Ethics And Taxation 9811500886, 9789811500886, 9789811500893

Table of contents :
Preface......Page 5
Contents......Page 7
Editor and Contributors......Page 9
Abbreviations......Page 11
List of Figures......Page 15
Overview of Case Law......Page 16
1 Introduction: Why Ethics Matter in Taxation......Page 21
References......Page 37
Tax Policy and Design of Tax Law......Page 40
2.1 Introduction......Page 41
2.2.1 Morality......Page 43
2.2.2 Tax......Page 45
2.3.1 Property Rights......Page 46
2.3.2 The ‘Social Contract’ and Natural Rights......Page 47
2.3.3 The Meaning of ‘Private Property’......Page 48
2.3.4 Tax and ‘Theft’......Page 50
2.4 The Moral Issues of Raising and Using Tax Revenue......Page 54
2.5 Other Viewpoints......Page 58
2.6 Concluding Remarks......Page 59
References......Page 60
3 Social Contract and Beyond: Sociability, Reciprocity and Tax Ethics......Page 64
3.1 Introduction......Page 65
3.2 Human Sociability, Law, Tax and Morality......Page 66
3.3.1 Introduction: Hobbes’ Social Contract, and Its Context......Page 69
3.3.2 Social Contract: Transition to Civil State and Justification of Obedience......Page 71
3.3.3 Hobbes’ Moral Psychology......Page 74
3.3.4 Various Relationships of Reciprocity......Page 76
3.3.5 Hobbes: Conclusion......Page 81
3.4.1 Introduction......Page 82
3.4.2 Natural Law and State of Nature......Page 83
3.4.3 Cooperation Comes Quite Naturally, the Social Contract Inverted......Page 84
3.4.4 Egoism and Mutual Aid......Page 86
3.4.5 Civil Laws as Self-legislation......Page 87
3.4.6 Reciprocity Variations......Page 90
3.4.7 Spinoza: Conclusion......Page 92
3.5.1 Hume in Context......Page 93
3.5.2 Hume’s State of Nature and Social Convention as the Main Ingredients for His Ethics......Page 94
3.5.3 Hume’s Moral Psychology as Preamble on His Ethics......Page 96
3.5.4 Hume’s Ethical Theory: An Overview......Page 97
3.5.5 Hume and the Ethics of Taxation......Page 98
3.5.6 Hume: Conclusion......Page 99
3.6 Conclusion......Page 100
References......Page 102
4.1 Introduction......Page 108
4.2.1 Taxation on Earnings from Labor and Forced Labor......Page 110
4.2.2 The Principle of Fairness......Page 115
4.3 Ayn Rand: Government Funding Without Compulsion......Page 120
4.4 Rothbard: “Theft on a Grand and Colossal Scale”......Page 124
References......Page 127
5.1 Introduction......Page 131
5.2.1 Head Taxes......Page 132
5.2.3 Progressive Taxation......Page 133
5.3.1 God’s Ownership......Page 137
5.3.2 The Temple Tax......Page 138
5.3.3 The Tithe......Page 139
5.3.4 The Sabbatical and Jubilee Redemptions......Page 140
5.3.5 Prophetic Protests......Page 142
5.3.6 Classical Judaism......Page 145
5.4.1 Introduction......Page 146
5.4.2 The Gospels......Page 147
5.4.3 The Book of Acts......Page 148
5.4.4 Obedience to Rulers......Page 149
5.5.1 Judaism......Page 150
5.5.2 Roman Catholicism......Page 151
5.5.3 Protestantism......Page 154
5.6 Conclusion......Page 156
References......Page 158
6.1 Introduction......Page 161
6.2 Theories of Tax......Page 163
6.2.1 Libertarianism......Page 164
6.2.2 Utilitarianism......Page 167
6.2.3 Political Liberalism......Page 170
6.3 Forms of Tax......Page 171
6.3.1 Income Tax......Page 172
6.3.2 Property Tax......Page 174
6.3.3 Wealth Transfer Tax......Page 175
6.3.4 Sales Tax......Page 176
6.4 Conclusions......Page 177
References......Page 178
7.1 Introduction......Page 180
7.2.1 Internationalist and Cosmopolitan Perspectives......Page 183
7.2.2 Methodology......Page 184
7.3.1 State Consent and the Intergovernmental Model of Democratic States......Page 186
7.3.2 Regulatory (Tax) Competition......Page 187
7.3.3 International Cooperation Between States......Page 189
7.3.4 Conclusion......Page 191
7.4.1 Introduction......Page 192
7.4.2 The Politicization of Global Tax Governance......Page 194
7.4.3 The Promises of the ‘All-Affected Principle’......Page 195
7.5 Conclusion......Page 197
References......Page 198
Ethical Standards and Obligations for Tax Advisors and Taxpayers......Page 203
8 Taxpayers’ Subjective Concepts of Taxes, Tax Evasion, and Tax Avoidance......Page 204
8.2 Social Representations......Page 205
8.3 Attitudes......Page 207
8.4 Attitudes Towards Honest and Dishonest Taxpayers......Page 209
8.5 Attitudes Towards Tax Avoidance, Tax Evasion, and Tax Flight......Page 211
8.6 Attitudes and Social Representations of Taxation, Tax Avoidance and Tax Evasion......Page 213
8.7 Synopsis......Page 214
References......Page 215
9.1 Introduction......Page 219
9.2 Tax Planning and Business Ethics......Page 221
9.3 Corporate Social Responsibility......Page 223
9.4 Good Tax Governance Under CSR......Page 226
9.5 Ethical Decision-Making......Page 229
9.6 Transparency: A Procedural Element of Good Tax Governance......Page 233
9.7 Conclusions......Page 237
References......Page 238
10.1 Introduction and Context......Page 244
10.2 Tax Avoidance in the 21st Century......Page 245
10.3 Morals in Tax and Ethics in Tax......Page 250
10.4 Codes of Ethical Conduct......Page 252
10.5 Conclusions......Page 255
References......Page 257
Tax Law Enforcement......Page 259
11.1 Introduction......Page 260
11.2 Taxpayer Rights and a Legislative Rights Framework......Page 262
11.3 Public Finance and Administration—The Principles and Compliance Framework......Page 265
11.3.1 Equity and Fairness......Page 266
11.3.2 Certainty and Simplicity......Page 267
11.3.3 Efficiency......Page 268
11.3.5 Effectiveness......Page 269
11.4 An Integrated Rights Framework......Page 272
11.5 What Are the Digital Developments to Which This Framework Should Apply?......Page 274
11.5.1 Electronics and Systems......Page 275
11.5.2 Artificial Intelligence and Tax Administration......Page 278
11.5.3 Challenges......Page 283
11.6.1 Sovereignty, Constitutionalism and Inter-nation Equity......Page 284
11.6.2 Consistency and Proportionality of Exceptions to Laws and Treaty Obligations......Page 287
11.6.3 The Making and Operation of Laws......Page 288
11.6.4 Administrative Interpretation and Exercise of Discretion......Page 290
11.6.5 Privacy, Confidentiality and Security......Page 292
11.6.6 Fairness, Accessibility and the User Experience......Page 294
11.7 Conclusion......Page 295
References......Page 297
12.1 Introduction......Page 304
12.2.1 Definition and Main Characteristics......Page 305
12.2.2 Justifications for and Limits to Combating Tax Avoidance......Page 306
12.2.3 The Role of Proportionality to Control Tax Avoidance by Balancing Rules and Principles......Page 308
12.3 International Human Rights Instruments and Taxpayers’ Rights......Page 311
12.4 International Courts Rulings on Tax Avoidance......Page 313
12.4.1 The European Court of Human Rights. Tax Avoidance and Evasion as Legitimate Restrictions of Fundamental Rights?......Page 314
12.4.2 The CJEU: Tax Avoidance and the Fundamental Freedoms......Page 316
12.4.3 The WTO Agreements and Jurisprudence on Tax Avoidance and Evasion......Page 321
12.5.1 The Anti-tax Avoidance Directive......Page 323
12.5.2 The Multilateral Instrument and the Principal Purpose Test......Page 324
12.6 Conclusion......Page 326
References......Page 328
13 Countermeasures to Tax Fraud, Evasion and Avoidance: A Critical Review......Page 331
13.1 Introduction......Page 332
13.2 The Harmfulness of Fraud, Tax Evasion and Avoidance......Page 333
13.3.1 Methods of Corporate Tax Avoidance......Page 335
13.3.2 Methods of Tax Evasion by Individuals......Page 336
13.3.3 Description of VAT Fraud in the European Union......Page 337
13.4 Estimates of Revenue Loss......Page 338
13.5.1 Creating Third Party Liability......Page 340
13.5.2 Abuse of Law Doctrine in the European Union......Page 343
13.5.3 Blacklisting......Page 349
13.5.4 Public Shaming......Page 351
13.5.5 Automatic Third-Party Reporting Requirements......Page 355
13.6 Summary and Conclusions......Page 361
References......Page 363
14.1 Introduction......Page 367
14.2 Theoretical Background: What Is the Rule of Law?......Page 370
14.3 What Is a Tax Ruling?......Page 372
14.4 What Is State Aid?......Page 375
14.5 Tax Rulings and State Aid......Page 376
14.6.1 EU Perspective......Page 377
14.6.2 U.S. Perspective......Page 379
14.7 Putting It All Together......Page 381
14.8 Conclusions......Page 383
References......Page 384
15.1 Introduction......Page 386
15.2 Context: The Push for Automatic Exchange of Information......Page 387
15.2.1 Technology Trends......Page 388
15.2.2 Political Trends......Page 390
15.2.3 Summary......Page 392
15.3.1 Taxation and Liberty......Page 393
15.3.2 Taxpayer Privacy......Page 394
15.3.3 Confidentiality and Trade Secrets......Page 395
15.3.4 Problems with the Existing Legal Framework......Page 396
15.3.5 Summary......Page 397
15.4.1 Multilateral Taxpayer Bill of Rights......Page 398
15.4.2 Withholding Tax for Non-cooperative States......Page 399
15.4.3 Global Financial Registry......Page 400
15.5 Conclusions......Page 401
References......Page 402
16.1 The Importance of Judicial Competence in Adjudicating Cases Under Income Tax Law......Page 404
16.2 Competent Statutory Interpretation Requires Some Understanding of Theories of Language......Page 405
16.3 Competent Judging Requires Insight into the Higher-Order Objectives of Income Tax Law......Page 409
16.4 Ascending the Hierarchy of Competence in Statutory Interpretation in Income Tax Law......Page 411
16.5 Additional Justifications for Ascending the Hierarchy of Interpretive Approaches to Income Tax Law......Page 414
References......Page 417

Citation preview

Robert F. van Brederode   Editor

Ethics and Taxation

Ethics and Taxation

Robert F. van Brederode Editor

Ethics and Taxation

123

Editor Robert F. van Brederode BrederodeTax Lancaster, PA, USA

ISBN 978-981-15-0088-6 ISBN 978-981-15-0089-3 https://doi.org/10.1007/978-981-15-0089-3

(eBook)

© Springer Nature Singapore Pte Ltd. 2020 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore

Preface

There exists by necessity a correlation between law and morality. Laws to a great extent are the reflection of the moral standards of society. This is particularly evident in criminal law and family law. Laws prohibiting and sanctioning murder, theft, rape, driving under the influence, or animal abuse contain the notion that such behavior not only is detrimental to the proper functioning of society but is morally wrong as well. Laws that allow marriage between one man and one woman but prohibit polygamous and polyandrous and/or same-sex marriages bear a clear moral distinction of correctness and incorrectness. Tax law is a subset of public law and as such must be affected by moral conceptions as well. The idea of taxes gives rise to moral questions regarding the nature of government; the relation between government (the state) and its subjects or citizens; the proper objectives of taxation; the use of coercive power in collecting taxes and enforcing tax laws; the distribution of the tax burden; and, last but not least, the use and distribution of tax revenue, including the method chosen to determine the latter. It raises questions as to the influence of special interest groups, the balance between individual rights of liberty and privacy and government compliance and information requirements, and the moral justification underlying the efforts of legislators and policy makers to restructure society and steer individual and corporate behavior. These issues are regularly discussed, mostly in popular media driven by ideology and without providing context or perspective. Academic discussion is often fragmented, focusing on a specific or single aspect. This volume aims not at featuring a single philosophical approach but at demonstrating divergence in opinions and approaches within the completeness of a framework consisting of three broad categories: tax policy and design of tax law; ethical standards and obligations for tax advisors and taxpayers; and tax law enforcement. The bibliography is organized separately for each chapter and found directly following each individual chapter. A register of case law is also organized by the chapter and found in consolidated form at the end of the book. This volume is current with the literature and case law through January 2019.

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Preface

The editor would like to extend his gratitude to Dalhousie University, Schulich School of Law, for hosting a conference on the topic of this book in October 2018, in Halifax, Canada, allowing the authors to present and discuss the first versions of their respective contributions. Foremost, the authors of these chapters deserve my deepest gratitude for their thorough and stimulating work and for their gracious patience with my insistent prodding and nagging. Lancaster, PA, USA

Robert F. van Brederode

Contents

1

Introduction: Why Ethics Matter in Taxation . . . . . . . . . . . . . . . . Robert F. van Brederode

Part I

1

Tax Policy and Design of Tax Law

2

The Moral Basis for Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Jane Frecknall-Hughes

3

Social Contract and Beyond: Sociability, Reciprocity and Tax Ethics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Hans Gribnau and Carl Dijkstra

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4

Libertarian Perspectives on the Ethics of Taxation . . . . . . . . . . . . . Walter E. Block and Christian Torsell

5

Head, Proportional, or Progressive Taxation: An Evaluation Based on Jewish and Christian Ethics . . . . . . . . . . . . . . . . . . . . . . 115 Ronald M. Green

6

Developing Moral Standards for Taxation . . . . . . . . . . . . . . . . . . . 145 Jennifer Bird-Pollan

7

Global Tax Justice: Who’s Involved? . . . . . . . . . . . . . . . . . . . . . . . 165 Cees Peters

Part II

Ethical Standards and Obligations for Tax Advisors and Taxpayers

8

Taxpayers’ Subjective Concepts of Taxes, Tax Evasion, and Tax Avoidance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191 Christoph Kogler and Erich Kirchler

9

Ethical Standards for Tax Planning by Corporations . . . . . . . . . . . 207 Ave-Geidi Jallai

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Contents

10 Ethical Standards for Tax Advisers . . . . . . . . . . . . . . . . . . . . . . . . 233 Michael Walpole Part III

Tax Law Enforcement

11 Taxpayer Rights and Protections in a Digital Global Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251 Duncan Bentley 12 Is There Any International Fundamental Right Against an International General Anti-avoidance Rule? . . . . . . . . . . . . . . . 295 João Dácio Rolim 13 Countermeasures to Tax Fraud, Evasion and Avoidance: A Critical Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 323 Robert F. van Brederode 14 Tax Rulings, State Aid and the Rule of Law . . . . . . . . . . . . . . . . . 359 Aleksandra Bal 15 Cross-Border Big Data Flows and Taxpayer Privacy . . . . . . . . . . . 379 Arthur J. Cockfield 16 The Ethical Tax Judge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 397 Kim Brooks

Editor and Contributors

About the Editor Robert F. van Brederode (LL.M., Utrecht University, 1985; Ph.D., Tax law, University of Amsterdam, 1993) is an independent tax lawyer and legal scholar. He held senior positions in tax with several of the Big 4 and top 10 accounting firms in Europe and the USA and was in-house tax counsel to a Fortune 100 company. He served as Assistant Professor at Maastricht University, School of Law, Professor of tax law at the Erasmus University, School of Economics, and Adjunct Professor at New York University, School of Law, Graduate Tax Program. His research areas are public law and tax law both from a legal and economic perspective with concentration on international tax and global indirect taxes and particular interest for comparative studies, tax law interpretation, tax policy, normative aspects of taxation, and criminal law as relevant to tax. He published dozens of journal articles and eight books on tax topics and is a frequent speaker at international seminars and conferences. His most recent books (both with Richard Krever) are Legal Interpretation of Tax Law (Kluwer Law International, 2nd edn., 2017) and VAT and Financial Services: Comparative Law and Economic Perspectives (Springer, 2017). Under the pen name Robert Fredericks, he also published a novel, The Enemy Within.

Contributors Aleksandra Bal Vertex Inc., King of Prussia, USA Duncan Bentley Swinburne University of Technology, Melbourne, Australia Jennifer Bird-Pollan College of Law, University of Kentucky, Lexington, USA Walter E. Block College of Business, Loyolo University, New Orleans, USA

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Editor and Contributors

Robert F. van Brederode BrederodeTax, Lancaster, PA, USA Kim Brooks Schulich School of Law, Dalhousie University, Halifax, Canada Arthur J. Cockfield Faculty of Law, Queen’s University, Kingston, Canada Carl Dijkstra Netherlands Tax and Customs The Netherlands; Radboud University, Nijmegen, The Netherlands

Administration,

Utrecht,

Jane Frecknall-Hughes Nottingham University Business School, Nottingham, UK Ronald M. Green Dartmouth College, Hanover, New Hampshire, USA Hans Gribnau Tilburg University, Tilburg, The Netherlands; Leiden University, Leiden, The Netherlands Ave-Geidi Jallai School of Law, Tilburg University, Tilburg, The Netherlands Erich Kirchler Faculty of Psychology, Department of Applied Psychology: Work, Education, and Economy, University of Vienna, Vienna, Austria Christoph Kogler Department of Social Psychology, School of Social and Behavioral Sciences, Tilburg University, Tilburg, The Netherlands Cees Peters Tilburg School of Economics and Management (TiSEM), Tilburg University, Tilburg, The Netherlands João Dácio Rolim IBDT, São Paulo, Brazil Christian Torsell College of Business, Loyolo University, New Orleans, USA Michael Walpole UNSW School of Tax and Business Law, Sydney, Australia

Abbreviations

AAT ACCA AEOI AG AI APA APES APESB Art. ASEAN ASU ATAD ATAP ATC ATO ATR ATR ATT BCE BEPS BVerfGE BVI Cap. CbCR CE Cf CFC Ch CIOT CJEU

Association of Accounting Technicians Association of Chartered Certified Accountants Automatic Exchange of Information Advocate general (EU) Artificial intelligence Advance pricing agreement Accounting Professional and Ethical Standards (Australia) Accounting Professional and Ethical Standards Board (Australia) Article Association of Southeast Asian Nations Anarchy, State, and Utopia (Nozick) Anti-Tax Avoidance Directive Anti-Tax Avoidance Package (EU) Australian Tax Cases Australian Taxation Office Advance tax ruling Australian Tax Reports Association of Taxation Technicians Before Common Era Base erosion and profit shifting Bundes Verfassungs Gericht British Virgin Islands Capitulum (Latin); chapter Country-by-Country Reporting Common Era Confer (Latin); compare Controlled foreign company Chapter Chartered Institute of Taxation (UK) Court of Justice of the European Union

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Cor CRS CSR DC Deut. DG Doc. ECHR ECR Ed. Edn. E.g. EOI ESG Et al. Et seq. Etc. EU EUR Exod FATCA ff FFI G20 GAAR Gal GAO GATJ GATS GATT GBP HL HMRC ICAEW ICAS ICIJ ICJ Id I.e. IEA IFA IGA IMF IP

Abbreviations

Corinthians Common Reporting Standard Corporate social responsibility District of Columbia Deuteronomy Directorate general Document European Convention for the Protection of Human Rights and Fundamental Freedoms European Court Reports Editor Edition Exempli gratia (for example) Exchange of information Environmental, social and governance Et alia; and others Et sequente; in what follows Etcetera European Union Euro Exodus Foreign Account Tax Compliance Act Folio (Latin), and following Foreign Financial Institution Group of Twenty, a forum of the world’s major economies General Anti-Avoidance Rules Galatians Government Accountability Office (USA) Global Alliance for Tax Justice General Agreement on Trade in Services General Agreement on Tariffs and Trade Great Britain Pound House of Lords Her Majesty’s Revenue & Customs Institute of Chartered Accountants in England and Wales Institute of Chartered Accountants of Scotland International Consortium for Investigative Journalists International Court of Justice Idem Id est; that is Institute of Economic Affairs International Fiscal Association Intergovernmental agreement International Monetary Fund Intellectual property

Abbreviations

IRC IRS IT IWB KPI Lec. Lev. LOB Matt MLI MNE n NCCB NGO No. NSWSC OECD OVDP p PAC PCRT Phil POTAS pp PPT PRI PwC Rom s S.C.R SA Sch. Sec. SRI STEP SWI TCF TFEU TIEA TNJ TP US USC UDHR UK

xiii

Internal Revenue Code (USA) Internal Revenue Service (USA) Information technology Internationale Wirtschaftsbriefe Key performance indicator Lectura (Latin), written lecture Leviticus Limitation on benefit Matthew Multilateral Instrument Multinational enterprise Note US National Conference of Catholic Bishops Non-governmental organization Number New South Wales Supreme Court Organization of Economic Coordination and Development Offshore Voluntary Disclosure Program Page Public Accounts Committee (House of Commons, UK) Professional Conduct in Relation to Taxation (UK) Philippians Promoters of Tax Avoidance Schemes (UK) Pages Principal purpose test Principles for Responsible Investment PricewaterhouseCoopers Romans Section Supreme Court Reports (Canada) Société anonyme (public share company under civil law) Schedule Section Socially responsible investing Society of Trust and Estate Practitioners Steuer & Wirtschaft International Tax Control Framework Treaty on the Functioning of the European Union Tax information exchange agreements Tax Justice Network Transfer pricing United States United States Code Universal Declaration of Human Rights United Kingdom

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UN PRI UN UNCTAD UNTS USD v VAT VBDO Vol. Vs vss WTO

Abbreviations

United Nations Principles of Responsible Investment United Nations United Nations Conference on Trade and Development United Nations Treaty Series United States dollar Versus Value-added tax De Vereniging van Beleggers voor Duurzame Ontwikkeling (The Dutch Association of Investors for Sustainable Development) Volume Verse Verses World Trade Organization

List of Figures

Fig. 8.1

Fig. 8.2

Fig. 8.3

Fig. 9.1

Description and evaluation of typical taxpayers, honest taxpayers and tax evaders (adopted from Kirchler 1998, 52). Judgments range from −2 (negative overall evaluation, lazy, stupid) to +2 (positive overall evaluation, hard-working, intelligent) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Perceived fairness of tax avoidance, tax evasion and tax flight among fiscal officers, business students, business lawyers and small business owners (adopted from Kirchler et al. 2003, 548) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mean overall judgements of tax evaders, tax avoiders, honest taxpayers, and typical taxpayers. Plotted points represent participants’ aggregated evaluative scores and vertical lines indicate the mean evaluation for each type of taxpayer (adopted from Kasper et al. 2018, 297) . . . . . . . . . . . . . . . . . . . . The Pyramid of corporate social responsibility . . . . . . . . . . . . . .

