, and funding of
these programs comes from mandatory social contributions.
i. These contributions are typically taken from an employee’s gross
salary, together with a contribution paid by the employer.
b. Taxes and social security contributions are both mandatory payments to the
government but, unlike taxes, social security contributions are collected to
specifically fund certain programs.
i. The earmarking of these contributions for specific risks is what
distinguishes taxes from social security contributions.
2. Toll charges and fees.
a. Many countries levy toll charges for driving on roads and bridges, but these
charges don’t qualify as taxes:
i. There’s a specific compensation for the payment (i.e. the user receives
a specific good/service in exchange for the fee).
ii. The payment can be avoided (ex: not driving on the highway).
, 3. Belgium’s police van tax (“combitax”).
a. In the 2010s, many Belgian municipalities introduced a police van tax that
applied when an individual had to be transported by a police van (ex: in the
case of public intoxication).
i. The idea of introducing it was that the expense of this transport should
be borne by the individuals involved, not the taxpayers.
b. However, the introduction of this tax created discussions on its legal nature:
i. One could argue that the fee was paid in exchange for a specific
service (i.e. transportation), but it could also be said that it concerned a
public expense (i.e. funding the police).
ii. The individual involved can’t really decide whether or not to use the
service.
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