Principles of Taxation summary
Overview
1. The fundamental questions of taxation
2. Income Taxes
o Personal income tax (PIT)
3. International Taxation
4. Value Added Tax – General Sales tax
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
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
o But gifts, donations, or voluntary payments to public authorities are not taxes
A tax is a mandatory, non-contractual and non-tort payment to public authorities
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 misdemeanours 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
o a mandatory contribution
o in accordance with the rule of law
o imposed by the public authority on its subjects
o for the purpose of public spending
o without any personal compensation
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
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);…
o Principle of legality
In accordance with the rule of law
• The “essential elements” of a tax must be governed by law, i.e. scope, tax base, tax rate,
administration & procedure on those matters, all taxpayers must give their (collective)
consent
• Part of the history of taxation is the history of how to give this collective consent (= the
history of democracy)
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 and over territory (= the two
main nexuses for taxation)
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
o In practice some taxes (climate, health taxes) are often motivated by specific goals,
but equality between a tax and the amount spent on a specific goals is very rare
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
• 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
• What about social security contributions?
• Like taxes public social contributions are generally mandatory payments imposed by
law
• In most EU countries social protection (unemployment, illness & accidents, old age &
retirement, child care) is provided by semi-public institutions, based on mandatory
social contributions
• But unlike taxes social contributions are subject to spending for specific social
purposes
• 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)
• What about tolls and fees?
• User fees are payments for services or goods provided by public authorities
• They are not taxes, because there is a clear and specific compensation for the
payment
, • However the price of the service is not a market price but a price unilaterally
determined by the public authority
The fundamental questions
Why do we tax and how do we tax?
• Why: the benefit principle
• Why: the principle of sovereignty
• How: the ability to pay & the equality principle
• How: the principle of legality
• How: efficiency
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 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
Why: the principle of sovereignty
• The sovereignty principle justifies taxation on the basis of the relationship of subordination
between the taxpayer and his government
• The sovereignty principle is a solid basis for taxation in connection with the legality principle:
“No taxation without representation”
o Levying taxes and spending tax revenue is subject to (democratic) consent & control
of the taxpayers
o Otherwise: arbitrary taxation
How: ability to pay & equality
• Benefit principle? Those persons who make most use and benefit of government action
should pay most taxes
Overview
1. The fundamental questions of taxation
2. Income Taxes
o Personal income tax (PIT)
3. International Taxation
4. Value Added Tax – General Sales tax
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
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
o But gifts, donations, or voluntary payments to public authorities are not taxes
A tax is a mandatory, non-contractual and non-tort payment to public authorities
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 misdemeanours 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
o a mandatory contribution
o in accordance with the rule of law
o imposed by the public authority on its subjects
o for the purpose of public spending
o without any personal compensation
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
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);…
o Principle of legality
In accordance with the rule of law
• The “essential elements” of a tax must be governed by law, i.e. scope, tax base, tax rate,
administration & procedure on those matters, all taxpayers must give their (collective)
consent
• Part of the history of taxation is the history of how to give this collective consent (= the
history of democracy)
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 and over territory (= the two
main nexuses for taxation)
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
o In practice some taxes (climate, health taxes) are often motivated by specific goals,
but equality between a tax and the amount spent on a specific goals is very rare
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
• 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
• What about social security contributions?
• Like taxes public social contributions are generally mandatory payments imposed by
law
• In most EU countries social protection (unemployment, illness & accidents, old age &
retirement, child care) is provided by semi-public institutions, based on mandatory
social contributions
• But unlike taxes social contributions are subject to spending for specific social
purposes
• 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)
• What about tolls and fees?
• User fees are payments for services or goods provided by public authorities
• They are not taxes, because there is a clear and specific compensation for the
payment
, • However the price of the service is not a market price but a price unilaterally
determined by the public authority
The fundamental questions
Why do we tax and how do we tax?
• Why: the benefit principle
• Why: the principle of sovereignty
• How: the ability to pay & the equality principle
• How: the principle of legality
• How: efficiency
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 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
Why: the principle of sovereignty
• The sovereignty principle justifies taxation on the basis of the relationship of subordination
between the taxpayer and his government
• The sovereignty principle is a solid basis for taxation in connection with the legality principle:
“No taxation without representation”
o Levying taxes and spending tax revenue is subject to (democratic) consent & control
of the taxpayers
o Otherwise: arbitrary taxation
How: ability to pay & equality
• Benefit principle? Those persons who make most use and benefit of government action
should pay most taxes