197

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200 213

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Overview of Case Law

Chapter 1 United Kingdom Ayrshire Pullman Motor Servs. and DM Ritchie v. C.I.R., (1929) 14 T.C. 754, 763/64 (H.L.) (Eng.). IRC v. Duke of Westminster [1936] AC 1 (H.L.) (Eng.). IRC v. Burmah Oil Co. Ltd (1981) 54 TC 200 (HL). IRC v WT Ramsay Ltd [1982] AC 300. Furniss v. Dawson (1984) 55 TC 324. IRC v. McGuckian [1997] 1 WLR 991. MacNiven v Westmoreland Investments Ltd [2001] STC 237. Barclays Mercantile Business Finance Ltd v Mawson [2005] STC 1. United States Compania General De Tabacos De Filipinas v. Collector of Internal Revenue, 275 U.S. 87 (1927). Commissioner v. Newman, 159 F.2d 848, 850-51 (C.C.A. 2, 1947). Chapter 6 U.S. Supreme Court Compania General De Tabacos De Filipinas v. Collector of Internal Revenue, 275 U.S. 87 (1927). Chapter 10 Australia Bell v Vahexi Pty Ltd 99 ATC 4055. Leary v FCT (High Court) 80 ATC 4452–4453. Symond v Gadens Lawyers Sydney Pty Ltd [2013] NSWSC 955. Walker v Hungerfords (1987) 19 ATR 745.

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Overview of Case Law

Chapter 11 Court of Justice of the European Union CJEU, 22 February 2018, Joined Cases C-398/16 and C399/16, X BV and X NV v Staatssecretaris van Financiën, ECLI:EU:C:2018:110. European Court of Human Rights Sporrong and Lönnroth v Sweden App. Nos. 7151/75 and 7152/75, Series A, No 52, [1982] ECHR 5, 18. United States Supreme Court of Wisconsin State of Wisconsin v Loomis, 881 N.W. 2d 749 (Wis. 2016). Chapter 12 European Court of Human Rights A., B., C. and D. v. the United Kingdom (8531/79) (1981) 23 D.R. 203. (EComHR) http://echr.ketse.com/doc/8531.79-en-19810310/ M.A. and 34 Others v. Finland (Application No. 27793/95). http://echr.ketse.com/doc/27793.95-en-20030610/view/ Riener v. Bulgaria (Application No. 46343/99) (2007) 45 E.H.R.R. 32. http://echr.ketse.com/doc/46343.99-en-20060523/ Hentrich v France, Application no. 13616/88. http://hudoc.echr.coe.int/app/conversion/pdf/?library=ECHR&id=001-57903&filename= 001-57903.pdf&TID=ihgdqbxnfi. Court of Justice of the European Union CJEU, 17 July 1997, Case C-28/95, A. Leur-Bloem v Inspecteur der Belastingdienst/Ondernemingen Amsterdam 2, [1997] ECR I-4161. CJEU, 12 December 2002, Case C-324/00, Lankhorst-Hohorst GmbH v Finanzamt Steinfurt, [2002] ECR I-11802; ECLI:EU:C:2002:749. CJEU, 29 April 2004, Joined Cases C-487/01 and C-2/02, Gemeente Leusden and Holin Groep BV v. Staatssecretaris van Financiën, [2004] ECR I-5337. CJEU, 26 April 2005, Case C-376/02, Stichting ‘Goed Wonen’ v. Staatssecretaris van Financiën, [2005] ECR I-3445; ECLI:EU:C:2005:251. CJEU, 13 December 2005, Case C-446/03, Marks & Spencer plc v. David Halsey (Her Majesty’s Inspector of Taxes), [2005] ECR I-10837. CJEU, 21 February 2006, Case C-255/02, Halifax plc, Leeds Permanent Development Services Ltd and County Wide Property Investments Ltd. v. Commissioners of Customs & Excise, [2006] ECR I-1609; ECLI:EU:C:2006:121. CJEU 2 May 2006, Case C-341/04, Eurofood IFSC, [2006] ECR I-3813.

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CJEU, 12 September 2006, Case C-196/04, Cadbury Schweppes plc and Cadbury Schweppes Overseas Ltd v Commissioners of Inland Revenue, [2006] ECR I-8031. CJEU, 13 March 2007, Case C-524/04, Test Claimants in the Thin Cap Group Litigation v Commissioners of Inland Revenue, [2007] ECR I-2157; ECLI:EU: C:2007:161. CJEU, 5 July 2007, Case C-321/05, Hans Markus Kofoed v Skatteministeriet, (2007) ECR I-5818; ECLI:EU:C:2007:408. CJEU, 17 January 2008, Case C-105/07, Lammers & Van Cleeff NV v Belgische Staat, [2008] ECR I-00173; ECLI:EU:C:2008:24. CJEU, 21 February 2008, Case C-425/06, Part Service, (2008) ECR I-897. CJEU, 21 January 2010, Case C-311/08, Société de Gestion Industrielle (SGI) v Belgian State, (2010) ECR I-487. CJEU, 3 October 2013, Case C-282/12, Itelcar—Automóveis de Aluguer Lda v Fazenda Pública, ECLI:EU:C:2013:629. Germany Steuersplitting, 6 BVerfGE 55, decision of 17 January, 1957. Available at: www. opinioiuris.de/entscheidung/851. Israel Yanko-Weiss Holdings (1996) Ltd v. Halon Assessing Office, (2007) 10 ITLR 524, decision of 30 December 2007. Spain Sentencia Constitutional No. 45/89 (STC 45/1989), 20 February, 1989, Constitutional Court of Spain. Available at: www.hj.tribunalconstitucional.es/en/ Resolucion/Show/1251. United States Hoeper v. Tax Commission of Wisconsin, 1931, 284 U.S. 206. Switzerland A Holding ApS v. Federal Tax Administration (2005) 8 ITLR 536. World Trade Organization Argentina—Measures Affecting the Export of Bovine Hides and the Import of Finished Leather, WT/DS155/R, Bovine Hides. Available at: www.wto.org/ english/tratop_e/dispu_e/cases_e/ds155_e.htm. Dominican Republic—Measures Affecting the Importation and Internal Sale of Cigarettes, WT/DS302/AB/R, Cigarettes. Available at: www.wto.org/english/ tratop_e/dispu_e/cases_e/ds302_e.htm.

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UN Human Rights Committee Miguel González del Río v. Peru, Communication No. 263/1987, U.N. Doc. CCPR/C/46?D/263/1987 (1992), https://www.ohchr.org/Documents/Publications/ SDecisionsVol4en.pdf. Chapter 13 Supreme Court of Canada Andrews v. Law Society of BC [1989] 1 S.C.R. 143. Court of Justice of the European Union CJEU, 16 July 1998, Case C-264/96, Imperial Chemical Industries plc (ICI), [1998] ECR I-04695. CJEU, 13 December 2005, Case C-446/03, Marks & Spencer, (2005) ECR I-10837. CJEU, 12 January 2006, joint cases C-354/03, Optigen Ltd; C-355/ 03, Fulcrum Electronics Ltd; and C-484/03, Bond House Systems Ltd, (2006) ECR-483. CJEU, 21 February 2006, Case C-255/02, Halifax Plc et al. v. Commissioners of Customs & Excise, [2006] ECR I-01609. CJEU, 6 July 2006, Joint Cases C-439/04, Axel Kittel, and C-440/04, Recolta, [2006] ECR-6177. CJEU, 12 September 2006, Case C-196/04, Cadbury Schweppes, [2006] ECR I-8031; ECLI:EU:C:2006:544. CJEU, 13 March 2007, Case C-524/04, Thin Cap GLO, [2007] ECR I-2157; ECLI: EU:C:2007:161. CJEU, 21 January 2010, Case C-311/08, Societe de Gestion Industrielle (SGI), [2010] ECR I-487. CJEU, 7 Dec. 2010, Case C-285/09, Criminal proceedings against R, [2010] ECR I-12605, ECLI:EU:C:2010:742. CJEU, 22 December 2010, Case C-277/09, The Commissioners for Her Majesty’s Revenue & Customs v. RBS Deutschland Holdings GmbH, [2010] ECR I-13805. CJEU, 3 October 2013, Case C-282/12, Itelcar—Automoveis de Aluguer Lda v. Fazenda Publica, ECLI:EU:C:2013:629. CJEU, 13 November 2014, Case C-112/14, Commission v. United Kingdom of Great Britain and Northern Ireland, ECLI:EU:C:2014:2369. CJEU, 18 December 2014, Joined Cases C-131/13, C-163/13 and C-164/13, Staatssecretaris van Financien v. Schoenimport “Italmoda” Mariano Previti vof and Turbu.com BV, Turbu. com Mobile Phone’s BV v. Staatssecretaris van Financien, ECLI:EU:C:2014:2455.

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CJEU, 17 Dec. 2015, Case C-419/14, WebMindLicences Kft. v. Nemzeti Ado es Vamhivatal Kiemelt Ado es Vam Főigazgatosag, ECLI:EU:C:2015:832. CJEU, 22 November 2017, Case C-251/16, Edward Cussens et al, ECLI:EU: C:2017:881. United Kingdom IRC v WT Ramsay Ltd [1982] AC 300. United States Supreme Court Gregory v. Helvering, 293 U.S. 465 [1935]. United States District Courts Florida Bankers Association v. Department of Treasury, No. 1:13-cv-00529 (D.D. C. 2014) (slip op.). Chapter 14 Court of Justice of the European Union CJEU, 11 Dec. 2012, Case C-610/10, European Commission v Kingdom of Spain, ECLI:EU:C:2012:781. CJEU, 21 December 2016, Case C-20/15 P, European Commission v. World Duty Free Group and Others, ECLI:EU:C:2016:981. Chapter 15 European Court of Human Rights Sommer v. Germany (April 27, 2017, no. 73607/13)(ECHR). Supreme Court of Canada R v Dyment, [1988] 2 SCR 417. R v O’Connor, [1995] 4 SCR 41. R v Mills, [1999] 3 SCR 668. Chapter 16 UK (House of Lords) Inland Revenue Commissioners v Westminster (Duke), [1936] AC 1 at 19 (HL). United States U.S. Court of Appeals for the Second Circuit Commissioner v. Newman, 159 F.2d 848 (CA-2, 1947).

Chapter 1

Introduction: Why Ethics Matter in Taxation Robert F. van Brederode

Abstract This chapter is the introduction to the book and provides an overview of the content of each chapter within the framework of a general, but necessarily short, theoretical treatise on the interaction of morality and taxation, touching topics such as the philosophical justification of taxes, the obligation to pay and the morality of tax avoidance and planning, voluntary compliance, and tax law enforcement and its ethical challenges. It provides context to the individual chapters, places footnotes by positions taken and shows alternative perspectives. Keywords Justification of tax · Avoidance · Planning · Corporate social responsibility · Obligation to pay · Ethical standards of tax · Tax law enforcement The word Ethics is derived from the Greek word èthos, which means custom. The word èthos translates in Latin to mos, plural mores, to which the English moral(s) is related. They have the same meaning, that which is related to normative behavior. Over time these concepts have evolved, and morality now refers to the totality of accepted behavioral rules and ethics refers to critical reflection on morality, the systematizing of morality and formulating moral principles (Brederode 1996). In this book this strict distinction between morality and ethics is not necessarily followed and many of the authors take morality and ethics as interchangeable concepts. Law and ethics are both human enterprises and there is a relation between them. Ethics can be seen as the theoretical and systematic elaboration of morality but at the same time ethics is morality in action: the practical exercise of morality through human behavior. Many laws have a moral foundation, containing rules of appropriate behavior to be applied to human interaction. Unsurprisingly, many moral norms have found expression in legal norms. That is obviously the case with criminal law, forbidding theft, murder, rape, etc., but it is essential to realize that these legal norms derive from moral standards and not the other way around. These moral standards exist regardless of whether they have found reflection in written laws. Murder, theft and adultery were already considered morally wrong by the Hebrews before Moses carved the Commandments in stone. Not all these moral rules are R. F. van Brederode (B) BrederodeTax, Lancaster, PA, USA e-mail: [email protected] © Springer Nature Singapore Pte Ltd. 2020 R. F. van Brederode (ed.), Ethics and Taxation, https://doi.org/10.1007/978-981-15-0089-3_1

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necessarily enforceable as a practical matter, but they function as a moral code of behavior. For example, the commandment to honor thy father and mother does not come with governmental sanction; rather, violation of this moral code will lead to the shaming or shunning by the larger community of the individual who broke the code. Not to covet thy neighbor’s possessions is a moral code, warning against envy and jealousy. But society does not punish the feelings of jealousy or envy itself; it only punishes if a person acts upon his jealousy by, for example, stealing from his neighbor the possession coveted. Also, there are moral rules that have not found expression in written law. Breaking these rules may not be punishable legally but society may nevertheless respond with condemnation. Laws to a great extent are the reflection of the moral standards of society. Moral standards are not fixed but fluctuate and evolve over time (e.g., the legalization of abortions during the last half century) and between cultures (e.g., honor killings). Logically, tax law as a subset of public law must be affected by moral conceptions as well. The idea of taxes gives rise to moral questions regarding the nature of government; the relation between government (the state) and its subjects or citizens; property rights; the proper objectives of taxation; the use of coercive power in collecting taxes and enforcing tax laws; the distribution of the tax burden; and, last but not least, the use and distribution of tax revenue, including the method chosen to determine the latter. It raises questions as to the influence of special interest groups, the balance between individual rights of liberty and privacy and government compliance and information requirements, and the moral justification underlying the efforts of legislators and policy makers to restructure society and steer individual and corporate behavior. It is worthwhile examining past justification for taxes to better understand the evolution to contemporary theories of tax justification. Our understanding of taxes is directly related to our conceptual understanding of the state; where the latter has changed over the centuries, so has the former.1 Therefore, too, any theory of taxation is deprived from operating independently and must be developed and applied within the broader political philosophy of which it is inherently a part. Normative discussions of taxation, broadly, concerns the justification of taxation as such, particular tax policies, i.e., what type of taxes are justified morally, and the behavioral responses to taxation, i.e., either full voluntary compliance or civil disobedience in the form of tax resistance and the responses by government to noncompliance through legislative and executive action of tax law enforcement. These aspects have shaped the content and structure of this book, which is divided into three parts: tax policy and design of tax law; ethical standards and obligations for tax advisors, revenue agents and taxpayers; and tax law enforcement. Part 1 focuses on tax policy and design of tax law, in particular the moral basis for taxation as such. Several chapters provide general and comparative views on the justification of taxation; others in this section focus on a particular philosophy, 1 This

idea goes back to the 19th century German lawyer and philosopher Lorenz von Stein, see Vogel (1988).

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approach or tradition. Jane Frecknall, in Chap. 2, accepts the contemporary rationale for taxation found in the provision by government of public services, redistribution of wealth, and the creation of physical and legislative infrastructure for the benefit of society. The provision of these services is the moral basis for taxation. One could formulate this differently and state, following Hart (1955) and Rawls (1971), that each citizen must bear his or her share of the cost of maintaining the common well-being of society. Paying one’s share in taxes, thus, becomes a moral duty. Consequently, in my view, this would require us to examine the quality of government output. If government services, in the broad meaning given to it afore, are the justification for taxation needed to fund these services, it seems to presuppose that government output is always beneficial to society, aimed at society’s common well-being, and non-controversial in nature. When government limited its output to road construction, common defense, police and justice, i.e., purposes that had broad support under the populace, indeed, taxes may generally be perceived as justified and fair from the perspective of the use made of the citizens’ contributions. But in contemporary times government is involved in almost every aspect of our lives and the economy, which increases the risk of discontent with or even opposition to some of the state’s output financed through taxes. This is increasingly true where the state uses taxation as a vehicle to realize non-fiscal objectives, such as certain social policies, or tax provisions are included that serve certain special interests but not the common good. Taxes may be perceived as unjust if they result in wasteful spending, e.g., to fund administrative agencies that show no beneficial output, or to subsidize activities of organizations that do not contribute to the common good. Apart from the fairness of individual taxes, the tax system as a whole may be questioned morally if the share of a country’s output that is collected by the public sector exceeds a certain percentage of GDP, indicating the degree to which the government controls the economy’s resources. In 2015, taxes at all levels of US government represented 26% of gross domestic product (GDP), compared with an average of 33% for the 35 member countries of the Organisation for Economic Co-operation and Development (OECD).2 Among OECD countries, only Korea, Turkey, Ireland, Chile, and Mexico collected less than the United States as a percentage of GDP. Taxes exceeded 40% of GDP in seven European countries, including Denmark and France, where taxes were greater than 45% of GDP (OECD 2015). When people perceive the overall tax burden as too high, and thus as unfair, they will respond through reduced voluntary compliance (see further below). Moreover, laws may be immoral. In deontological ethics, in particular as found in the writings of Emmanuel Kant, the challenge lies in discovering and formulating general, unconditional and binding norms without demanding rigid obedience to these norms regardless of circumstances or situation. If we assume that the obligation to pay duly imposed taxes is such a Kantian categorical imperative, would that remain to be true if the levy itself lacks morality, i.e., is unjust? And how are taxpayers supposed to respond to such unjust tax laws? In itself, an unjust law does not provide justification to defraud the state. Chaos would result if each individual citizen had 2 The

OECD Average is a weighted average by GDP for all countries excluding the United States.

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the power to obey or disobey tax laws based on the citizen’s perception of what constitutes (in)justice (Bonaham 1953, 87). But what if a tax law is indisputably immoral? If a country were to introduce a tax to finance a program of involuntary euthanasia of the elderly, or forced abortions of pregnancies of women belonging to an ethnic or cultural minority declared undesirable by the state, is tax avoidance or even tax evasion not a moral duty? One could take it a step further by arguing that the duty to pay taxes is not only an obligation to the state or society but, from the perspective of fairness, also to all other tax payers. Both Hart and Rawls indicate so much. Hart (1955, 185) writes: when a number of persons conduct any joint enterprise according to rules and thus restrict their liberty, those who have submitted to those restrictions when required have a right to a similar submission from those who have benefited by their submission.

Rawls (1958, 177) makes the observation: that the question of fairness arises when free persons, who have no authority over one another, are engaging in a joint activity and amongst themselves settling or acknowledging the rules which define it and which determine the respective shares in its benefits and burdens.

However, this reciprocal obligation to pay taxes between tax payers does not remove the dilemma posed by immoral tax laws. Frecknall examines definitions of ‘tax’ and ‘morality’, noting the development of morality as a concept that changes over time, and continues by considering in depth the link between property and taxation, examining property rights, the concept of the ‘social contract’ and natural rights, the meaning of private property, and the idea of ‘tax as theft’—looking in this latter context at the ideas of St. Augustine and St. Thomas Aquinas, together with libertarian and counter-libertarian arguments. Bird-Pollan, in Chap. 6, considers taxation to be a manifestation of a nation’s philosophical ideals of distributive justice. Legislators must consider the underlying philosophical beliefs of their constituents in determining the tax laws, the types of tax and the amount of tax to be imposed. She considers a variety of political philosophical positions that are common in contemporary societies, and then evaluates how a legislator might incorporate those views into the creation of a system of tax laws that properly reflect those political perspectives. Her focus is on libertarianism, political liberalism, and utilitarianism, and then thinks through how each of these positions would apply to the creation of a variety of tax laws, including sales taxes, property taxes, wealth taxes, and income taxes, for the purpose of creating an example of how a legislator could go about developing such standards in her own particular circumstances. Gribnau and Dijkstra, in Chap. 3, exclusively examine social contract theory. They examine three important thinkers Hobbes, Spinoza and Hume. It is noted that Hobbes is a social contract theorist par excellence, Spinoza is clearly shifting away from social contract theory, and Hume replaces the social contract with social convention. Consequently, they provide different models of thinking about natural sociability, contract and convention, sovereignty, reciprocity, morality, law and legal obligations.

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Enlightenment philosophers argued that the origin of society can be found in a so-called Social Contract between the state and the individual (Rousseau 1963 [1762]). Social contracts arguments, typically, posit that individuals have consented to surrender some of their natural freedoms and submit to the authority of the state in exchange for the protection of their remaining rights. The obligation to pay taxes naturally follows from the necessity to enable the state to perform these duties. Such a contract is, of course, a myth. Having that said, however, the social contract idea does have some roots in feudalism where the king conveyed title and land to his barons in exchange for money, labor, and military service. But that was an arrangement exclusively between members of the privileged class, i.e., the political, economic and military elite; it was far removed from an arrangement encompassing all members of medieval society. As such, the social contract is a pure fiction. There exists no document from ancient times signed by a ruler and all his subjects that would constitute anything that resembles a social contract. And today, nobody is asked to sign a document or contract when he or she reaches legal age agreeing to the terms of societal participation. Rawls (1971) tries to overcome this problem by presenting a hypothetical contract but, as Dworkin (1973, 501) correctly pointed out, a hypothetical contract means essentially “no contract at all”; it remains a theoretical construct only and its terms cannot be binding. Block and Torsell in the next chapter deal exclusively with libertarian views on taxation, focusing on three most prominent libertarians: Nozick, Rothbard and Rand. The latter is not an academic thinker but an influential novelist who has proven to be an effective ambassador for libertarian thought. Nozick compares taxation of earnings from labor with forced labor. The chapter explains that position on the basis of the principle of self-ownership and defends it against certain criticism. It also discusses Nozick’s rejection of the fairness principle as developed by Hart and Rawls. Ayn Rand’s case is for minimal government funded by voluntary taxation only. Rothbard believes that taxation equates theft and therefore is unjust. The chapter evaluates his position by opposing it to a number of justifications for taxation. Green (Chap. 5) examines the presence of each of a number of taxing options, i.e., head, proportional and progressive taxation in Jewish and Christian thinking on the basis of scripture (Hebrew Bible and New Testament) and Jewish, Roman Catholic and Protestant teachings. Although there are significant differences within and between these traditions, he concludes that the advocacy of progressive taxation as a means of serving the least-off members of society and promoting social equality and opportunity is a leitmotif of the biblically informed religious traditions. Over the centuries a persistent theme is the rejection of private property as an absolute right and it is, therefore, not immune from community appropriation. The tax system laid out in the Hebrew bible is according to his analysis roughly Rawlsian in its contours. Citing Hamill (2006, 691), he sees parallels between the causes of poverty of the Old Testament times and the contemporary cycle of poverty and similarities in the design of remedies. Green discusses John Rawls’ concept of justice extensively and sees correspondence between Rawlsian theory and biblical thinking about ownership and taxation.

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The fairness of an individual type of tax has a long history of philosophical debate. The defense of a proportional tax goes back to Smith ([1776] 1994) who formulated his maxim of equality as follows: The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state. The expense of government to the individuals of a great nation is like the expense of management to the joint tenants of a great estate, who are all obliged to contribute in proportion to their respective interests in the estate.

Under the benefit principle, taxation is justified on the ground that one benefits from the public goods and services provided by the state. Ideally, under this approach, each would pay according to the measure of state services received which, as a consequence, may lead to higher taxation of some lower income groups if we accept the assumption (Tiebout 1956) that the rate of consumption of public services declines with rising incomes. A tax based on the benefit principle would likely be regressive, but not necessarily so, as this would depend on the value of the state services consumed and higher income groups may very well consume higher ‘priced’ public goods and services. Smith, however, does not look at governmental services provided by the state to individual citizens but takes as measurement the income each is able to generate as a result of the protection of the state. That is a fundamentally different approach: One does not pay taxes according to what one receives in services from the state, but according to what one has been able to earn due to the infrastructural circumstances created and maintained by the state. Utilitarianism, as expressed by Jeremiah Bentham and John Stuart Mill, provides philosophical moral foundation for progressive taxation in that it is focused on maximizing utility, commonly defined as that which produces the greatest well-being of the greatest number of people. Utilitarian reasoning calls on the ability to pay as a justification for graduated taxation. However, in my mind, ability to pay can only be used as an argument to exempt the poor from taxation. It fails to convince as a justification for progressive taxation, simply because the sole possession of monetary and investments funds, or wealth, does not explain or justify the level or method of taxation. Ability to pay is, essentially, a robber’s argument: when Willie Sutton was asked why he robbed banks, he answered, ‘because that’s where the money is.’3 The reasoning that taxation inflicts greater hardship on lower income groups than higher income groups seems prima facie invalid when income were to be taxed proportionally. For that reason, a flanking argument for progressive taxation was found in the concept of diminishing marginal utility, the idea that with rising income the use or utility of that income would decrease. Therefore, to warrant equal sacrifice by all to the fiscal needs of the state, higher incomes should pay a larger percentage of their income in tax, ideally inversely proportional to the diminishing grade of utility. This argument, however, is factually incorrect. The utility of an additional monetary unit is the same 3 The story is apocryphal, however. The coined phrase appeared for the first time in the Redland’s Daily Facts on March 15, 1952. Sutton denied in his autobiography (1976, 160) that he ever said it and credits an enterprising journalist.

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for everyone as it provides the same additional purchasing power. If a millionaire and a minimum wage earner both receive a one dollar raise, both can purchase a one-dollar meal at a McDonald’s restaurant. However, given scarcity of means, an economic actor will prioritize his wants and satisfy them according to his preferences, using additional monetary units to satisfy wants lower and lower on the scale. The idea that additional increments of income provide less satisfaction to the well-off than to lower income groups is a psychological assumption that cannot be verified nor measured. Both a Chevy and a Ferrari bring you from A to B, but the additional satisfaction found in the thrill of driving a Ferrari cannot be quantified. How would we measure the satisfaction of Bill Gates, the founder of Microsoft, in giving billions of dollars away to charitable causes? Is the satisfaction derived from driving a Ferrari larger or smaller than the satisfaction derived from buying your son a new baseball bat for his birthday? Because the presumed reduction in psychological satisfaction of additional monetary units cannot be measured, the idea of diminishing marginal utility is useless for determining any rate of progression in taxation. In conclusion, the theory of diminishing utility fails both factually, in terms of utility, and in terms of measuring psychological satisfaction. Where the curve of marginal utility cannot be determined, the theory does not provide a basis for determining income brackets and associated tax rates.4 The application of utilitarian practices with its quest for realizing aggregate satisfaction can in extremis lead to oppression of individual rights for the benefit of the whole, as Green correctly points out. The perception of the state and the justification of taxes has significantly changed over time. In the Middle Ages, the state and the monarch were essentially identical and public needs were royal needs, mostly financed from revenue derived from royal estates. Taxation needed the consent of those who had to contribute. Later, the state was conceived as distinguished from the monarch, but still placed opposite the tax payers. The obligation to pay was a moral duty and the justification for taxes was individualized: either based on individual benefits derived from state activities or, with Adam Smith, on what each individual had been able to earn due to the protection of the state. In our contemporary view the state has evolved into an instrument of society acting for the common benefit of all citizens. This is somewhat idealistic as the state and the corps administrative, the body of civil servants, often have their own interests as well, which may not be aligned with or even oppose the interests of the citizens. Nevertheless, where the state, in principle, works in the interest of its citizenry, funding for its activities also becomes a joint effort and taxation can be seen as an obligation not just to the state but to one’s fellow citizens as well. The link between paying taxes and advantages derived from the state’s activities becomes less direct, less personal and, instead, the relationship becomes more abstract. But this does not resolve the issue of how to determine individual tax contributions. When one accepts, philosophically, that taxation should vary depending on income, we arrive easily at proportional taxation of income—which, in itself, has progressivity build-in as who earns twice as much, pays twice as much—but there is no accurate 4 This

is, however, not an argument against progressive taxation per se, but a demonstration of the practical difficulty with implementing such a tax fairly.

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methodology to determine the rate of progression of a graduated income tax that is based on a strong moral foundation.5 It appears to be more fruitful to abandon all efforts to find justifications for individual type of taxes but instead to concentrate on ensuring that the tax system as a whole is morally acceptable, i.e., just in its application and outcomes. We already discussed outcomes in terms of both percentage of GDP claimed by the public sector and expenditure that is either ineffective, or wasteful, or not serving the common good, but outcomes should perhaps also include the distribution of tax revenue between countries, especially now that the world has become more interrelated due to the accelerated speed of globalization. Peters focuses, in Chap. 7, on global tax governance and particularly the legitimacy of the decision making of international institutions. He does so by comparing two competing models of global tax governance: the intergovernmental model of democratic states and the model of cosmopolitan pluralism. The normative right to rule of the institutions in both models is tested against their potential to establish truly democratic national taxing systems in the states that implement these decisions. Peters concludes that the only way for creating a more democratic form of global tax governance lies in the ability of non-state actors, such as NGO’s, to put external pressure on states. This is, indeed, an interesting suggestion for what appears to be a more inclusive decision-making model, but it will also require further research and contemplation, I think, as these non-state actors represent special interests. As such, they are less focused on the interest of the common good. Rule-making based on a compromise between special interests may negatively impact on the overall quality of laws and regulations. Moreover, were the democratic legitimacy of international institutions can be questioned, the same is true for the non-state actors as they are not accountable to any constituency with voting rights. From outcomes we will now shift our focus to the normative implications related to the application of tax law. There exists a correlation between law and morality as laws largely are the reflection of the moral standards of society (although law can never codify public morality exhaustively). This may be more obvious in criminal law and family law, but normative principles are applicable to tax laws as well. Tax laws contain normative rules, either explicit or implicit, on how the tax law should be applied. There are general moral tax rules, such as equality, and rules that are more specific for, and dependent on, the type of tax. The general normative rules or fundamental legal principles function as external standards to lawmakers when making new laws and offer criteria against which new laws can be evaluated (Gribnau 2014). The more specific rules define what is sometimes called the nature of a tax (Ruppert 1963, 9), or is referred to as the legal character of a tax (Terra 5 That

explains why in practice there exists no uniform rate of graduation. The progressive income taxes applied around the world are levied at different rates and use varying income brackets to which these are applied. For example, the U.S. has 7 tax rates for federal personal income tax: 10, 12, 22, 24, 32, 35, and 37% for income over $500,000. In comparison, the Netherlands applies 4 brackets on earned income with the top rate of 51.75% kicking in at income over e68,508; Germany has 3 rates with the top rate of 45% applying to income over e256,304; Australia has 4 rates of 19, 32.5, 37%, and a top rate of 45% which applies to income over AU$180,001.

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1988, 9), which character should have direct normative consequences (Brederode 1996). In its design, a tax must conform to both the external legal principles and to the principles that are immanent to its legal character in order to meet the standard of moral fairness.6 Thus, the legal character of a tax should play a guiding role to both the legislative and judicial branch of government. This is in itself not a novel idea. Sneed (1965) has developed guidelines, both practical and normative, for income tax in the U.S. Johnson (2013) acknowledges the balance applied in the U.S. between revenue facilitation and fairness protection imperatives. Where government institutes morally just tax policy, i.e., tax law and policies that meet the standards set out afore, this may likely generate a higher potential for taxpayer compliance, as studies have demonstrated the correlation between taxpayers’ attitude and perception and voluntary compliance.7 In my view, there exist equilibrium between morally just tax law, the moral obligation to pay these taxes and the level of voluntary compliance. The obligation to pay taxes lawfully imposed is balanced by the requirement that the legislature (government) has the moral obligation to only impose taxes that are just and fair, i.e., taxes that adhere to both the external, general standards and the internal, specific principles, or the legal character of a given tax. The obligation to pay is vested in the assumption that the taxes imposed are, indeed, just and fair. Compliance is the execution of the moral obligation to pay. These three components behave like communicating vessels, i.e., a set of containers containing a homogeneous fluid that, when it settles, balances out to the same level in all of the containers regardless of the shape and volume of the containers. If additional liquid is added to one vessel, the liquid will again find a new equal level in all the connected vessels. In the same way, where and to the extent that a tax law fails the moral standard of fairness, the moral obligation to pay retracts as well, reinstating equilibrium through reduced voluntary compliance. This explains the virtue of fair and just taxation. A reduced level of fairness will almost automatically lead to reduced levels of compliance and may even cause aggressive tax avoidance planning. When contemplating on the details of designing tax law, the legislature would be wise taking into account that special interest provisions and non-fiscal objectives lower the normative authority of a tax law which, in turn, may negatively impact on voluntary compliance. Law that is perceived as unfair has no moral standing, but laws that retain their moral standing will be obeyed even when they are disliked or disagreed with. For that reason, lawmakers should be focused on designing tax laws that meet the immanent standards that directly derive from the legal character of that law itself since this would raise the obligation-to-pay standard as well as the moral standard of voluntary compliance as these three elements operate in equilibrium. A related question is how far the obligation to pay taxes goes. Adam Smith was first in offering the insight linking self-interest and the public good. The limits of 6 Tax law could also violate constitutional norms. For the U.S., Vance (2013) argues that Congress has

made the tax code so complex that it violates the due process requirement of the Fifth Amendment that a person of ordinary intelligence must be able to understand how to conform their behavior to the requirements of the law. 7 See, e.g., Alm et al. (1992), Alm, and Torgler (2006), Cummings et al. (2005), Picur and RiahiBelkaoui (2006), Slemrod (1992), Torgler and Schneider (2007), Fjeldstad et al. (2012).

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the moral obligation to pay taxes are also found in balancing an individual’s selfinterest in preserving as much of his earning for personal use (pay the lowest amount of taxes possible) and the demands of society to contribute fairly to the common good. Balance is the crucial concept in determining the reach of the obligation to pay. It may be a misconception to believe that self-interest of individuals, and the materialism on which it is presumably based, oppose taxation for the common good. Materialism is often stigmatized for its lack of communal orientation. This is an oversimplification as there exist considerable support that materialists espouse a collective-oriented quality and interest in achieving prosocial goals (Awanis et al. 2017). In the realm of tax compliance, ethics in individual and corporate behavior play a role and taxpayers are not directed only by their self-interest but carry other motivations as well (Alm and Torgler 2011). The reach of the obligation to pay refers most importantly to attitudes of taxpayers towards taxation, including their acceptance or disapproval of tax avoidance and evasion. In Part 2, Chap. 8, Kogler and Kirchler explain that tax compliance, i.e., the extent to which someone fulfills his or her obligation to pay, is influenced by beliefs, attitudes, and social representations of taxpayers. These subjective conceptualizations may not be objectively true, but they determine how citizens construct their subjective reality. In particular, the authors refer to several of their own empirical studies which identify relevant differences in attitudes between different occupation groups. Self-employed entrepreneurs express less favorable views on taxes and, as a result, feel more restricted and hindered in their work; employed workers focus stronger on the exchange function between tax payments and the resulting provision of public goods. Interestingly, recent studies suggest that tax avoidance seems to be morally accepted and taxpayers engaging in tax avoidance are judged more positive than the typical taxpayer. A large number of empirical studies have been conducted in recent years as to attitudes towards tax avoidance and evasion, more specifically into the arguments of justification for such behavior, and demographic differences for example between genders, income groups, age groups, marital status, level of education, ethnicity and religion (McGee 2012). The outcomes are often mixed but clear is that attitudes towards tax planning, avoidance and evasion or, in other words, the reach of the obligation to pay is far from homogenous and differs significantly. The reach of the obligation to pay includes the question of the amount of taxes to be paid and, therewith, the room for tax planning and tax avoidance. In public discussion it is often proposed that corporations and individuals should voluntarily pay their so-called ‘fair share’. As in more detail discussed in Chap. 13, aggressive tax planning has been described as being not illegal but immoral. Thus, morality seems to be introduced as a new standard for determining the amount of tax to be paid. That is problematic, firstly, because the standard remains undefined and can therefore never result in a determination of the amount of tax due; and, secondly, because this new standard is found outside tax law itself, which is in my view logically impossible. I would argue that a person has a moral obligation in se to contribute to the society one is part of. However, that does not mean that elements fulfilling that obligation (such as paying taxes) are in themselves moral obligations in se also. One can contribute significantly to society by discovering a cure for Alzheimer’s disease or a new source

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of clean and renewable energy, or by serving in the military. None of these activities are mandatory in any sense. There exists no standard to measure how much each individual must contribute to society and, in reality, individual contributions are neither the same in type nor equal in quantity or quality. How do we evaluate the action of tax planning? I am not referring to tax evasion, which is a violation of the law, but to tax planning (aggressive or not—as this is a subjective evaluation of the action,8 the distinction is irrelevant) within the parameters of the law. Tax planning is in itself neither illegal nor immoral and the result: paying less taxes, is also not immoral in itself. The obligation to pay taxes is imposed on members of society by law. Without a legal obligation, there is no moral obligation to pay taxes. Therefore, the obligation to pay taxes is not a moral obligation in se but a moral obligation in legem. That is the essential difference with, for example, murder which has been considered wrong morally through the ages, even before it was written down in law. Where the moral duty to pay taxes is only based on the law that created that obligation, it is irrational to assume that a standard of duty to pay taxes exists outside the law that created it. The moral duty to pay taxes is directly derived from the law and, therefore, the moral standard and the legal standard must be the same. If tax planning remains within the bandwidth of the law, the resulting amount of taxes due must be morally acceptable. Of course, tax law does not require a certain amount of tax to be paid; it requires to pay a certain percentage of the profit or income to be handed over to the state. Profit and income, of course, are defined in the law, but ‘manipulating’ facts for the purpose of lowering profit or income and, therewith, the amount of taxes, or shifting the profit or income to another jurisdiction with lower tax rates, cannot be immoral as long as that manipulating occurs within the parameters of the law, simply because the moral and legal standards are identical where the former arises from the latter. Jallai, in Chap. 9, discusses tax planning in the context of business ethics and corporate social responsibility (CSR). She conceptualizes tax planning within the context of CSR as good corporate tax governance. Complying with solely the letter of the law is insufficient for acting socially responsible. In her view, ethical decisionmaking in the context of tax planning requires corporations to develop a tax code of conduct and adhere to standards of transparency.9 However, in my view, there are two objections against extending CSR to the area of taxation. First, where the obligation to pay tax is not a moral obligation in se but in legem, as argued afore, 8 The

terminology used to describe unfavorable human actions in the area of reducing tax payments are not neutral but value-based (Sage-Fuller and Lippe 2014). The adjective ‘aggressive’ in aggressive tax planning, or the word ‘abuse’ in abuse of law, or ‘harmful’ in harmful tax planning are purposefully used to convey moral condemnation of the action with the intent to steer public opinion towards moral rejection as well. And with notable success as press coverage is also mostly negative towards tax avoidance and arguments defending the practice are generally ignored. The public perception is of course relevant as it determines both the latitude given to companies and individuals in the area of tax planning and the extent and methods available to the state in combatting tax avoidance. 9 Determining such standards is no sinecure if we take to mind Judith Freedman’s caution (drawing on the work of Onora O’Neill) that increased transparency can actually lower tax morale and the willingness of taxpayers to pay their taxes voluntarily (Freedman 2018, 130).

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it is illogical to apply a moral norm of conduct vested in CSR, thus outside of tax law. The second objection is a practical one: CSR may be inadequate in providing tax guidance to corporations where decisions around tax are interwoven with many other complex social and economic considerations. Tax advisors play a core role in tax planning. Walpole, Chap. 10, reviews the relatively recent drive to the development of ethical standards for tax advisors as a response to their involvement in less acceptable forms of tax planning. He looks in some detail at the underlying reasons for this development and notices a divergence of ethics between tax advisers in the legal profession and others. The demarcation lines between tax evasion and tax avoidance, and between tax planning and tax avoidance are blurred (Freedman 2004, 349). The distinction between the first pair is often found in the illegality of tax evasion where tax avoidance takes place within the boundaries of the law. That is not completely true, though, as with the rise of domestic anti-avoidance rules tax avoidance increasingly is held to be against the law. The remaining difference is that tax evasion is a criminal offense and unlawful tax avoidance is an administrative offense. The distinction between the latter pair seems to be the unlawful character of avoidance versus the lawfulness of tax planning. These distinctions, however, do not help in determining the demarcation line with any clarity or certainty. In all instances, the purpose of the taxpayer is to realize tax benefits through either a reduction in the amount of tax to be paid, deferment of tax payment (cash flow advantage), or eliminating the tax liability altogether. What sets them apart is the methodology used to achieve the tax benefits. Tax evasion violates both the letter and the spirit or purpose of the law. Tax avoidance follows the letter of the law but is contrary to its purpose. Finally, tax planning violates neither the letter or spirit of the law (although it may not necessarily be in line with the latter) (Filipczyk 2015). The question of whether tax avoidance and tax planning are morally acceptable must start with the question whether taxation itself is morally justifiable. If taxation per se were immoral, then any planning to reduce or avoid the tax must be morally acceptable. The morality of taxation is directly related to one’s preferred philosophical theory of the role of the state, the interrelation between the state and its citizenry, and of property rights as we have discussed above. Whatever we conclude as to the morality of taxation, we should wonder whether there exists a true moral distinction between tax evasion, tax avoidance and tax planning, intrinsically. The difference between them is only a matter of degree as with the pickpocket and the bank robber who both steal. If taxation per se were immoral, all three forms of generating tax benefits should be morally acceptable, regardless that evasion may be illegal. If taxation is moral, would not any effort to reduce taxes be immoral? The difference would then only be found in the degree of their immorality (Prebble and Prebble 2010). I think that this depends on what gives rise to the obligation to pay. If this is found outside the law itself, as a higher moral call, then I would agree that any form of tax avoidance and evasion constitutes an immoral act. Tax planning, although a required step in the process of avoidance, does not by itself necessarily amount to avoidance for many planning structures are designed to reduce cash flow disadvantages, avoid compliance duplications, and

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prevent double taxation and as such may even be aligned with the ratio legis of the tax law. But, logically, I see no support for such a moral code outside the law obligating to pay one’s taxes duly and completely. Many human actions have been regarded as wrong and immoral through the ages before they were written down into law. Morality tells us that murder is wrong, and theft, and lying. The law simply confirms what is already accepted by society. The obligation to pay taxes does not arise from morality but only from the law itself. Contributing to society is a moral obligation in se but the elements fulfilling that obligation, including paying taxes, are not. Tax evasion, which is essentially criminal fraud, is still immoral as it legally constitutes theft, but tax avoidance and planning may be morally acceptable because they do not amount to theft. Therefore, paying taxes is a legal obligation, not an external moral obligation, and the moral compulsion can only arise from the tax law itself. That leads us to the question what moral boundaries to tax planning and avoidance can be found in tax law itself. Prior to the 1980s, the UK common law approach under the so-called Duke of Westminster doctrine10 was that every person has the right to take every legal step to minimize his tax liability. In the words of Lord Tomlin: every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be.

In an earlier case Lord Clyde made clear that transactions made for tax avoidance purposes are both legal and morally acceptable: [n]o man in this country is under the smallest obligation, moral or other, so to arrange his legal relations (…) as to enable the Inland Revenue to put the largest shovel into stores.11

In this view, as long as there exist a genuine transaction creating legal rights and obligations, form will prevail over substance. This approach is based on the perception of taxation as a compulsory appropriation of income that belongs to the individual. Consequently, an individual should be allowed to reduce his tax burden by any means possible.12 This sentiment has found expression also in the U.S. in the words of Judge Learned Hand: (…) [T]here is nothing sinister in so arranging one’s affairs to keep taxes as low as possible. (…) [F]or nobody owes any public duty to pay more than the law demands: taxes are enforced exactions not voluntary contributions. To demand more in the name of morals is mere cant.13

A different view is held by Oliver Wendell Holmes Jr., an associated judge in the U.S. Supreme Court, who stated 10 IRC

v. Duke of Westminster [1936] AC 1 (H.L.) (Eng.). Pullman Motor Servs. and DM Ritchie v. C.I.R., [19291 14 T.C. 754, 763/64 (H.L.) (Eng.). 12 Such sentiments are often attributed to Adam Smith’s canons of taxation. It is however instructive to quote the full sentence on which this view is based: ‘Every tax ought to be so contrived as both to take out and keep out of the pockets of the people as little as possible, over and above what it brings into the public treasury of the state.’ (The Wealth of Nations Book 5, Chap. 2 [emphasis added]). 13 Commissioner v. Newman, 159 F.2d 848, 850-51 (C.C.A. 2, 1947). 11 Ayrshire

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R. F. van Brederode It is true, as indicated in the last cited case, that every exaction of money for an act is a discouragement to the extent of the payment required, but that which in its immediacy is a discouragement may be part of an encouragement when seen in its organic connection with the whole. Taxes are what we pay for civilized society, including the chance to insure.14

Rather than putting the state opposite of individual citizens, this notion applies an organic view to the state and, therewith, perceives taxes are the price we pay for civilization. In itself, Holmes’ view does not, in my opinion, contradict the Duke of Westminster doctrine. Rather, Holmes offers a strong nuance to the previous view that taxes are mere exactions by emphasizing the purpose of taxation, which is to maintain civilized society in the interest of each member of society. Holmes does not, however, exact how much should be paid or how to determine an individual’s fair contribution through taxation. The form over substance approach accommodated abuse by the taxpayer. The Holmes-approach, further developed in later case law, limits the ability of a taxpayer to reduce his tax burden through applying a purposive approach to taxation. In the UK the landmark case was Ramsay,15 where Lord Wilberforce re-examined the principle of statutory construction, stating: The courts are not confined to a literal interpretation but should consider the context and scheme of the relevant Act as a whole, and its purpose may, indeed should, be regarded.

With this statement the House of Lords rejected pure literalism in interpreting tax laws. In the same year it confirmed the new approach in Burmah Oil 16 in which Lord Diplock stated: It would be disingenuous to suggest, and dangerous on the part of those who advise on elaborate tax avoidance schemes to assume, that Ramsay’s case did not mark a significant change in the approach adopted by this House in its judicial role to a pre-ordained series of transactions (whether or not they include the achievement of a legitimate commercial end) into which there are inserted steps that have no commercial purpose apart from avoidance of a liability to tax which in the absence of those particular steps would have been payable.17

The Ramsay principle has been further developed in later case law in the UK from disregarding non-commercial intermediate steps inserted solely to avoid taxes to a purposive approach.18 A parallel development took place in civil law countries. Teleological interpretation is now the norm in most leading and emerging economies.19 Tax planning is still allowed as long as the form chosen does not violate the purpose 14 Compania General De Tabacos De Filipinas v. Collector of Internal Revenue, 275 U.S. 87, 100, dissenting (21 November 1927). This quote is engraved above the entrance to the IRS headquarters at 1111 Constitution Avenue, Washington, DC. 15 IRC v WT Ramsay Ltd. [1982] AC 300. See Freedman (2007). 16 IRC v. Burmah Oil Co. Ltd. (1981) 54 TC 200 (HL). 17 Supra at 219. 18 See, e.g., Furniss v. Dawson (1984) 55 TC 324; IRC v. McGuckian [1997] 1 WLR 991; MacNiven v Westmoreland Investments Ltd. [2001] STC 237; Barclays Mercantile Business Finance Ltd. v Mawson [2005] STC 1. 19 See, Brederode and Krever (2017).

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of the law. In short, form over substance has been reversed into substance over form. No one is required to pay more than the law requires, and tax reduction planning is allowed as long as the spirit of the law is not violated. Thus, the law provides a bandwidth for taxation with a maximum (no more than) and a minimum (violation of the spirit of the law) (Brederode 2014). Tax laws are imperfect, of course, and that calls for the legislature to find ways to improve them so to make them morally more adequate (Freedman 2010). However, it is naïve to assume that tax laws can ever be fully perfect and that interpretation by the judiciary would become obsolete. Again, the moral obligation to pay taxes can only arise from within a given tax statute, and the scope of that obligation is, therefore, defined by the parameters of the legal provision. The legislature cannot abdicate its responsibility by relying on vague moral standards as ‘fair share’, which are inapplicable as they arise from outside the parameters of tax law, apart from being simply inadequate as they cannot be accurately defined. Many countries have introduced general anti-avoidance provisions (GAAP) to counter tax avoidance. That reduces the instances in which tax avoidance schemes are legally acceptable. I have stated that tax evasion because of its criminal character is held to be immoral. It does not necessarily follow that tax avoidance arrangements a contrario must be found to be moral (Prebble and Prebble 2010, 716). However, because the obligation to pay taxes is a legal and not a moral obligation, I conclude that tax avoidance schemes that meet the legal requirements under GAAP or the judicial standards under the substance over form doctrine are also morally acceptable. Tax avoidance that fails to pass these tests, however, is in principle immoral, unless the tax avoidance is incidental and the intent of the taxpayer was not to avoid or reduce taxes. Rolim, in Chap. 12, discusses the role and main aspects of International Human Rights in the light of justifications for general anti-avoidance rules in international taxation. He analyses whether or not an international GAAR, such as the PPT (principal purpose test) of the OECD Multilateral Instrument may be against some international fundamental rights under International Conventions on Human Rights. He also discusses what type of GAAR or specific rules would be more appropriate as a legal tool for combating tax avoidance and analyses its consequences in relation to taxpayers’ rights. Tax compliance has a direct link with tax law enforcement, because without the latter, the former will likely erode. They operate in equilibrium as a higher rate of the former would reduce the need for the latter and vice versa. Tax defiance will increase if a large percentage of taxpayers is successful in their non-compliance efforts. Brederode, in Chap. 13, focuses on the moral legitimacy of enforcement methodology used by tax authorities in coercing compliance with tax laws. In his opinion, the end does not justify the means and government will lose its moral authority if it is overzealous in its efforts to combat tax avoidance, which may trigger an adverse reaction. Tax law enforcement requires a degree of proportionality to maintain the equilibrium between fair taxation, the obligation to pay, and voluntary compliance. Proportionality in this context means a cost/benefit analysis of any enforcement measure, including the impact of enforcement measures on bona fide taxpayers. He analyses, and to some degree opposes, in particular three somewhat

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recent developments in the area of tax law enforcement: public shaming, OECD blacklisting, and the U.S. Foreign Account Tax Compliance Act. Further, he analyses the most significant abuse of law-rulings by the Court of Justice of the European Union but is critical of a recent judicial move towards, so it appears, denying fraudsters all rights available under the law in an effort to fight tax fraud, thus undermining the foundational legal principles of European VAT and eviscerating the rule of law. Tax law is complicated and subject to change and taxpayers seek to obtain certainty as to the tax consequences of certain actions or transactions. This is realized in many countries through the instrument of advance tax rulings. While it is generally recognized that tax rulings are a useful tool for both tax administrations and taxpayers, there have also been growing concerns over their use for abusive purposes. Bal, in Chap. 14, discusses the relatively new approach by the European Commission to investigate tax rulings to determine whether they constitute prohibited state aid. In her opinion, a system of fair taxation, cannot be realized if the fundamental elements of the Rule of Law, such as legal certainty and predictability, are at risk. State aid rules should not be used to remedy shortcomings in the tax legislation or administration of the Member States and to scrutinize binding decisions of national tax authorities. In addition to Rolim in the context of an international GAAR, taxpayers’ rights or concerns of violation of these rights are also the topic of two further chapters. Bentley, in Chap. 11, explores the impact on taxpayer rights of digital developments in electronics and systems, artificial intelligence, and security. Using an integrated rights framework comprising principles of tax administration and compliance, together with legal rights, he sets out the challenges and opportunities offered by digital disruption. He addresses issues such as proportionality, discrimination, equity and fairness, transparency and bias in legal and administrative decision-making, security, privacy and confidentiality. He concludes that the opportunities are available to enable global implementation of an integrated rights framework to protect taxpayers even more effectively through digital disruption. Cockfield, in Chap. 15, observes the enhanced automatically exchange of bulk taxpayer information enabled by technological developments. Although, information sharing serves a legitimate goal of reducing tax evasion and avoidance, he fears that legal protections for taxpayer privacy and other interests are insufficiently robust for this emerging international framework to share big tax data. He suggests that taxpayers should be seen as ‘data subjects’ with rights proactively protected by data protection laws and policies, including fair information practices. An optimal regime balancing the interests between taxpayers and tax authorities should include a multilateral taxpayer bill of rights, a cross-border withholding tax in lieu of information exchange, and a global financial registry to allow governments to identify the beneficial owners of business and legal entities. The interpretation of tax law is essential for its proper functioning. The role of judges is often overlooked when tax ethics are discussed. Brooks, in the final chapter, claims that judges have an ethical obligation to enhance their knowledge about the archeology and art of statutory interpretation, tax law and tax policy, which is essentially an ethical duty to be and remain competent. She articulates some of the foundational understandings that support that competence and provides a simple

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hierarchy of approaches to interpreting income tax law. It concludes by contending that greater competence is not only more ethical but also advances other important societal goals fulfilled by the imposition of income tax systems. So, why do ethics matter in taxation? Because laws are the reflection of society’s morality and laws that lack moral standing can ultimately not survive. The state, as an instrument of society acting for the common good of its constituents, cannot put a financial burden on its citizens without moral legitimacy. It may have the power to do so, but if the state imposes taxes that do not have the support of the populace, it undermines its own purpose. Justification of taxation per se is, therefore, very important. Moreover, individual tax laws need to adhere to ethical internal and external standards, i.e., general legal principles such as equal treatment and principles immanent to a given tax, derived from its legal character. The moral quality or fairness of tax law is important because it determines the reach of the obligation of the constituents to pay taxes and the level of voluntary compliance. Tax law enforcement is important to ensure an adequate level of voluntary compliance, but methods used need to be balanced and proportional. The power to tax is intrusive and needs to be balanced by adequate taxpayers’ rights and protections, which is vital in a global environment of digitalization and automatic information exchange.

References Alm, James, Gary H. McClelland, and William D. Schulze. 1992. Why do People Pay Taxes? Journal of Public Economics 48 (1): 21–38. Alm, James, and Benno Torgler. 2006. Culture Differences and Tax Morale in the United States and in Europe. Journal of Economic Psychology 27 (2): 224–246. Alm, James, and Benno Torgler. 2011. Do Ethics Matter? Tax Compliance and Morality. Journal of Business Ethics 101 (4): 635–651. Awanis, Sandra, et al. 2017. Asia’s Materialists: Reconciling Collectivism and Materialism. Journal of International Business Studies 48: 964–991. Bonaham, O. Michael. 1953. Moral and Ethical Considerations in Tax Practice. Marquette Law Review 37 (1): 85. Cummings, Ronald G., Jorge Martinez-Vazquez, Michael McKee, and Benno Torgler. 2005. Effects of Tax Morale on Tax Compliance: Experimental and Survey Evidence. CREMA Working Paper no 2005–29. Basel: Centre for Research in Economics, Management and the Arts. Dworkin, Ronald. 1973. The Original Position. University of Chicago Law Review 40 (4): 500–533. Filipczyk, Hanna. 2015. Why is Tax Avoidance (Im)Moral? Ethics, Metaethics and Taxes. Toru´nski Rocznik Podatkowy: 28–48. Fjeldstad, Odd-Helge, et al. 2012. People’s Views of Taxation in Africa: A Review of Research on Determinants of Tax Compliance. Brighton, UK: ICTD. Freedman, Judith. 2004. Defining Taxpayer Responsibility: In Support of a General Anti-Avoidance Principle. British Tax Review 4: 331–356. Freedman, Judith. 2007. Interpreting Tax Statutes: Tax Avoidance and the Intention of Parliament. The Law Quarterly Review 123: 52–90. Freedman, Judith. 2010. Improving (Not Perfecting) Tax Legislation: Rules and Principles Revisited. British Tax Review 6: 717. Freedman, Judith. 2018. Restoring Trust in the ‘Fairness’ of Corporate Taxation: Increased Transparency and the Need for Institutional Reform. In Tax and Trust: Institutions, Interactions and

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Instruments, ed. Goslinga, Sjoerd et al., 121–141. The Netherlands: Eleven International Publishing. Gribnau, Hans. 2014. Not Argued from but Prayed to: Who’s Afraid of Legal Principles. eJournal of Tax Research 12(1): 185. Hamill, Susan Pace. 2006. An Evaluation of Federal Tax Policy Based on Judeo-Christian Ethics. Virginia Law Review 25 (3): 671–764. Hart, H.L.A. 1955. Are There Any Natural Rights? Philosophical Review 64 (2): 175–191. Johnson, Steve R. 2013. Reforming Federal Tax Litigation: An Agenda. Florida State Law Review 41: 205–273. McGee, Robert W. (ed.). 2012. The Ethics of Tax Evasion: Perspectives in Theory and Practice. New York: Springer. OECD. 2015. OECD Tax Statistics. Revenue Statistics: OECD Countries-Comparative Tables. Picur, Ronald D., and Ahmed Riahi-Belkaoui. 2006. The Impact of Bureaucracy, Corruption and Tax Compliance. Review of Accounting and Finance 5: 174–180. Prebble, Zoe M., and John Prebble. 2010. The Morality of Tax Avoidance. Creighton Law Review 43 (3): 693–745. Rawls, John. 1958. Justice and Fairness. Philosophical Review 67: 164–193. Rawls, John. 1971. A Theory of Justice. Cambridge, MA: Harvard University Press. Rousseau, Jean-Jacques. [1762] 1963. Du contrat social ou Principes du droit politique. Paris: Union Général d’Éditions. Ruppert, Dieter. 1963. Die Beurteilung des deutschen, schweizerischen und französischen Umsatzsteuersystems nach Grundsätzen der allgemeinen Steuerlehre. Frankfurt am Main: Union Druckerei. Sage-Fuller, Benedicte, and Ferdinand Prinz zur Lippe. 2014. Abuse of Tax Law as Language of Morality of Modern Times: A Comparative Analysis of France, Canada and Ireland. Comparative Law-Engaging Translation: 191. Slemrod, Joel (ed.). 1992. Why People Pay Taxes: Tax Compliance and Enforcement. Ann Arbor: The University of Michigan Press. Smith, Adam. [1776] 1994. An Inquiry Into the Nature and Causes of the Wealth of Nations. Modern Library Edition. London: Random House. Sneed, Joseph T. 1965. The Criteria of Federal Income Tax Policy. Stanford Law Review 17: 567. Sutton, Willlie, and Edward Linn. 1976. Where the Money Was: The Memoirs of a Bank Robber. New York: Viking Press. Terra, Ben. 1988. Sales Taxation: The Case of Value Added Tax in the European Community. Deventer-Boston: Kluwer Law International. Tiebout, Charles. 1956. A Pure Theory of Local Expenditures. Journal of Political Economy 64: 416. Torgler, Benno, and Friedrich Schneider. 2007. What Shapes Attitudes Toward Paying Taxes? Evidence from Multicultural European Countries. Social Science Quarterly 88 (2): 443–470. Van Brederode, Robert F. 1996. Ethiek van het Omzetbelastingrecht (Ethics of Turnover Tax Law). Inaugural lecture. Deventer: Kluwer. Van Brederode, Robert F. 2014. A Normative Evaluation of Tax Law Enforcement: Legislative and Political Responses to Tax Avoidance and Evasion. Intertax 42 (12): 764–783. Van Brederode, Robert F., and Richard Krever. 2017. Legal Interpretation of Tax Law, 2nd ed. The Netherlands: Kluwer Law International. Vance, David E. 2013. Is the Federal Income Tax Code Unconstitutionally Vague? Mustang Journal of Law & Legal Studies 5: 47–62. Vogel, Klaus. 1988. The Justification for Taxation: A Forgotten Question. American Journal of Jurisprudence 33 (1): 19–59.

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Robert F. van Brederode (LL.M., Utrecht University, 1985; Ph.D. Tax law, Amsterdam University, 1993) is an independent tax lawyer and legal scholar. He held senior positions in tax with several of the Big 4 and top 10 accounting firms in Europe and the US and was in-house tax counsel to a Fortune 100 company. He served as assistant professor at Maastricht University, School of Law, professor of tax law at the Erasmus University, School of Economics, and adjunct professor at New York University, School of Law, Graduate Tax Program. His research area is public law and tax law both from a legal and economic perspective with concentration on International Tax and Global Indirect Taxes and particular interest for comparative studies, tax law interpretation, tax policy, normative aspects of taxation, and criminal law as relevant to tax. Robert published dozens of journal articles and 8 books on tax topics and is a frequent speaker at international seminars and conferences. His most recent books (both with Richard Krever) are Legal Interpretation of Tax Law (Kluwer Law International, 2nd edn., 2017) and VAT and Financial Services: Comparative Law and Economic Perspectives (Springer, 2017). Under the pen name Robert Fredericks he also published a novel, The Enemy Within.

Part I

Tax Policy and Design of Tax Law

Chapter 2

The Moral Basis for Taxation Jane Frecknall-Hughes

Abstract This chapter attempts to consider some of the major moral issues involved in the imposition of taxation. It assumes prima facie that the rationale nowadays for a government imposing taxation derives from its responsibility to raise revenue for providing public goods, redistributing income/wealth to those who are in need or less well-off, promoting social and economic welfare, promoting economic stability, and creating a sound infrastructure for the development of business; and possibly, promoting fiscal harmonisation with other countries. These ideas suggest that the provision of public goods and services paid for by tax revenue inherently constitutes the moral basis for imposing taxation. The chapter goes on to examine definitions of ‘tax’ and ‘morality’, noting the development of morality as concept that changes over time, often subject to increased scientific knowledge, and continues by considering in depth the link between property and taxation, examining property rights, the concept of the ‘social contract’ and natural rights, the meaning of private property, and the idea of ‘tax as theft’—looking at in this latter context the ideas of St. Augustine and St. Thomas Aquinas, together with libertarian and counter-libertarian arguments. The chapter then considers further the moral underpinning for the process of raising taxes and their use, examining in detail the ideas of Green (J Religious Ethics 12(2):146–161, 1984). The final sections offer some other possible viewpoints and concluding remarks. Keywords Morality/ethics · Property rights · Theft · Social contract · Distributive justice

2.1 Introduction Generally, the rationale nowadays for a government imposing taxation derives from its responsibility to raise revenue for providing public goods (e.g., defence, policing, roads); redistributing income/wealth to those who are in need or less well-off (via pensions, social services, unemployment benefits, etc.); promoting social and economic J. Frecknall-Hughes (B) Nottingham University Business School, Nottingham, UK e-mail: [email protected] © Springer Nature Singapore Pte Ltd. 2020 R. F. van Brederode (ed.), Ethics and Taxation, https://doi.org/10.1007/978-981-15-0089-3_2

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welfare (by means of health services or incentivising certain kinds of behaviour); promoting economic stability (e.g., by preventing high inflation and unemployment and creating a sound infrastructure for the development of business); and possibly, promoting fiscal harmonisation with other countries.1 In recent years there has been extensive media coverage about tax avoidance being unethical because it reduces the tax revenue available for these purposes. Particular allegations have been made in the UK press about the avoidance practices of large multinational companies such as Starbucks, Amazon, Google and Facebook (see Barford and Holt 2012), with their company executives being interrogated by the UK government’s Public Accounts Committee as to why no or very little corporation tax had been paid to the UK revenue authorities—a situation exacerbated by the straitened financial circumstances following the worldwide economic downturn in 2008. The UK Chancellor of the Exchequer, George Osborne, specifically described such avoidance as “morally repugnant” (Krouse and Baker 2012).2 As Doyle et al. (2014, 624–625) comment: Less tax revenue means reduced provision of public goods and services (e.g. unemployment benefits, hospitals, policing, roads, etc.) or more borrowing by national governments to fund these activities. Therefore … tax avoidance … can be seen as depriving society (especially the needy) of those goods and services, or burdening future generations with increased repayments, both of which are unethical.

These ideas suggest that the provision of public goods and services paid for by tax revenue inherently constitutes the moral basis for imposing taxation.3 Meredith (2008, 44) comments that “the moral question of taxation is [assumed to be] fundamentally one of distributive justice and that distribution of justice means redistribution of wealth by the state”, especially among Christian ethicists. However, tax revenue has not always been used for a wide variety of purposes: in earlier times it was often raised only to defend the realm and/or support a ruler, and although the provision of some degree of public goods/services underlies the earliest tax theories (see later), the provision of goods and services to the extent provided by modern democratic governments is a feature of the so-called ‘big state’. On this latter basis, looking at the moral basis for imposing taxation from the aspect of the benefits it is used to provide does not appear inherently unreasonable. This chapter attempts to consider some of the major moral issues involved in the imposition of taxation. 1 This

chapter explores in more depth ideas broached earlier in a more general overview of the morality of taxation (see Frecknall-Hughes 2017). 2 Attitudes towards the morality and acceptability of tax avoidance have, however, differed over time—see (Bainbridge 2017; Bank 2017; Frecknall-Hughes 2014). There is a wide range of both UK and US case law demonstrating the change in attitudes over the years. 3 Basing tax so as to fund public goods/services on a populace’s willingness to pay for the benefits received (the benefit principle), is generally attributed to Knut Wicksell and Erik Lindahl of the Stockholm school of economic thought, but is implicit in, for example, the ideas expressed much earlier in Part 2 of Paine’s 1792 Rights of Man, where he discusses in detail the use of tax revenues (in terms of paying the armed services, funding government administration expenses, pensions, children’s education and various kinds of poor reliefs) and how that may be raised—arguably one of the first expositions of the precise (social) uses of taxation (see the discussion in Frecknall-Hughes 2007).

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The next section starts with definitions and discussion of key concepts involved. The remainder of the chapter then examines the idea of property, ‘tax as theft’ and the moral underpinning for the process of raising taxes and their use. The final sections offer some other possible viewpoints and concluding remarks.

2.2 Definitions—Morality and Tax 2.2.1 Morality Given that this chapter will consider the moral basis of imposing taxation, what do we mean by ‘moral’ or ‘ethical’? At root the word ‘moral’ is derived from the Latin word mores, which means customs, habits, behaviour or morals (either ‘good’ or ‘bad’) and ‘ethics’ from the plural of the ancient Greek word Ãθoς/θoς (ethos), which means much the same thing. On this basis, even the Devil would have ethics. The development of an innately neutral term, particularly through its use in Christian and Western philosophical writings, to denote something connected to the principles of right or wrong behaviour is beyond the scope of this chapter, as is the different usage of ‘morality’ to refer to individual behaviour and ‘ethics’ to refer to external codes of conduct or the study of a philosophical subject. For the purpose of this chapter, the terms ‘moral’ and ‘ethical’ will be used interchangeably, without distinction of meaning, to denote behaviour, thoughts or actions that are regarded as ‘right’, ‘socially acceptable’, ‘equitable’, ‘just’ or ‘fair’. It should, however, be noted that what might be considered ‘moral’ changes over time. For instance, it is now commonly accepted that smoking is unethical, as not only does it harm the smoker, but passive smoking may cause harm to others who do not themselves smoke.4 The attitude to smoking was different in the early years of the twentieth century. In the following quotation from a novel written in the 1930s (Sayers 1933, 229), an advertising scheme is being discussed. The manufacturers of a certain brand of cigarettes are proposing to give vouchers in the packets, which may be collected and used for travel, holidays and other leisure activities. This scheme should carry a strong appeal to women. “Give your children that seaside holiday by smoking Whifflets.” That sort of thing. We want to get women down to serious smoking. Too many of them play about with it. Take them off scented stuff and put them on to the straightforward Virginia cigarette […] You can smoke a lot more of them in the day without killing yourself. [This ‘killing’ was in the context, humorously, of getting nicotine poisoning, which is rare in respect of smoking.]

This is a revealing quotation, as it is embedded in a contemporary novel and is indicative of opinion at the time. Because of the rewards the vouchers can bring, it is portrayed as beneficial to smoke. There is no suggestion that smoking can do any real harm or is in any way unacceptable. The quotation also reveals a change of attitude 4 The

following example is taken verbatim from Frecknall-Hughes (2014, 5).

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towards women smoking: this was unacceptable in the Victorian era, when women who smoked were regarded as degraded. However, it is also important to consider why the change in the moral acceptance of smoking occurred. This is no doubt because of evolving scientific knowledge and understanding of the harm caused to the smoker and others, not because of a change per se in morality. Many theorists have considered what should be the underlying ideals and principles of a tax system (and taxes generally), commonly from the viewpoint of individual public finance/economic theorists (Groves 1974), but also now from wider philosophical themes and perspectives (O’Neill and Orr 2018). Most scholars who study tax will be familiar with the concepts (or canons) of equity/proportionality, certainty, convenience and efficiency propounded by Adam Smith in Book 5 of his work, An Inquiry into the Nature and Causes of the Wealth of Nations, to which later theorists have added neutrality, correction/control/influencing of behaviour, flexibility, simplicity, fairness, accountability and acceptability (in terms of behaviour of governments and individuals) (see Daunton 2001). The Mirrlees Review5 of the UK tax system (Mirrlees 2011, 22) accepted Smith’s canons as commanding “near-universal support but they are not comprehensive, and they do not help with the really difficult questions which arise when one objective is traded off against another”. Nor, indeed, do they appear ‘wide enough’ to address tax in the ‘big state’. Richard Murphy, in his A Code of Conduct for Taxation, deems Adam Smith’s maxims “outmoded” (2007, 8), because they (2007, 9): … fail to recognise the obligation of the State to the citizen with regard to the provision of public goods, and relate primarily to the practice of taxation rather than the principles that underpin it.

Based on the United Nations’ Universal Declaration of Human Rights (although the latter itself makes no reference to taxation), on pp. 9–10, Murphy sets out a series of principles, namely that the state should: protect its citizens; provide public goods; not discriminate in protection/provision; democratically determine its provision; be unconstrained by the action of another state; and levy taxation, which must respect the right to hold private property; must be imposed by law; must not be arbitrary; and must apply to all citizens. Citizens must pay the tax due by them, but can appeal against it, although they must disclose all relevant data to the state. They do have the right to leave, in which case they lose their right to state protection and provision, but equally are not obliged to contribute to its maintenance. Whatever the moral framework or set of principles that may be adopted, Newton (2015, 3) comments that while the state has a right to take away property from affluent members of society to support the needy, “this does not answer the question of how much of an individual’s property might be so used for the relief”. It is possible to derive some theoretical answers to the issues of imposition and collection by applying the concepts of moral philosophy, for instance, utilitarianism, which advocates aiming for the greatest happiness of the greatest number, perhaps in the form of consequentialism, which would judge the morally right action to be the one with 5 The

most recent review of the UK tax system.

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the best overall outcome. Jeremy Bentham favoured a version of this as a universal rationale for the imposition of tax along the lines of it being “consistent with the principle of least sacrifice of enjoyment” (Dome 1999, 321). As taxation reduces the means of achieving well-being or happiness from those who pay it, then it should be imposed in accordance with criteria which minimise its impact, namely: First object of finance – to find the money without constraint – without making any person experience the pain of loss and of privation. Second object – to take care that this pain of constraint and privation be reduced to the lowest term. Third object – to avoid giving rise to evils accessory to the obligation of paying the tax. (Bentham, General View of a Complete Code of Laws, 204)

One might also use a deontological approach, which focuses on whether actions themselves are right or wrong, as opposed to whether the consequences of those actions are right or wrong; or adopt a virtue ethics’ approach which looks to the character and habits of individuals (see Baron 2012). These ideas are also considered when looking at how tax revenue is used to meet government responsibilities. For example, a utilitarian would support redistributing resources from the rich to the poor as it makes the poor happier more than it makes the rich unhappy; a deontologist will accept that it is right to care for the poor; and for a virtue ethicist, giving money to the poor is inherently a virtue as well as something which will alleviate their condition. The extent to which these ideas can be stretched further to promote not only redistribution, but equality, is more difficult and has yet again been the subject of philosophical debate.

2.2.2 Tax ‘Tax’ (or ‘taxation’) is also a term which requires definition. It can be difficult to define what a tax actually is. For example, the Ancient Egyptians compelled people to buy new cooking oil which was taxed, and did not allow the recycling of old cooking oil—quite the opposite of what might be encouraged nowadays (Blankson 2007, 3). Tax “is rather like an elephant—difficult to define or even describe, but you know it when you see it” as per Frecknall-Hughes (2014, 3), who goes on to cite some of the various attempts at definition: A compulsory contribution to the support of government, levied on persons, property, income, commodities, transactions, etc. (Oxford English Dictionary). A tax is a payment, exacted by authority, from part of the community, for the benefit of the whole. From whom, and in what proportion such a payment shall be required, and to what uses it shall be applied, those only are to judge to whom government is intrusted (Johnson Taxation No Tyranny 1775, 2). A tax is a compulsory levy made by public authorities for which nothing is received directly in return (James and Nobes 2012, 1).

The use of words like “compulsory” and “exacted” suggest that even the idea of a tax or taxation is unwelcome, which may be part of the reason why avoidance

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and, indeed evasion, occur. It is clear at least that tax involves people or entities transferring a payment (which may not always be money but could be some other kind of property) to another body, government in the definitions given above, although it may not always be so6 ; and that something may be given in return, but not necessarily linked to specific contributions—the last definition making clear that tax is not a ‘fee for services provided’ type of payment.

2.3 Property, Tax and ‘Theft’ 2.3.1 Property Rights As indicated by the above definitions of tax, the link between tax and property is inescapable (see also Biron 2018). This brings into play a number of significant considerations: what actually constitutes property in the first place; the inherent legitimacy of any government and its right to grant property ‘ownership’ and/or take away money or property via taxation; the right of members of a society to private property; and the uses to which tax monies may be put. Some of these concepts now find expression in various documents on human rights. The Universal Declaration of Human Rights, Article 17, for example, recognises a right to own property and not to have it taken away arbitrarily, and the European Convention on Human Rights, Protocol 1, Article 1, acknowledges the right of every natural and legal person to peaceful enjoyment of his possessions—but the state may “enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties”.7 Religious bodies also often support the right to private property, for example, the Roman Catholic Church, as “owning things is commensurate with what it means to be human” and is a natural right (Newton 2015, 2, citing Leo XII’s Rerum Novarum), but it carries with it an obligation for the better-off to support the needy. Property rights have varied over time and between different countries, and still do. In England, for instance, the development of the concept of property (e.g., common, collective (or state) and private—see Waldron 1996), of property law and of individual rights to property are long and very complex processes (see Finn 2011, 494), moving broadly in alignment with the type of government in power, ranging through absolute monarchy, republic, government-controlled monarchy, to representative democracy, with the rights of individuals to property often being dependent on their social standing.8 An infeudated serf in a post-Conquest England, for example, 6 There are several taxes, such as the Christian tithe and the Islamic zakat, which are paid to religious

bodies, often voluntarily, although certain countries allow religious bodies to assess tithes. International Covenant on Civil and Political Rights and the International Convention on Economic, Social and Cultural Rights do not, however, recognise property rights. 8 See Waldron (1996, 2011) for an exposition of property rights from a legal and philosophical point of view. While there is no scope in this chapter to consider the development of property rights 7 The

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where the monarch had arrogated all land, did not even ‘own’ himself, let alone have any rights to his own labour or its products, unless specifically granted, whereas a free-born aristocrat might be granted land-rights in exchange for providing knights (‘knight service’ or ‘scutage’) when required for the royal army in times of war— with scutage being considered as a kind of tax, later commutable to money. This, together with the fact that heirs had to pay sums of money (referred to as ‘reliefs’) to inherit a father’s property, may convey an aura of paying for the right to use assets.9 The idea of not owning the fruits of one’s labour has given rise to the concept of tax as ‘slavery’ or ‘forced labour’ (see typically, Nozick 1974, 169ff), as taxation seems to compel a worker to work for the benefit of others. This idea is extensively discussed by Feser (2000) and Moore (2018). Other scholars disagree—Newton (2015, 3–4) by reference to the dependence on things such as education, the work and products of others, the availability of resources resulting from the society in which the worker lives, which make the work possible; and Kearl (1977) because a state provides services in return (but see the later discussion of libertarian arguments).

2.3.2 The ‘Social Contract’ and Natural Rights The Enlightenment period (roughly, 1689 through to 1800), saw a very great change in thinking about property rights, to which the work of John Locke (1632–1704) was fundamental. The events in England, Scotland and Ireland in 1688/1689 during the so-called ‘Glorious Revolution’ and ideas behind it have reverberated globally ever since, and it is impossible to underestimate the significance of these ideas in their own time, in their influence on the American and French Revolutions and subsequently. Locke, in his Second Treatise of Government (1690) sets out “four of the philosophical tropes most closely associated with these events and with the practice of liberal government ever since and in all places: the legitimacy of property rights, the contractarian nature of government, just and unjust taxation and the need for majoritarian consent both to taxation and to other levies” (Snape and Frecknall-Hughes 2017, 1). To Locke, property rights were a natural right, legitimate because they were prepolitically just, originating from before the institution of the state. There have been numerous interpretations of Locke’s theory of property (see Frecknall-Hughes 2007, 260), but a key idea was that a supreme power could not take property away without the owner’s consent, at will or dispose of it arbitrarily (Second Treatise, 11.138).

and law, these are particular to individual nations and societies and have developed differently. Many different philosophers have considered property issues, for example, Plato, Aristotle, Grotius, Pufendorf, Hobbes, Locke, Hume, Smith, Rousseau, Hegel, Marx, Bentham, Mill, Nozick and Rawls, as Waldron (1996, 11) comments. 9 See Frecknall-Hughes and Oats (2007, 2004) for a discussion of scutage and other medieval taxes. It is notable that the estates of persons in England and Wales who die intestate and without heirs still revert to the Crown or the Duchies of Cornwall or Lancaster (both royal duchies), depending on the place in which a deceased person has resided.

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However, an individual must be prepared to alienate voluntarily his property rights in return for the state’s protection of those rights: Tis true that Governments cannot be supported without great charge, and’tis fit every one who enjoys his share of the Protection should pay out of his estate his proportion for the maintenance of it. But still it must be with his own Consent – i.e. the Consent of the Majority, giving it either by themselves or their Representatives chosen by them. For if any one shall claim a Power to lay and levy Taxes on the People by his own authority, and without such consent of the People, he thereby invades the Fundamental Law of Property, and subverts the end of government. For what property have I in that which another may by right take when he pleases himself? (Locke (1690) Second Treatise of Government, 11.140).

This is the basis of the so-called social contract.10 There is a fundamental tension in this concept, as taxation may be regarded as “the power to coerce … individuals to surrender property without their consent … and authorizes the sovereign to commit acts of aggression against the very citizens it is supposed to protect” (Epstein 1986, 49; see also Spooner 1867). This may lead to the idea that there is little to do with personal morality in tax: we comply with tax law because we must, through fear of punishment for not complying. Finn (2011, 489) cites Fr. Robert Sirico (2007): That we go along with the demand is not great credit to our sense of humanitarianism or charity. The impulse here is essentially one of fear: we know that if we fail to give, we will find ourselves on the wrong side of the state.

The idea of the social contract remains pervasive, however, even today, but it was rejected by other philosophers, notably David Hume and Jeremy Bentham, the latter also rejecting the notion of natural rights: “[n]atural rights is simple nonsense: natural and imprescriptible rights, rhetorical nonsense—nonsense upon stilts” (in Anarchical Fallacies, 501). Also, in his work entitled Supply Without Burden or Escheat Vice Taxation (significantly, a tax work), Bentham delivers one of his most forceful denunciations of natural rights and statements that rights can only be granted by law. Of a natural right who has any idea? I, for my part, I have none: a natural right is a round square [or] an incorporeal body. What a legal right is I know. I know how it was made. I know what it means when made. To me a right and a legal right are the same thing, for I know no other. … Right is with me the child of law.

Many see the idea of a social contract as a very artificial construct, as citizens have not agreed to anything, nor have they been given any opportunity to do so.

2.3.3 The Meaning of ‘Private Property’ If a state allows private property, it is worth considering what this actually means, as not all states do allow individuals the right of ownership. Tax has moral dimensions 10 There

are different forms of this, as the concept was espoused by many different thinkers, such as Grotius, Pufendorf, Hobbes, Rousseau and Kant.

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only where “society operates within a framework of private possession of the major material resources” as some socialist/communist nations have located “productive property in the hands of the state” and directly fund “socially desired objectives out of these common resources” (Green 1984, 158). Waldron (1996, 7) makes clear that private property ownership comprises “a bundle of rights”, with two main elements: … it implies the absence of any obligation to use or refrain from using the object in any particular way. The owner may decide as she pleases and she is at liberty to put her decision into effect by occupying, using, modifying, perhaps even consuming or destroying the object. Second, private property implies that other people do not have this liberty: they do have an obligation – an obligation to the owner – to refrain from occupying, using, modifying, consuming or destroying the object. They can use it of course with her permission; but what this means is that it is up to the owner to decide whether or not to exclude others from the enjoyment of the object.

Permission to use may include (depending on the type of property) lending, renting, or granting rights over property, to one or more individuals. Moreover, the owner may transfer the “whole bundle of rights” by way of gift, sale or legacy after death (Waldron 1996, 8). The removal of any of these rights without an owner’s agreement will therefore constitute an offence against property rights in moral—and legal— terms. Waldron (1996, 8–9) goes on to comment that private property requires justification because it is a type of institution that involves opportunity costs and operates “in a way that seems—on the face of it—morally objectionable”. He goes on to explain (1996, 9) that this is: because it deprives the community of control over resources which may be important to the well-being of its members, and because it characteristically requires us to throw social force behind the exclusion of many members of our society from each and every use of the resources they need in order to live. … [R]ecognizing individual powers of transfer … [means] that resources may gradually come to be distributed in a way that leaves a few with a lot, a lot with very little, and a considerable number with nothing at all.

He continues (1996, 9): Private property involves a pledge by society that it will continue to use its moral and physical authority to uphold the rights of owners, even against those who have no employment, no food to eat, no home to go to, no land to stand on from which they are not at any time liable to be evicted.

The unequal (and possibly unethical) distribution of resources is a possible basis for using taxation as a means of redistribution, which is discussed later. The idea that taxation takes away property without an owner’s permission, and is therefore theft and immoral, has a long history and will be explored in the next section, while the implications of having, as it were, ‘too much’ private property, also has implications for tax in terms of how much property or money it might be moral for individuals to have, how much it might be acceptable to take away and the purposes to which the revenue raised might be put.

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2.3.4 Tax and ‘Theft’ 2.3.4.1

Augustine and Thomas Aquinas

The basic idea underlying the idea of tax as theft is that a government violates private property rights because it compulsorily collects taxation, depriving people of their financial resources/assets (see Finn 2011, 490; Newton 2015, 1). It is adopted by various schools of political/philosophical thought (e.g., anarcho-capitalism, monarchism, but most especially libertarianism) which espouse the principle of non-aggression, with aggression meaning in this context forcible intervention in an individual’s affairs, most commonly interference with rights to property. It is a notable theme in the writings of Spooner (1867), Chodorov (1947), Nozick (1974) and Rothbard (1982), and is still an idea currently debated and discussed (Vallentyne 2018). It is, however, a concept of long standing and is often attributed to St. Augustine of Hippo in his challenging of “the moral legitimacy of government by conquest”, inherently inviting “consideration of the fundamental ethical question raised by the phenomenon of taxation: What is the difference between just taxation and legal plunder?” (Meredith 2008, 41). Remove justice, and what are kingdoms but gangs of criminals on a large scale? (Augustine, City of God, Book 4, Chap. 4)

St. Thomas Aquinas considered this idea further in his Summa Theologica, referring specifically to this section of the City of God. He is also often widely credited with the idea that tax is theft, but as Meredith (2008) demonstrates, what Aquinas actually wrote needs to be considered in greater depth to tease out his meaning. Aquinas acknowledges the right to own property,11 and while he accepts that rulers do take many things away from their subjects by violence, this is not always theft and may be justified: Robbery implies a certain violence and coercion employed in taking unjustly from a man that which is his. Now in human society no man can exercise coercion except through public authority: and, consequently, if a private individual not having public authority takes another’s property by violence, he acts unlawfully and commits a robbery, as burglars do. As regards princes, the public power is entrusted to them that they may be the guardians of justice: hence it is unlawful for them to use violence or coercion, save within the bounds of justice – either by fighting against the enemy, or against the citizens, by punishing evil-doers: and whatever is taken by violence of this kind is not the spoils of robbery, since it is not contrary to justice. On the other hand to take other people’s property violently and against justice, in the exercise of public authority, is to act unlawfully and to be guilty of robbery; and whoever does so is bound to restitution. (Aquinas, Summa Theologica, II–II, Q. 66, art. 8, obj. 3).

11 See

Finn (2011, 494), who comments that Aquinas endorses “personal ownership because it is efficient but, at the same time, insists on the ‘common use’ of property, because in creation God intends that the material goods of the earth meet everyone’s needs. This teaching has been reaffirmed and extended institutionally by all of the modern papal social encyclicals. Pope John Paul II clearly advocated governments raising taxes to ensure, for example, ‘in every case the necessary minimum support of the unemployed worker’”, citing John Paul II, Centesimus Annus 15.

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A ruler may take property in his role of a ‘guardian of justice’, to fight against an enemy, quell revolts and punish law-breakers: if for any other purpose, then this would be robbery. Meredith (2008, 43) goes on to show that, in his commentary on Paul’s Epistle to the Romans (In Romanos12 ), Aquinas also suggests that taxes (tributa) should form a kind of (legitimate) salary for the ruler’s ministry, an allowance or maintenance for preserving the public peace, and also for fighting for the common good.13 Likewise, in In Romanos, he suggests that another type of tax, vectigal,14 can be used to maintain the ruler and pay him for rendering other public services, such as upkeep of the highways, although these services are not specified in any detail (Meredith 2008, 43). According to Aquinas, exaction of taxes by a ruler at a greater level than his people can pay or than is allowed by law would be wrong, as would be extracting lawful taxes but failing to use them for the good of the public. This seems to be the basis of the attribution of ‘tax as theft’ to Aquinas. A ruler should give back taxes if he fails to fulfil his obligations (Meredith 2008, 4415 ). For Meredith (2008, 44), in Aquinas’s view: … the proper function of taxation is administrative. It is justified by the prince’s provision of necessary public services, such as defense from foreign enemies, suppression of crime, domestic peace and order, and a transportation infrastructure, and it is morally legitimate only as long as the prince faithfully executes these obligations. Its purpose is to provide the prince with a living and to cover the costs of his administration, its scope is limited by a kind of social contract between the prince and the populace, and its collection qualifies as legal plunder if this purpose and scope are disregarded.

2.3.4.2

Libertarian and Counter-Libertarian Arguments

The libertarian and similar arguments that tax constitutes theft do not accept the idea of a social contract, as outlined earlier. The main libertarian arguments considering tax as theft are put forward succinctly by Huemer (2017).16 He starts with an illustrative scenario in which a man with a gun robs well-off people on the street, and gives the money to a charity he has set up to feed the hungry, doing this because the charity is not receiving sufficient donations. As he has taken money without the victims’ consent, it is theft—despite the fact that it might be termed “socially beneficial theft”. This is like a government’s forcible extraction of tax. Huemer sets up three arguments and possible responses. The first argument is that tax cannot be theft because citizens have consented to pay tax as part of the social contract—an agreement between citizens and government 12 Cap.

13, lec. 1, ad 13:6, following Meredith (2008, 43) and endnote 4, on 54.

13 Per Meredith (2008, 43) and endnote 5, on 54, in a letter from Aquinas to the Duchess of Brabant. 14 Cap.

13, lec. 1, ad 13:6, following Meredith (2008, 43) and endnote 4, on 54. In Romanos, cap. 13, lec. 1, ad 13:7, and Summa Theologia, II–II, Q. 62, art. 7, responsio. 16 See, however, Vallentyne’s (2018) discussion of libertarian views on taxation, which reveals a wide range of nuances of thought, including instances where “it is just to tax those who infringe libertarian rights for the reasonable costs of enforcement provided by the state” (2018, 109). 15 Citing

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whereby citizens agree to pay tax in return for government protection, indicating acceptance by using government-provided services (roads, schools, policing) and living in the territory owned by the government. The response is that such a contract is fictional: it is unwritten and unsigned. Use of government-provided services might suggest consent—but those who do not use them still have to pay—and use does not inherently indicate agreement to pay tax. Also living in a government’s territory is fallacious as the government does not own all territory: most is owned by private individuals.17 The second argument is that a government cannot steal because a government: (i) grants property rights by means of its laws; and so (ii) can legislate that money due in tax does not belong to an individual, but to the government. Huemer’s response is to suggest that there is no reason to believe that property rights depend on government law or that a government can create property rights in this way. He uses to refute (i) the example of someone travelling to land not owned by any government and stealing a spear from a hermit he found there (the hermit having made the spear): still theft without government-granted property rights. To refute (ii) he uses the example of a nineteenth-century slave escaping from his master in the American South—thus violating property rights by stealing himself. The third argument is that tax is the price individuals pay the government for the provision of law and order, without which society would collapse and people would have nothing. This is unlike theft because valuable services are provided to enable individuals to prosper and make money—from which tax is extracted. Huemer’s response is to use the instance of a robbery whereby an individual is robbed of $20, but is left in exchange a book worth more than $20. It is irrelevant that the book is worth more than the sum taken or that it might in fact enable the victim to become financially better-off should he/she read the contents: it is still theft. Huemer does admit that some taxation ‘thefts’ might be justified, as in the case of preventing “some terrible outcome, such as breakdown of social order”—analogous to an individual stealing “a loaf of bread to survive”—and he would not necessarily abolish tax. His conclusion is that: the “tax is theft” thesis has the effect of raising the standards for justified use of taxes. When the government plans to spend money on something (support for the arts, a space program, a national retirement program, and so on), one should ask: would it be permissible to steal from people in order to run this sort of program? If not, then it is not permissible to tax people in order to run the program since taxation is theft.

This is not altogether different from the arguments advanced by Aquinas. Other ideas associated with the concept of ‘tax is theft’ suggest that a free market could provide the services which customarily the state provides (Tame 1989)—and that it is legitimate to resist tax (Rothbard 1982). However, not even “the most radical of libertarians … actually recommends a truly unrestricted market where there would be no laws about what would be allowed” (Finn 2011, 496), although Rothbard (1982) appears to suggest that a society without a state is both viable and the only type consistent with natural rights, which is a radical standpoint. There are other 17 This argument, however, does not consider the difference between ‘ownership’ and ‘jurisdiction’.

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possible instances of ‘theft’ less widely considered. One might, perhaps, put forward the view that, if the state is morally obliged to use tax revenue to provide public benefits, then actually reducing tax rates, and so the revenue available, is unethical and tax cuts also can be considered as theft (see Johnson 2017, Singer 2017) and a breach of the social contract. Also, individuals who use public goods/services but either evade or avoid tax might possibly be considered as thieves because they are not making a contribution towards them, but this argument runs into difficulties when one considers that a pure public good is defined as one which no one can be excluded from consuming and that some individuals’ income is so low that it is below taxable parameters, so falls foul of the redistribution arguments (see later). The main non-libertarian arguments that tax is not theft are put forward by Murphy and Nagel (2002), who contend that requiring property to be handed over as taxation to a government cannot be theft, as it is a government which grants property rights in the first instance, and the state protects property and the legal system: “private property is a legal convention defined in part by the tax system; therefore, the tax system cannot be evaluated by looking at its impact on private property, conceived as something that has independent existence and validity” (Murphy and Nagel 2002, 8). The legal system which grants and governs property rights “would be impossible without the framework provided by government supported by taxes” (ibid) and “[p]roperty rights are not the starting point but [the] conclusion” of tax policy (Murphy and Nagel 2002, 10). Howard (2012, 2) comments that Murphy and Nagel’s “dominant theme is … anti-Lockean”, and that they seek to make visible the conventional and complacent acceptance of the background distribution of property and the “belief in an alleged natural property right to one’s pre-tax income, a belief that the authors refer to as ‘everyday libertarianism’”. These are not new ideas, and resonate with the ideas on rights expressed by Bentham, but they have been regarded as controversial—see further Biron (2018), Brennan (2005, 2018) and Stewart (2005). Brennan (2005, 129–130) summarises Murphy and Nagel’s arguments: ownership is therefore a myth and “the only object of interest in assessing the justice of the tax system is how the tax system affects the final distribution of well-being”. Baron (2012) suggests that the arguments put forward by Murphy and Nagel would not “legitimise high levels of taxation and a big state”. If there were a minimal state, for instance, which provided only security and a legal framework, many goods and services (schools, roads, hospitals, etc.) would be provided by private enterprise, not the state, so while income/wealth in total might be similar, distributions might be very different. Nozick (1974) argued that the imposition of tax violates property rights: it interferes with distributions of resources that have been accepted as just because of the ways in which they were originally acquired or transferred. Following Nozick’s view, the distribution as outlined for a minimal state would be just—and using taxation to create a “bigger state would violate people’s rights” (Baron 2012). Clearly this remains a matter of debate.

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2.4 The Moral Issues of Raising and Using Tax Revenue If one accepts that government imposition of tax is morally acceptable, then the ways in which tax is actually imposed, collected and used are also subject to ethical considerations. Green (1984) considers many of these issues. He starts from the position that “at its heart taxation is a moral issue. Every decision about who and what should be taxed involves important moral decisions about values like fairness and justice” (1984, 146). He asks “whether taxation itself is ever morally justified”, given that taxation is “coercive social instrumentality” (1984, 147) and goes on: May a community expropriate private wealth or resources for collective purposes, and, if so, under what circumstances? For what purposes may the coercive power of the state or community legitimately be used? If taxation can be justified, there arises a series of questions concerning how taxes may be fairly apportioned. Who must pay taxes, which resources are the proper object of taxation, and at what rate or rates may these resources be taxed? These questions lead to what many regard as the central question of tax ethics: what makes tax or a system of taxes fair and equitable?

However, Green’s implicit view, in his subsequent review of Western tax theorists, is that tax is morally justified, as he considers primarily the “moral values in the making and assessment of tax policies”, examining them under a series of headings (discussed below), namely: freedom (or liberty); material well-being and employment; health, welfare and public ‘morals’; equity; and distributive justice—in other words, generally the purposes and uses of tax revenues, as outlined in the first paragraph of this chapter, hence his views are discussed extensively below to align with the overall approach adopted in this chapter.18 An individual’s economic freedom to dispose of personal resources, for instance, is infringed by tax, suggesting that “negative” freedom19 —in which context freedom broadly means freedom from interference by others—would generally favour “the lowest possible tax burden” (1984, 149). While this would reduce tax take overall, it would allow individuals to make greater contributions to their religious and/or residential communities. A lower tax burden would arguably weaken the idea that tax is forced labour (as expounded by Nozick 1974, 169ff. and Rand 1973, 363–367). In terms of material well-being and employment, Green follows Rescher (1966) and Rawls (197320 ) in emphasising the importance of ensuring that individuals have sufficient monetary income and a job, in that any tax policy which allowed people 18 Meredith’s

comments (2008, 44) that Aquinas’s vision of just taxation does not include “any notion of a duty on the part of the prince to direct tax revenues to provision for the physical needs of the poor or to redistribute the wealth of the more affluent members of the community to those of limited means”. He comments further that writers who favour redistribution do not typically engage with Aquinas’s writings. One of the few writers who looks at Aquinas through the lens of distributive justice is Finnis (1998), and Meredith’s article disagrees with Finnis’s interpretation of Aquinas on various aspects associated with redistribution. 19 Green draws a distinction between “negative” freedom and “positive” freedom, with the latter meaning “freedom to achieve one’s ends without being hindered by various natural obstacles or forces, including those within the self” (1984, 149). 20 See later as regards Rawls’s version of distributive justice.

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to live in poverty, even if it fulfilled other moral criteria, would be unethical. The difficulty of achieving and implementing such a policy is acknowledged, as there is a complex interaction between economic activities, taxation and public expenditure. Green (1984, 150) comments that “[i]nitially the assumption of economists was that taxation reduces work effort, savings, and investment” (citing Ricardo 1817), but in modern economies taxation and public expenditure may create opportunities and an environment in which commercial efforts flourish. However, “it is always morally legitimate to ask whether a proposed tax will have an impact on employment or business activity” (Green 1984, 150). Green suggests that the so-called ‘sin’ taxes on smoking products, alcohol, gambling and fossil fuels used to promote health, welfare and public ‘morals’ by encouraging/discouraging certain kinds of behaviour can cause conflicts, and are thus inherently difficult to implement in terms of an ethical tax policy. Taxes may be relatively easy to raise on cigarettes and alcohol, for example, but increased smoking and drinking may then require that some of the revenue generated be spent on health services to deal with smoking- or alcohol-related illnesses. Moreover, the imposition of a tax on smoking and drinking may be seen as an infringement of freedom—and not everyone agrees that smoking and drinking are ‘sins’. The changing moral landscape as regards smoking was mentioned earlier. Equity, Green contends (1984, 151) “stands on a plane of its own” as regards tax policy, although there are various interpretations of what ‘equity’ might mean, as it will depend on any given individual’s political and/or social beliefs. Green considers particularly equal monetary payment, proportionate monetary payment and proportionate sacrifice. The idea underlying equal monetary payment is selfexplanatory: everyone pays the same amount as a contribution towards the public services provided from tax revenues. However, this means that a poor man would pay the same as a rich one, which appears unfair and therefore unethical because they are not ‘equal’. Treating ‘equals equally’ leads on to the idea of proportionate money payment—that is, that “each citizen should pay for essential public services in proportion to his share of wealth” (Green 1984, 152). However, there is considerable difficulty in assessing how much benefit any individual derives from public services. As Green comments (1984, 152), “the wealthy owner of a solid brick mansion may have less need of fire protection than the pauper in a ramshackle wood hovel, yet it seems odd to tax the poor man more for this service” (citing Groves 1948, 74). However, a counter argument to this would be that the brick mansion (despite being less likely to catch fire, perhaps) would be of greater monetary value than the wood hovel, so the mansion owner would have more to lose in case of a fire, so the fire protection would be worth more as the loss would be greater. The idea of paying for benefit received is difficult to implement in practical terms, and often leads to the idea of the person with more resources (and more to lose, thus benefiting more from the protections offered by society) paying more tax, which may be implemented in a number of different ways (e.g., via progressive taxation rates). Proportionate sacrifice is, perhaps, even harder to envisage. The underlying concept is that a person who has more resources suffers less than someone who has fewer when a proportion of his/her resources is taken away. He suggests (1984, 153):

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J. Frecknall-Hughes When this idea is conjoined with a notion of diminishing marginal utility – the idea that above some minimal level, the more dollars one has, the less satisfaction one derives from each additional dollar of income – it leads naturally to a demand for graduated or progressive taxation: higher rates for higher levels of income. Somewhat differently, a lesser reliance on the assumption of diminishing marginal utility but a strong intuitive sense that the leastwell-off are more seriously damaged by taxation leads to a “degressive” approach, involving substantial tax abatement for those at the lowest income levels and a flat-rate or proportionate tax above these levels (citing Mill 1848 and Blum and Kalven 1952).

Green (1984, 154) concludes that the most justifiable conception of equity out of the three discussed will be “a function of the social and economic theory of justice one holds”. If one is attracted to the kind of entitlement theory, as outlined by Nozick, then equal monetary payment might be favoured, as, if a person’s economic holdings are considered as merited, there is then no reason for his/her contribution to public resources to be greater than another’s. However, utilitarian theory would, Green suggests (ibid), “lead to a contrary conclusion”. Its inherent concept of maximising social welfare has the corollary that the tax policy which would promote this best is one which would impose a minimum tax burden—and when joined with the notion of diminishing marginal returns, suggests that taxes should be progressively higher as incomes increase—a variant of the proportionate sacrifice view of equity. Hence, many see utilitarianism as a very convincing moral basis for graduated taxation (see Blum and Kalven 1952), although Green (1984, 154) also refers to Edgeworth’s (1925) countervailing utilitarian argument against heavily graduated taxes on the basis that they may diminish “economic initiative and work effort”. A graduated approach may also be favoured by those favouring Rawls’s (contractualist) form of distributive justice, with its emphasis on the use of tax to transfer resources from the better-off to the less well-off, although Rawls does allow for differences in income as a way of stimulating productive efforts. Green comments (1984, 154), however, that Rawls’s view on graduated taxes is “not yet clear”. Rawls (1971), however, favoured arranging social inequalities so that those with the fewest advantages should receive the greatest benefits, but accepted inequalities: if they were a necessary result of there being incentives which encourage skilled people to work hard and entrepreneurial people to take risks, so long as the result was that those with the least income-earning potential were still made better off than they would otherwise have been. That looks sensible. Why not let the rich grow richer, if the poor are helped by their doing so? The poor will possibly even be grateful (Baron 2012).

Baron (2012) goes on to comment that not everyone accepts that such inequalities would be just, for example, citing Cohen (2008): as humans are capable of rational financial thought, they can work out what they should do without incentives or inequality needing to be considered—although it is acknowledged that individuals do respond to (financial) incentives. While Rawls does posit that individuals might want an egalitarian society, subject to the inequalities allowed, Baron (2012) comments that it is unclear that individuals would only accept inequalities which benefited those who were the worst-off. Green’s final comments on equity (1984, 155–156) concern some of the wider issues of implementation of policy. Even if one agrees on the moral framework,

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there are still issues about what should be taxed (the tax base). Should this be income/profits, capital, wealth, consumption or expenditure—and how? If one considers income alone, there are different kinds, for instance, that earned from labour as opposed to unearned, such as interest/dividends from investments. Is it fair to tax both in the same way because both are income (horizontal equity) or differently, because they are from different sources and particular to the circumstances of the taxpayer (vertical equity)? Should tax rates be uniform or levied at higher rates the more income one has? Should corporations which trade be taxed differently from individuals who trade, as happens currently? Should there be different means of paying? These kinds of issues have been, and continue to be, heavily and often vituperatively debated from both a practical and moral perspective. The final section of Green’s (1984) article is concerned with how the tax burden should be shared to reflect the various social purposes to which revenue generated is put, including consideration of distributive justice. There are many ways for a society to reduce differences in economic circumstances existing between its citizens (such as by employment policies and so forth), but it would be unethical not to use tax revenue to transfer or redistribute income, to promote distributive justice (in addition to using it to fund directly public goods/services). There are different views, though, on what distributive justice means, and Green helpfully recaps the main ways in which the concept has been addressed. In his consideration of natural liberty and formal equality of opportunity (1984, 156), espoused by laissez-faire capitalists, some libertarians and “advocates of an entitlement view of distributive justice” (citing Nozick 1974 and Hayek 1948), he comments that while economic rewards go to those who can run fastest and farthest in life’s race (resulting in a ‘natural’ distribution), all runners should be given the same opportunity to compete and discriminatory barriers impeding them (sex, race or social background) should be removed. Such interference by a government by means of using tax revenue to enforce non-discrimination “is viewed as tantamount to theft” (1984, 157) and economically inefficient. A further step would be to provide fair equality of opportunity to compete by using tax revenue to compensate for imbalances created by circumstances of birth or home environment—supporting a degressive/progressive tax policy, as those needing support would most typically be those with fewer resources. In addition, there are those who consider distributive justice predominantly from the viewpoint of equality of outcome, who: believe that any significant differences in economic achievement are unfair, and [who] call for major programs of economic redistribution, while others advocate more modest transfer programs. Still others believe that at least a minimum “floor” should be established below which a just society will not allow its least fortunate citizens to fall (Rescher 1966, 28–30). In any case, those who insist on the need for such transfers of income will usually rely on the taxing authority of the state to effect this end. Their perceptions of what is a just tax policy is thus deeply shaped by their redistributive preferences (Green 1984, 157).

However, the redistribution arguments mostly consider the starting point, as it were, of recipients, and the outcomes. The other element to this concerns how much a government can take away from those that have to redistribute to those that have not. As Williams (2008) commented:

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J. Frecknall-Hughes Government income redistribution programs produce the same result as theft. In fact, that’s what a thief does; he redistributes income. The difference between government and thievery is mostly a matter of legality.

It seems the idea of theft creeps in everywhere.

2.5 Other Viewpoints If we set aside the idea that tax imposition is morally justified because revenue pays for various benefits or has a redistributive purpose, is there any (other) moral basis per se for imposing tax? What about a government which taxed the purchase of plastic carrier bags, to deter plastic use, but which did not spend the money generated on cleaning up plastic waste or reducing landfill? Would a state which raised tax but spent it just on government administration have a moral basis for imposing tax? Conceivably, some benefits currently provided by a state could at least be provided by non-state bodies, such as religious organisations or charities21 (see Tame 1989). Taxation itself is a process which has many different aspects. Any taxing process in the modern world arguably starts with a perceived need for the tax, mostly for revenue raising purposes, but increasingly, perhaps, to control behaviour, with issues of tax policy following (what/whom to tax, and by how much), implementation into law, with concomitant machinery for administration, compliance, collection, monitoring and expenditure all needing to be taken into account. Some of these aspects (if not all) may admit of a moral dimension. One might, for example, have a specific tax that satisfies some moral criteria (however defined), but not others. The UK’s Community Charge of 1989–90, for instance, was a well-considered tax, except in one crucial respect: it was a flat-rate tax and so was felt not to differentiate well between individuals’ ability to pay, thus appearing unethical and unfair—and with disastrous results (Cullis et al. 1993; James 2012a, 56–57, b, 471–472; Smith 1991). However, on the other hand, one may take the view that there is no moral dimension whatever to imposing tax, and that it is a purely practical matter aimed at funding state and social needs, undertaken by government in lieu of any other authority better qualified to deal with it. As Hale (1985, 385) specifically comments in respect of medieval property tax: A tax has two kinds of political importance: it supplies the revenue needs of the government; and it embodies in a concrete way the citizen’s obligation to supply those needs. Or to put it another way, a tax reveals the meaning of legitimacy in a given community at a given time: what it is considered legitimate for the government to do; and what it is considered legitimate for the government to demand of its subjects. Since governments do not collect tax randomly, but according to what they “can get away with”, they are forced to walk a boundary between what is permissible and what is not.

21 The

Salvation Army, for example, is second only to the government in the UK in terms of the provision of social services.

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A similar idea was famously attributed to Jean-Baptiste Colbert (1619–1683), the Finance Minister to King Louis XIV of France: The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing.22

History is littered with examples of rebellion and even war when governments have got various aspects of taxation ‘wrong’ (see Burg 2004 passim), as people at root do not like taxation, even though they might accept the necessity for it, and it must be remembered that acceptance of impositions by those who are taxed is a critical factor. Hence, perhaps the notion of acceptability should be the ‘thermometer’ for measuring the level of moral heat associated with taxation.

2.6 Concluding Remarks This chapter has attempted to outline, by reference to various sources, the basic elements in the debate about the morality of imposing tax. Given the constraints of space, it has only been possible to consider relatively little of what has been written, and apology is hereby offered to writers whose work could have been considered. The debate is rather like a door, hung on a number of moral hinges. The first hinge is what is meant by ‘moral’, the meaning of which is not static over time. Following on from that, given that tax involves the taking away of property (usually now in the form of money) by a body, typically a government, the matter of a government’s right to take away property is key—and this hinges on whether an individual has a (moral/natural) right to property independent of any government granting that right, or not. If he/she does, this gives rise to idea of tax as ‘theft’ or as ‘slavery’, depending on the nature of what is taken, as property rights are violated, which is uneasily moderated by the artificial concept of the social contract. If not, the idea of theft does not arise in the same way. Other moral hinges (regardless of whether tax is paid ‘voluntarily’ or coercively) concern how revenue is collected and how much it is moral to collect, and the use to which the revenue might be put, depending on whether there is a ‘big’ or ‘minimal’ state—the idea of appropriate use of revenues being considered in some of the oldest tax theory. In the ‘bigger’ state, economic and social policies funded by tax revenue tend to be wider in remit, which may cause support policies for the less well-off via various means of redistribution to appear questionable in moral terms: it has long been a bone of contention that a person in work can be less well-off financially because of having to pay tax than someone in certain circumstances receiving state benefits, so redistributive policies may end up being perceived as taking away too much, even though the benefits provided are crucial to their recipients. There is, arguably, no resolution to this debate. Previously it was suggested that tax may be simply what governments can “get away with”, that tax is a measure of 22 One

of the entries under Taxation in Vitullo-Martin and Moskin (1994, 279).

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a government’s legitimacy and that governments “walk a boundary between what is permissible and what is not” (Hale 1985, 385). Perhaps that is the most realistic moral thermometer there is.

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Vallentyne, Peter. 2018. Libertarianism and Taxation. In Taxation: Philosophical Perspectives, ed. O’Neill, Martin, and Stepley Orr, 98–110. Oxford: Oxford University Press. Vitullo-Martin, Julia, and J. Robert Moskin (eds.). 1994. Executive’s Book of Quotations. Oxford and New York: Oxford University Press. Waldron, Jeremy. 1996. Property Law. In A Companion to Philosophy of Law and Legal Theory, ed. Patterson, Dennis M., 3–23. Oxford: Blackwell Publishers Ltd. Waldron, Jeremy. 2011. The Right to Private Property. Oxford Scholarship Online, at www. oxfordscholarship.com. Accessed 31 Aug 2018. Williams, Walter, E. 2008. Government Theft, American-style. WorldNetDaily, August 6, at https:// www.wnd.com/2008/08/71517/. Accessed 22 Aug 2018.

Jane Frecknall-Hughes is Professor of Accounting and Taxation at Nottingham University Business School, which she joined on 1 November 2016. After graduating from the University of Oxford, she became a chartered accountant and chartered tax consultant with KPMG. In 1992 she joined the University of Leeds, gaining postgraduate teaching qualifications and a Ph.D. (in Revenue Law and Tax Practice) and was awarded a master’s degree (with distinction) in Commercial Law from the University of Northumbria in 2007. She is a fellow of the Higher Education Academy. After moving to the University of Sheffield in 2005, she then joined The Open University in 2008 as Professor of Accounting, later holding the posts of Professor of Law and Head of the Open University Law School and then Professor of Revenue Law. She joined Hull University Business School in September 2014 as Professor of Accounting and Taxation and Head of the Accounting and Finance Subject Group. Jane’s research focuses on taxation, especially from an interdisciplinary perspective. She has gained an international reputation for her work in this area, which is reflected in her publication record. She has taught a wide range of subjects in the accounting and business law area, including taxation, and her textbook, entitled The Theory, Principles and Management of Taxation: An Introduction, was published by Routledge in October 2014.

Chapter 3

Social Contract and Beyond: Sociability, Reciprocity and Tax Ethics Hans Gribnau and Carl Dijkstra

Abstract Paying taxes, as determined by the legislature, is a moral obligation owed by members of a community to their community. Question is whether paying taxes has become an exclusively legal affair: a legal obligation towards the state, replacing a moral obligation towards society. This chapter tries to find an answer to that question by analysing social contract theorists and their critics. Social contract theorists and their critics searched for principles underlying a viable civil polity. Hobbes, Spinoza and Hume focused on political and legal authority and obedience; grounding their theories on various ideas regarding human motivations and human sociability. These different starting points resulted in diverging conceptions of the reciprocal relationships between ruler and subjects and between subjects and fellow subjects. We will show the consequences thereof for the relationship between tax law and morality. Different conceptions of the reciprocal relationships involved may invite behaviour varying from minimalist compliance to a more liberal compliance with tax law. Taxpayers facing absolute sovereignty may adopt a legalistic attitude relying on the letter of the law or exploiting loopholes rather than stay within the spirit of applicable tax legislation. Keywords Social contract theory · Contractualism · Hobbes · Spinoza · Hume · Tax compliance · Letter of the law · Spirit of the law · Legalism · Formalism · Reciprocity

H. Gribnau (B) Tilburg University, Tilburg, The Netherlands e-mail: [email protected]; [email protected] Leiden University, Leiden, The Netherlands C. Dijkstra Netherlands Tax and Customs Administration, Utrecht, The Netherlands e-mail: [email protected] Radboud University, Nijmegen, The Netherlands © Springer Nature Singapore Pte Ltd. 2020 R. F. van Brederode (ed.), Ethics and Taxation, https://doi.org/10.1007/978-981-15-0089-3_3

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3.1 Introduction Paying taxes is often presented as a moral obligation owed by members of a community to their community. The extent of this obligation is further determined by the legislature. Subsequently, the tax authorities collect the amount of taxes that are due from the citizens. It may seem that paying taxes is an exclusively legal affair—a legal obligation towards the state replacing a moral obligation towards society. What to think of this? In this chapter we delve into political and legal theory to find an answer to this question. Social contract theorists and their critics searched for principles underlying a viable civil polity. Hobbes, Spinoza and Hume focused on political and legal authority and obedience; grounding their theories on various ideas regarding human motivations and human sociability. These different starting points resulted in diverging conceptions of the reciprocal relationships between ruler and subjects and between subjects and fellow subjects. We will show the consequences thereof for the relationship between tax law and morality. Different conceptions of the reciprocal relationships involved may invite behaviour varying from minimalist compliance to a more liberal compliance with tax law. Taxpayers facing absolute sovereignty may adopt a legalistic attitude relying on the letter of the law or exploiting loopholes rather than stay within the spirit of applicable tax legislation. Thus, the research question is: Do various conceptions of reciprocity result in different approaches to the legal obligation to pay tax? We answer this question by exploring the moral, political and legal theories of three major thinkers: Hobbes, Spinoza and Hume. We have chosen these three because Hobbes is a social contract theorist par excellence, Spinoza is clearly shifting away from social contract theory, and Hume takes a “final” step by replacing the social contract with social convention. Consequently, they provide different models of thinking about natural sociability, contract and convention, sovereignty, reciprocity, morality, law and legal obligations. These various aspects structure this chapter through the different sections that deal with Hobbes, Spinoza and Hume respectively. This paper is subject to several limitations, one being that only three (early) modern political thinkers are discussed. Moreover, our focus is on domestic taxation so we will not deal with the idea of a global social contract (see Christians 2009, 115–116). Furthermore, we make a distinction between a vertical reciprocal relationship (state/government—citizen/taxpayer) and a horizontal reciprocal relationship (among members of society) though other, more refined, distinctions are possible (see Bjorklund Larsen 2018, 26–27).

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3.2 Human Sociability, Law, Tax and Morality In early modern Western Europe political theorists were in search of a comprehensive principle for coping with the interest-ridden conflicts between individuals, groups, and states. The pursuit of different interests in sixteenth- and seventeenth century Western Europe was the result of a lacking sense of common life. Protestant theories encouraging individualism contributed to a lack of consciousness of community and reduced the sense of shared loyalties. In political terms, the central question was: “on what basis could the practice of government be conducted once the society was no longer a community?” (Wolin 2004, 215–216). A form of association had to be created for governing men. Due to the Reformation, it was no longer so clear which prince and whose laws one had to obey. Note, this case for disobedience was not motivated by the idea that earthly law-givers imperfectly expressed God’s Law, since human law—no matter how wellintentioned—by definition embodies God’s Law imperfectly. Political obligation became a problem in need of serious thinking since disobedience became conceivable in the minds of men who were habitually inclined to obey the law. This explains that law became “in some sense a matter for negotiation between rulers and subjects; in short, a matter of agreement or contract” (McClelland 1996, 173). Consequently, the concept of social contract came to dominate political thinking. It was used to establish sovereign authority and explain why men should obey the state and the law. The classical contractarian thinkers rejected the then-influential view that there is natural (political) authority among men on the basis of which rulers are entitled to govern by birth and subjects are required to obey the rulers. The contractarians’ fundamental assumption was that men are, by nature, free and equal (Morris 1999, ix; Forsyth 1994, 37). This leads to the fundamental question as to how a sovereign state is constituted who legitimately rules over people. Consent became a key feature of political thinking. Indeed, the Renaissance and Reformation paved the way for the spiritual and intellectual emancipation of the individual (Greengrass 2014). By the late sixteenth century, the Christian faith had abandoned its centuries-old claim of a single central authority (Spellman 1998, 3). Social contract theorists were unanimously opposed to the deduction of political authority from above, and came to find the source of political power in the people. Moreover, they shared an individualistic conception of society. Hence, the state is seen as “the legal creation of individual will” (Friedmann 1967, 118). Thus, the protagonists of the social contract theory were concerned with the political legitimacy of sovereigns and the political and legal obligations of subjects, both “viewed as the voluntary creation of equal moral humans” (Riley 1982, x). Social contract theories and their implied individualistic conception of society are “quite incompatible with an organic view of society.” (Friedmann 1967, 118) Voluntarism, the idea that rulers require authorization by individual men understood as ‘authors’, and ideas of a legitimate state—rather than a good state—all have their roots in the medieval period (Riley 1982, 1–8). This involved an important shift in thinking about law: from questions of law’s “goodness” to questions about

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law’s legitimacy. The centre of theoretical concern was with correctly identifying the person who was entitled to legislate rather than with the content of law. Social contract theory was focused on questions of a more legalistic and procedural nature (McClelland 1996, 173–177; Letwin 2005, 106). An essential feature of social contract doctrine is that men agree to pass from a state of nature to a state of society. Men express their consent in either an actual or a hypothetical contract. The relationship between ruler and the ruled is said to be “contractual, explicitly or implicitly, and which specifies or implies the respective rights and duties of the contractees” (Boucher and Kelly 1994, 10). One may distinguish two agreements, one in which men undertake “to respect each other and live in peace (pactum unionis)” and a second pact “by which the people thus united undertake to obey a government which they themselves have chosen (pactum subjectionis)” (Friedmann 1967, 118). In short, legitimate government should be based on agreement—willingly entered into and binding upon the ruler and the ruled. Again, this involved shift of emphasis, from the content of the laws to (legitimacy of) the law-giver and procedural considerations. Cooperation generally enhances individual well-being. As Rawls (1999, 4) wrote, society can be seen as “a cooperative venture for mutual advantage […] typically marked by a conflict as well as by an identity of interests.” If there is little natural sociability, however, as in Hobbes’ view, there is need for a strong state that has to step into create and sustain an artificial sociability. A vertical relationship of reciprocity emerges since the horizontal reciprocal relationship is weak. For Hobbes, cooperation is driven by a fear of death, and in order to leave the natural state of a war of all against all a strong political authority is established. This is done by way of the social contract, creating the obligation to obey the law. Spinoza and Hume are more optimistic about natural sociability. Societal cooperation comes about naturally. Though Spinoza still mentions a social contract, it definitely carries much less weight than in Hobbes’ thinking. He shifts subtly away from the Hobbesian legalistic and formalistic approach. Crucial to Spinoza is the actual behaviour of the sovereign and his subjects rather than (just) reciprocal promises, i.e., the sovereign acting in the public interest and the subjects complying voluntary with the tax laws. Reciprocal commitment and behaviour reinforce natural sociability in society. Rational people promote their self-interest through altruistic concern and respectful treatment of others (benevolence). However, most people do not live under the guidance of reason; the state, therefore, has to enforce rational cooperation, which serves their self-interest. Hume does not allow for a social contract at all. We need convention rather than contract, and convention can just grow. Human sociability makes such an artificial contract superfluous. For Hume, limited benevolence accounts for the need of limited government. The “organic model” of Hume, offers us a completely different view of human sociability and the modern state, with its focus on human benevolence and (parental) education. In Hume’s theory, prior to any sovereignty, human cooperation results in primitive societies with social conventions. State power is only developed after these primitive societies become more complex and need more supervision.

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Unlike Hobbes, in Hume’s social philosophy the government is a consequence of society. Hobbes, Spinoza and Hume were no tax theorists, but may inform those rethinking taxation and tax ethics. They represent different views on human sociability and, consequently, on political and legal authority and obedience. These different views also lead to different approaches to tax regulation and ethics. Paying taxes is a moral obligation owed to the community by its members for the purpose of enhancing one’s own liberty as well as the liberty of others (horizontal reciprocal relationship). Taxes are a contribution to the expense incurred by meeting collective needs. But the obligation to pay taxes is incomplete because taxpayers cannot particularise this obligation for themselves. “It has no real content until the amount or rate of tax is fixed by an institutional decision, by law” (Honoré 1993, 5). Thus, the legislature has to determine the amount of tax to be paid by each member of society (vertical reciprocal relationship). Because legal rules can be understood or explained differently, tax compliance will vary and, as a result, not all may pay their fair share. This also has an impact from an ethical perspective. Consequently, there exists a pervasive need for the interpretation of legal rules, since rules obviously are not self-interpreting and their application to particular factual situations often remains unclear. Rules have to be interpreted so they can be applied to instances not contemplated by the legislature, or because inconsistent rules may indicate undesirable and unacceptable outcomes in hard cases. Undesirable and unacceptable outcomes may also result from gaps in the law. Moreover, there is often a choice between different legal rules, and rules can be manipulated in unethical ways. Interpreting and using the law inevitably implies making value judgments (Peczenik 1989, 21; Gribnau 2015a, 239–240). Enter morality. Morality, very much like the legal system, is a public system, containing norms that govern behaviour which, in turn, affects other persons. Unlike law, morality is an informal system: there are no judges authorized to decide moral conflicts, and there exist no formal decision-making procedures that provide unique and definite answers to all moral questions. Public morality and ethical responsibilities are partially codified in the law, but the legal system will never be able to codify public morality exhaustively. Moral responsibility begins precisely where actions are not completely determined by the law. That is, freedom of choice entails responsibility, and using, for instance, tax rules is inevitably a matter of exercising that responsibility. Taxpayers can comply with the rules but they can also structure their affairs in a manner that minimizes their tax liability. The choices made by these actors may affect, i.e., enhance or undermine, the integrity of the tax system, distributive justice and sustainable societal cooperation (Gribnau 2017). The question then is: how will taxpayers comply with their obligations as laid down in the law? Will they go for strict compliance to the letter of the law? Or will they have a more benevolent attitude towards their tax obligations—which are contributions to society paid via the state? Political theories that take as their starting point the exclusively self-serving interest of human beings, like Hobbes’ social contract theory, may answer these questions

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quite differently from those that view human beings as social beings. In terms of reciprocity, a thin understanding of the horizontal reciprocal relationship between human beings may call for a strong authority to rule the vertical relationship between state and citizens (taxpayers) through strict laws. A lack of natural sociability may require a command-and-control legislature establishing tax obligations for individuals who are seen as calculating selfish ‘atomic’ individuals lacking natural sociability and benevolence.

3.3 Hobbes 3.3.1 Introduction: Hobbes’ Social Contract, and Its Context Thomas Hobbes (1588–1679) sought to discover principles for the construction of a civil polity. His moral and political theory was strongly influenced by the turbulent years of English history he lived in. The political upheaval of the mid-seventeenth century meant the disintegration of the early modern polity. The civil war fought between the king, Charles I, and parliament in 1642–1646 was disruptive. Parties were “contending on two fronts: for ‘the liberty of the subject’, which depended on free meetings and debates in parliaments and on the security of property, and, for ‘religion’” (Worden 2009, 7). At the beginning of the seventeenth century political participation was based on consensual methods. Consensual decision-making, however, was eroded by the “emergence of permanent divisions within the ruling élites over beliefs. Initially these were controversies over religion” (Kishlansky 1996, 62–63). Religious and political controversies scourged England—spreading to Scotland and Ireland as well. Parliament disputed the king’s authority—many members dissenting from the established Church of England. A republic was declared in 1649 and the king beheaded. As a result, England became a “kind of laboratory for political experiment, as king, parliament and army fought for supremacy (Wolin 2004, 216). In Hobbes’ view these events were ruinous to England. Of course, he was keenly aware that the upheaval was experienced throughout Europe. The divisive challenge to papal authority and dynastic conflicts that changed the relationship between rulers and ruled inspired The Thirty Years War (Malcolm 2007; Martinich 1999, 84–85; Grayling 2016, 25). A form of association had to be created for governing men motivated by self-preservation, driving individuals to enlarge their power. Hobbes was quite ambitious in this respect. His aim was not to supply prudence but science—a system of certain knowledge. Aristotle for example could be of little use. “I see what use they make of Aristotle’s logic, physics, and metaphysics; but I see not yet how his politics serve their turn” (Behemoth 1990, 43). Political philosophy, like natural science, had to be built anew on solid foundations: in his writings “root and branch reform of language and logic were deemed indispensable for future peace and order” (Porter 2000, 58). Moreover, he was not concerned with a science of the art of government, but rather, “a science that would demonstrate the necessity of

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government and the need for government to have certain essential features” (Malcolm 2007, 119). Indeed, for Hobbes, “the skill of making and maintaining Commonwealths, consisteth in certain rules, as doth arithmetic and geometry; not (as tennis play) on practice onely” (Leviathan XX, 145). Hobbes viewed human life as “perpetuall and restlesse desire of power after power, that ceaseth onely in Death” (Leviathan XI, 70). There is no such thing as natural sociability which could be a useful point of departure for his political theory. Certain living creatures, as bees and ants, live sociably together, Hobbes argues, “the agreement of these creatures is Natural, that of men, is by Covenant only, which is Artificiall” (Leviathan XVII 120). As he wrote in the Preface to the readers of On the Citizen, his starting point therefore was “a Principle well known to all men by experience, and which everyone admits, that men’s natural Disposition is such, that if they are not restrained by fear of a common, they will distrust and fear each other, and each man rightly may, and necessarily will look out for himself from his own resources” (On the Citizen, Preface to the readers, 10). Hobbes would probably agree with the following quote about fear. “It is life’s only opponent. Only fear can defeat life. It is a clever, treacherous adversary, how well I know it. It has no decency, respects no law or convention, shows no mercy” (Martel 2002, 161). Natural human inclination fuels conflict and civil war since human beings do not naturally agree and cooperate. This amounts the state of nature, the “war of every man against every man” (Leviathan XIII, 90). Hobbes did not introduce a brandnew concept. The sixteenth-century Spanish school of scholastic theologians and philosophers possessed “the concept of the state of nature even when they did not possess the phrase” (Skinner 1978, 155) with a further distinction between social and political contract, marking “the transition from the social to the political condition” (Monahan 1994, 137)—the latter producing an actual political society. Men agree to pass from this natural condition to a state of society. It is true that in the natural condition all men are equal, having an unlimited but rather useless natural right to preserve themselves. Because of this equality, there is no natural authority among men. All authority has to be instituted by the consent of those over whom it is exercised, that is, the people themselves. Hobbes therefore argues that the authority of any prince “must be grounded on the Consent of the People and their Promise to obey him” (Leviathan XL, 324, cf. XLII, 395). Hobbes sought to discover rational principles for the construction of a stable civil polity. To his mind, virtually any government would be better than a civil war. To ensure stability and avoid dissolution into civil war, people ought to submit themselves to a government with almost unlimited power. Thus, the burdens of even absolute government are “scarce sensible, in respect of the miseries, and horrible calamities, that accompany a Civill Warre” (Leviathan XVIII, 128). Fear of death, rather than the pursuance of the common good, drives cooperation. As Ryan (2012, 429) points out, Hobbes inverts Aristotle’s search for the common good. “There can be no consensus on the highest good for mankind, but there is a worst evil, and that is death.” The origin of the sovereign authority to command (and the obligation to obey) roots in a social contract that institutes sovereignty. The contract or covenant is

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concluded by self-interested individuals driven by the fear of death (Leviathan, XIII, 90). The sheer need for self-preservation takes precedence over other desires and needs. Hobbes builds on this foundation of self-preservation a set of universal rules of human action, “laws of nature”, which all men must find valid if they reason correctly. Thus, these laws of nature, universal, immutable moral principles, are dictates of reason. Taken together, these laws of nature provide the means towards the avoidance of death, prescribe men to give up a part of their natural liberty in order to attain peace, “the establishment of stable and trusted relations” (Malcolm 1991, 535). Hence, the people in the state of nature are presumed to confer their power to a common power and to authorise the sovereign. The duty to obey the law is created by the social contract—itself depending on trust (Riley 1982, 26). By entering into this contract, people agree to give up their right to act solely on their private judgment, but “instead treat the determination of the sovereign as both final and conclusive” (Steedhar 2012, 200). The right of people to govern themselves is replaced by the obligation to act on the judgment of the sovereign. The will of the sovereign, as expressed by the civil law, effectively replaces individuals’ private judgment. Hobbes’ theory therefore requires people to “renounce not only rights of action but also rights of judgement” (Malcolm 1991, 540). Subjects should refrain from disputing sovereign power, as this may undermine stability and the state. For Hobbes, peace is conditional upon this submission to the sovereign command (Ewin 1991, 71; Lobban 2012, 53).

3.3.2 Social Contract: Transition to Civil State and Justification of Obedience Hobbes paints quite a gloomy portrait of human nature and the state of nature. People therefore have strong reasons to avoid this anarchy. The solution Hobbes offers entails submitting to a mutually recognized public authority, because as long as a man is in the condition of mere nature (“which is a condition of war”) private appetite is the measure of good and evil (Leviathan XV, 111). Obligations that previously did not exist are created by a legal device: the social contract. This agreement marks the transition from the state of nature to the civil state. Hobbes thus uses the social contract as the basis for the citizens’ obligation to obey the law, that is, the command of the sovereign (Gribnau and Dijkstra 2019). Self-interest is the main driver here. Men in the state of nature contract with one another only for their own good. The contract consists of a mutual agreement among the many to submit to one or a few, who is or are expected to lay down the rules that will enable the peaceful coexistence of people. Men mutually transfer their rights and create the sovereign (as an artificial identity) whose commands they will obey. There is always a value attached to obedience to laws, because there is always a duty towards the legislature, whose continuing authority assures peace (Malcolm 1991, 541). As shown above, the commands of the sovereign, that is, civil law, replaces

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individuals’ private judgment. For Hobbes, it is therefore a mere rhetorical question to ask: is it up “to private men [to decide] whether the commands of Kings are just or unjust, and that his commands may rightly be discussed before they are carried out?” (On the Citizen, Preface to the readers, 8–9). Indeed, “the virtue of a subject is comprehended wholly in obedience to the laws of the commonwealth” (Behemoth 1990, 44). Hobbes goes on to maintain that to obey the laws, is “justice and equity”, and even “the prudence of the subject.” In passing we note, that Hobbes’ rather one-dimensional portrait of human nature and the state of nature based on his mechanistic psychology (Watkins 1973, 75; Springborg 2007, 9) invites criticism. Some feminists, for example, criticize “his masculine value system centred on autonomy, detachment, objectivity, and a general hostility to others as a threat to one’s ego boundaries” (Coole 1994, 200). The premise of the separated and oppositional nature of males entails a “male emphasis on rights, justice and principles” rather than an ethics of care based on “categories of empathy, proximity and relatedness” (Boucher and Kelly 1994, 28). In the state of nature, we find masculine egos contracting with one another. The relations between these “discrete egos are based on combat and subsequently limited and impersonal contractual exchanges” (Coole 1994, 200). Some of these charges are addressed by Spinoza and Hume, as will be shown. Does Hobbes present a literal, historical narrative of the state of nature and the formation of political society? This is not the case, for Hobbes presented it in this way for the sake of exposition; in essence it is a “product of a thought-experiment” Hobbes carried out in order to understand the rights of men in the absence of any authority with the power to issues rule of conducts and settle disputes (Malcolm 1991, 538). The obligation to obey the law is thus rooted in the social contract. However, the sovereign is not a party to this contract. This is a conspicuous feature of Hobbes’ social contract theory with far-reaching consequences. People submit and transfer their rights to the sovereign (state) who has almost unlimited power. They “transfer their power and strength” and relinquish their “right of resisting him” (Man and Citizen, 19, 10, 107). Subjects agree not to resist the sovereign which according to Martinich (1997, 49) entails obeying the sovereign’s commands: “to pay money when taxed, to take up arms when invaded, and so on.” The absence of corresponding sovereign obligations accounts for Hobbes’ almost absolutist theory of the state. For Hobbes, those who have obtained sovereign power are not bound by any agreements to anyone; consequently, they can do no wrong (Hobbes, On the Citizen VII, 14, 97 and Leviathan XVIII, 122). The obligation to obey the commands of the sovereign is not established by a contract between governors and governed, but a covenant “of every man with every man” whereby each gives up his right of governing himself to one man or assembly of men, on condition that the others do so too (Leviathan XVII, 120). Here, we see the first of three different reciprocal relationships in Hobbes’ theory. The mutual agreement between people in the state of nature reflects a very thin conception of horizontal reciprocity. The natural laws, being dictates of reason, prescribe men to seek peace and give up their part of their natural liberty—as much as others will do

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(first and second law of nature) (Leviathan XIV, 91–92. Cf. Ryan 1996, 222–224 and Jaume 2007, 202–203). People subsequently submit to the sovereign by transferring their rights to him in order to ensure horizontal reciprocity which has a mere virtual existence in the state of nature, thereby establishing a second, vertical, reciprocal relationship between governors and governed. According to Hobbes, the content of the laws of nature can be “contracted” to say that one should not do that to another, which you would not have done to yourself (Leviathan XVI, 109). As Newey points out, this is a negative variation of the well-known “Golden Rule”—‘do unto others as you would have them do unto you’— which Hobbes cites earlier in a slightly different form (Leviathan XIV, 92; see Newey 2014, 94). It is a fundamental rule of “negative reciprocity” which derives its imperative force from “natural reason, which dictates course of action as inescapable” (Newey 2014, 98). Hobbes makes this negative duty of reciprocity, conditional upon certainty with regard to other people’s behaviour. Therefore, no obligation exists to observe these laws of nature unless one has sufficient security that the others will observe the “same Lawes towards him” (Leviathan XV, 110. Cf. Curley 1994, xxx). It is up to the sovereign authority to enforce everyone’s compliance with the laws so as to secure mutual trust and confidence in others observing the laws. The sovereign thus makes possible the relationship between individuals in the civil condition which is a third relationship of (horizontal) reciprocity. Hobbes’ social contract theory was grounded upon an individualistic, even atomistic conception of men, quite unlike, for example, John Locke’s social contract theory. Locke’s state of nature is a “Paradise Lost, a state of peace, good will, mutual assistance and preservation men have all the rights nature gives them” (Friedmann 1967, 123). Reciprocal relationships come naturally. Since they mainly lack sustainable organization, the social contract serves men to agree on an artificial community and the establishment of specialist agencies to which the community’s (the people’s) power is entrusted (Locke Two Treatises of Government II, § 87–95, 99–131). In a first step, men agree to pool their powers and resolve to act jointly and collectively uniting “into one Body” (Locke, Two Treatises of Government II, § 87, 324). Subsequently, they “relate to one another in a framework of political institutions” (Waldron 1994, 52). Thus, individuals transfer their rights to the society as a whole rather than to the sovereign as Hobbes has it (Sommerville 1986, 18). They consent to put themselves “under an Obligation to everyone of that Society” (Locke, Two Treatises of Government II, § 97, 332). Locke has no use for unrestricted sovereign authority to compensate for people’s supposed lack of natural sociability—unlike Hobbes. Hobbes is no tax theorist. Nonetheless, he has some interesting thoughts on taxation. Taxation is often seen as an infringement of the inalienable right to property, but for Hobbes there is no such right since he grounds all property rights in positive law. Private property is the result of the exercise of sovereign authority. Thus, “the introduction of Propriety is an effect of Commonwealth; […] it is the act only of the sovereign; and consisteth in the Lawes, which none can make that have not the Soveraign Power” (Leviathan, XXIV, 171). It follows that the subject has a right against other subjects, but not against the sovereign (Leviathan, XXIV, 172). There

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is no such thing as a property right which has to be respected by the sovereign himself and, as a consequence, subjects can legitimately be taxed (Shapiro 1986, 32). For Hobbes taxes are the price of security, the enjoyment of life: “the Impositions, that are layd on the People by the Soveraign Power, are nothing else but the wages, due to them that hold the publique Sword, to defend private men in the exercise of several trades and callings” (Leviathan XXX, 238). As all subjects benefit the peace, they all should pay taxes. Circumstances determine the amount of taxation required, but it must be limited to the maintenance of civil peace and national security (Leviathan XXIV, 172–173; Shapiro 1986, 32–33). A wise sovereign observes natural law which suggests some restraints on taxation.1 Equality is an important principle in this respect (Leviathan XXX, 238). Hobbes argues: “And it is not so much the burden itself that men object to, as the inequality” (On the Citizen XIII, 10, 147). Indeed, for Hobbes the tax burden as such does not really come under question, he seems to assume that most people are ‘relatively indifferent to the monetary cost of taxation’ (cf. Holmes 1990, xxiii). This is evidenced by Hobbes’ account in Behemoth, his history of the Civil War, of the Hampden affair.2 It is all about equality of the tax burden, though since the sovereign has “reciprocal moral obligations” to impose a tax equally (Braddick 2019, 34). For, Hobbes equal taxation refers to equality of burden. This implies proportionate equality between tax burdens and government benefits whereas the latter are to be best measured by consumption. For him the benefit theory of taxation entails taxing consumption—curtailing luxury consumption being a secondary goal (Gribnau and Dijkstra 2019).

3.3.3 Hobbes’ Moral Psychology For a long time, it was argued that Hobbes was committed to psychological egoism, the view that people are by nature self-interested and care only about their own good. There are indeed egoistic-sounding passages found in Hobbes’ texts, such as “every man by nature seeketh his own benefit, and promotion” (Leviathan XIX, 133) and “no man giveth, but with intention of Good to himself” (Leviathan XIV, 105). Peters (1967, 61) defends this (traditional) reading: “Self-interest, taught Hobbes, is the only operative mode.” Watkins (1973, 77) argues that “a set of metaphysical ideas about human nature and a set of generalizations about human behaviour both play indispensable roles in his psychological theory.” Thus, Hobbes’ morality and his ‘egocentricity-principle’ is based on men’s interest and deepest wants. Hampton maintains that “the label ‘psychological egoism’ is dangerously ambiguous” since very different positions may be implied. However, any philosopher who,

1 See

also Jackson (1973), who distinguishes between prudential maxims and moral rules. Hampden refused to pay the ship-money, a levy for naval support, which “in its fatally controversial form took shape after 1634” (Braddick 2019, 31).

2 John

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like Hobbes, makes desires the sole motivators for our actions, adheres to psychological egoism in the sense that ‘all of my actions are caused by my desires and that my desires are produced in me by a “self-interested bodily mechanism”’ (Hampton 1986, 23, 24). To her mind, this is a very plausible psychological statement generally shared by modern philosophers. Newey, however, argues that Hobbes’ representation of human motivations should not be perceived as accusing ‘man’s nature’, but is more about people competing for scarce vital resources. They sure have a reasonable interest “in securing the necessities of life.” This does not make them egoistic. To his mind, “the bestial ethos of the state of nature shows that in some circumstances, there is no reasonable alternative to behaving like a beast” (Newey 2014, 91). Moreover, it is not unreasonable to take measures to protect one’s property such as lock one’s doors. As Hobbes writes “Let him therefore consider with himself: when taking a journey, he arms himself and seeks to go well accompanied; when going to sleep, he locks his doors; when even in his house he locks his chests; and this when he knows there be laws and public officers, armed, to revenge all injuries shall be done him; what opinion he has of his fellow subjects, when he rides armed; of his fellow citizens, when he locks his doors; and of his children, and servants, when he locks his chests. Does he not there as much accuse mankind by his actions as I do by my words? But neither of us accuse man’s nature in it” (Leviathan XIII, 89). According to Gert (1996, 166), Hobbes’ view about human nature is rather ordinary. He argues that Hobbes’ remarks about human nature are meant as generalizations and do not relate to actual human beings in the real world. Hobbes’ premises about human nature are building blocks for a workable political theory and, for that reason, one should not think that Hobbes subscribed to psychological egoism. He definitely did not hold that “no one is ever motivated by concern for others” (Gert 1996, 167). Gert maintains that Hobbes uses limited altruism, rather than assuming that man is a political animal and man naturally loves “his fellow men” (See On the Citizen I, 2, 22). Moreover, Hobbes defines various passions that express concern for others, such as indignation, benevolence, charity, love (Leviathan, VI, 41–42). Interestingly, Hobbes held that the behaviour of real humans is strongly determined by their education or training, which animates conflict (Leviathan XI, 73; On the Citizen, Preface to the readers, 11). In this view, inadequate moral upbringing rather than fundamental human nature animates civil conflict (Unlike the more optimistic Hume, Sect. 9.4.1). Ewin (1991, 99) even asserts that “Hobbes’ full-blown account of human nature is of people as social beings, people who are part of a people and not part of a multitude.” To his mind, the radical portrait of person in state of nature is not a real person, because than leaving the state of nature would simply be impossible. Wootton (2018, 93) also argues that Hobbes’ is not a hard-line definition of an egoist, “which would hold that people never act to the benefit of others.” He then points at a genuine difference between Hobbes’ world and Hume’s world—the world of the eighteenthcentury Enlightenment. To his mind, Hobbes cannot imagine that we might feel compassion (sympathy) for a stranger—in stark contrast to Hume who assumed that people are good-natured. Consequently, Hume’s moral philosophy differs from

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Hobbes’ partly because of the growing emphasis on sympathy, humanity and good nature in the eighteenth-century (Wootton 2018, 107). The debate on Hobbes’ position with regard to egoism may be due to his rhetorical strategy, argues Martinich. He draws a distinction between tautological egoism and selfish egoism. Tautological egoism holds that “every act is caused by some desire of the agent, and everyone acts in order to satisfy that desire.” This is a harmless doctrine as it even goes for Mother Theresa. Selfish egoism, however, “is the view that everyone acts only with desire to benefit himself. This doctrine is interesting, dangerous and false” (Martinich 1999, 234). Martinich points out that Hobbes argued for tautological egoism while pretending that he had proven selfish egoism—to justify absolute sovereignty. Hence, he equivocates over ‘egoism’ to argue for absolute sovereignty and hierarchical governance. In the end, Hobbes’ theory is premised upon people’s lack of viable sociability; their inadequate moral upbringing even animates conflict. They, therefore, should be ruled top-down; ‘natural’ mutual obligations are partly replaced by obligations towards the rulers which have to be set out in laws. This also goes for the obligation to pay taxes.3 In the Hobbesian model this obligation can hardly be seen as an obligation to contribute to society via government (the state), since the almighty sovereign is essentially free to rule as he pleases since he has only a very limited obligation towards the people. In the Hobbesian model, it is hard to rely on taxpayers’ willingness to comply with their legal obligations (voluntary compliance). Thus, government (tax authorities) has to resort to enforced compliance—based on the coercive powers of revenue authorities to enforce that taxpayers comply with their legal obligations (Kirchler et al. 2008; Enachescu and Kirchler 2018).

3.3.4 Various Relationships of Reciprocity Hobbes is not denying that some people are sociable. Reciprocity among individuals is, however, factually non-existent without the reciprocal relationship between the ruler and the ruled. This reciprocity is based on the ‘mutual Relation between Protection and Obedience’, which informs the design of Leviathan (Leviathan 1991b, ‘A Review, and Conclusion’, 491; see Dyzenhaus 1980, 497). Consequently, the realisation of horizontal reciprocity heavily relies on vertical reciprocity. This vertical reciprocity relationship is coloured by the (almost) absolute power of Hobbes’ sovereign since he is not a party to the social contract. The sovereign has a monopoly on legislative power. Nonetheless, he cannot do just as he likes, regardless that the sovereign is not a party to the covenant. The wise

3 As

for compliance with tax obligations, this may refer to the following kinds of obligations: (1) registration in the system; (2) timely filing or lodgement of requisite taxation information; (3) reporting of complete and accurate information (incorporating good record keeping); and (4) payment of taxation obligations on time; OECD (2014).

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sovereign has certain duties, derived not from contract, but from the law of nature. However, the sovereign is accountable to God and to no one else (Lobban 2012, 53). The authority is given to the sovereign “by covenant only of one to another, and not of him to any of them” (Leviathan XVIII, 122). Hobbes therefore proposes two obligations which are owed: a contractual one to the other citizens, and a noncontractual one to the person bearing the sovereignty but “not of him to any of them”, entailing that none of the sovereign’s subjects “can be freed from his Subjection” (Leviathan XVIII, 122). These two obligations, an agreement of each with each of the rest and a ‘submission of all their wills to the will of one man or of one Assembly’, are also to be found in On the Citizen (V, 7, 72). The sovereign not being a party to the covenant among the people accounts for Hobbes’ absolutism. Though the sovereign is limited by the aims of the contract, he “does not have rights that have correlative duties to individual subjects or citizens” (May 2013, 65). In order to maintain stability, the sovereign has both a monopoly on all the political power in the state and the right to regulate every aspect of life (Martinich 1997, 45). Hobbes maintains that absolute sovereignty is compatible with liberty. Liberty is the capacity of doing something in the absence of external impediments (Leviathan XXI, 145). Liberty is defined by the sovereign’s commands. “The Liberty of a Subject, lyeth therefore only in those things, which in regulating their actions, the Soveraign hath praetermitted” (Leviathan XXI, 148). This absolute obedience is compatible with liberty, though, since in the act of submission to the sovereign “consisteth both our Obligation, and our Liberty” (Leviathan XXI, 150) as subjects authorise all actions of the sovereign. They are not at liberty to disobey his commands that serve peace. The sovereign for his part cannot command and force subjects to act contrary the natural right to self-preservation. Hobbes continues “as for other Lyberties, they depend on the Silence of the Law” (Leviathan XXI, 152). In cases where the sovereign has not issued a command, prescribed no rule, a subject has the liberty to act according to his own discretion. Therefore, liberty for Hobbes means just the opposite of law. The liberty of individuals is correspondingly specifically delimited. Natural liberty prevails wherever the sovereign, “as a free gift”, chooses to keep silent and not to enact (civil) laws (Jaume 2007, 203). Underlying Hobbes’ argument is his rejection of a (Roman) republican conception of liberty which regarded political participation as part of liberty. According to Goldsmith, Hobbes constructed an alternative and restricted meaning of the term “liberty”, intent on denying that subjects can legitimately claim liberty. Attempting to counter the “implicit democratic menace” of the republican, participatory notion of liberty, he declared that the liberty of the ancient Greek and Roman philosophers referred to the state’s independence, not the freedom of individuals (Leviathan XXI, 149). He argued that the subject’s freedom consists in those things the sovereign has “praetermitted”—not legislated on—“whether because he has simply overlooked them or because he has thought them in no need of regulation” (Goldsmith 1994, 199). The laws also protect citizens from incursions by fellow citizens. For Hobbes it is apparently sufficient that subjects enjoy their “civic rights and liberties as a matter of fact; the mere presence of arbitrary power within a civil association does nothing to subvert out liberty” (Skinner 2008, 212).

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Republicanism, by contrast, had a far more positive conception of liberty. Republicans did not deny a natural tendency in humans to selfishness and self-seeking, but virtue was possible and could be encouraged by a good society. The laws and institutions could be arranged so as to encourage public spirit. For republicans, a goodconstitution, good laws, good institutions would train citizens into self-discipline (Goldsmith 1994, 209). This line of thinking is in stark contrast to Hobbes’ negative liberty depending on “Silence of the Law” which leaves the subject entirely at liberty without any public spirited self-restraint. Hobbes radically differs from republican thinkers. Law interferes with subjects’ liberty but, outside the interferences authorized by a law, individuals possess a sphere of autonomy. Taxes, therefore, should be imposed by laws; if the sovereign has not issued a command to pay tax, no such obligation exists. The strong opposition between law and liberty, seems to require extensive and detailed regulation, providing legal protection against undue government interference but potentially also inviting formalism at the expense of the spirit of the law. Hobbes argues that subjects do not need to fear total (“command and control”) legislation, for it is impossible to regulate and control every aspect of human life. Subjects are therefore free to behave largely as they please (Leviathan XXI, 147; Martinich 1997, 45). Here, Hobbes seems to be rather naive as the emergence of totalitarian states shows. The reciprocal relationship between the almighty sovereign and subjects—with very few rights for the latter—seems indeed to be a very vertical, asymmetrical relationship. Hobbes’ command theory of law requires subjects’ absolute obedience. Consequently, these subjects may adopt a strict attitude towards compliance: selfinterested, distrustful individuals will go for the letter of the law, driven by a concern for their negative liberty (interference by others; see Berlin 1969, 122). It is thus hard to conceive of any positive conception of taxation, citizenship and society: taxation is not seen as a civic obligation to contribute towards society—enhancing one’s positive liberty and autonomy. “The ‘positive’ sense of the word ‘liberty’ derives from the wish on the part of the individual to be his own master”, wrote Isaiah Berlin who coined the term positive liberty. “I wish my life and decisions to depend on myself, not on external forces of whatever kind” (Berlin 1969, 131). With an almighty ruler placed above and ruling them by his commands, it is hard for taxpayers to view society as a co-operative venture. The existence of the sovereign makes possible the civil condition. He dictates the terms of interaction between his subjects through enacting laws. As Dyzenhaus (2014) argues, the third reciprocal relationship, is another horizontal one established between individuals in the civil condition, that is, legal subjects. Through laws the sovereign constitutes a condition of civil liberty, making it possible for individuals to select their own goals. Hobbes’ theory aims at justifying the creation of a stable association of human beings, without relying on human sociability. An absolute sovereign has to provide and guarantee stability and peace. Hobbes shows by the hypothetical device of the social contract how such association is created. In particular, according to Oakeshott (1999, 149), he shows, “how human beings might acquire the condition of being obligated to observe the prescriptions of an humanus legislator.” Oakeshott goes on

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to argue that the social contract serves as the device to set up a sovereign authority that has the right to make laws that observes the “three fundamental principles of moral obligation.” These principles are that no natural man (in contradistinction with artificial institutions) can have the authority to impose obligations on another, that nobody is free to choose his own obligations, and that one can become obligated only by voluntary choice. These principles reflect the fundamental assumption that men are, by nature, free and equal (see Sect. 4.1). Oakeshott therefore maintains that for Hobbes, “the rule of law stands for a moral (not a prudential) relationship” (Oakeshott 1999, 150). According to Dyzenhaus (2014, 123), elaborating on Oakeshott, the sovereign who rules his subjects through enacting laws—the exercise of political power by legal means—brings about a relationship of reciprocity between those who are subject to the sovereign power. This relationship “has a particular quality to it, the quality of respecting and enabling the agency of the subjects.” Hobbes provided the basis for the idea that government according to law is constitutive of a particular kind of liberty—civil liberty, or the liberty the subject enjoys under an order of public laws. His image of law is not then one of law as a necessary constraint on liberty, but law as a necessary condition of civil liberty. Moreover, law is also a sufficient condition for individuals to have liberty in the important sense of civil liberty. Where there is law, so there will be liberty. And this liberty comes about because law makes possible the horizontal relationship of reciprocity between free and equal legal subjects. Dyzenhaus (2014, 125) concludes that “the subject has reason to regard the law as a public conscience.” Does this horizontal reciprocal relationship impact the vertical reciprocal relationship? To our minds, passive subjects do not seem to bear much responsibility to sustain the relationship of vertical reciprocity, which is up to the almighty sovereign. In Hobbes’ theory there seems to be a strict separation between both reciprocal relationships. One could argue that the vertical reciprocal relationship is meant to promote peace and security which is also the business of citizens. Their behaviour could enhance peace and security. This kind of citizen responsibility does not sit well with Hobbes’ strict separation between both reciprocal relationships. For Hobbes, obedient, passive citizens do not seem to bear any responsibility for the general interest. This is a ‘one direction only’, and therefore, very thin kind of reciprocity. According to Hobbes, “the Law is a Command, and a Command consisteth in declaration, or manifestation of the will of him that commandeth, by voyce, writing, or some other sufficient argument of the same” (Leviathan XXVI, 187; see also Behemoth 1990, 50). For Hobbes, the law alone defines justice. Justice is legal or conventional justice and the concept of authority is the foundation of the rule of law (Letwin 2005, 105). Hence, the law, as the command of the sovereign, is nothing but an expression of will. As d’Entrèves (1967, 107) observes, Hobbes’ voluntarism seems to know no boundaries. The Hobbesian conception of political rule and of the law represents a tradition in modern legal and political reasoning in which the law is understood as a sovereign command, closely associated with “the asocial, self-preserving actors who fight amongst themselves for their scarce resources, and must be protected from each other by the authoritative will of the sovereign” (Preuss

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1998, 325). These self-interested human beings require “command and control” governance, inviting legalistic—i.e., abiding by the letter of the law—compliance. Note that Hobbes sets out some non-binding principles to ensure the legitimacy of legislation (Leviathan XXX; Goldsmith 1996). Legitimate legislation enacted to promote the public interest may inspire trust in the legislature and motivate subjects not to act as free riders. Hobbes’ silence of the law may thus be seen as opening up a space of trust which may enhance an ethical attitude beyond minimalist compliance with the law (Lemmens 2013). Moreover, no sovereign can ever hope to make the people obey his laws, merely by “terrour of legall punishment” (Hobbes, Leviathan XXX, 232). If the state is to survive, therefore, “the people must obey it not because they fear the consequences of disobedience, but because they recognise that there are good reasons for acquiescing in its rule” (Skinner 2008, 159; see also Behemoth 1990, 50–51 about passive and active obedience). Thus, Hobbes seems to support the position that a distinction should be made between mere obedience to law and fidelity to law (Fuller 1977, 41). According to May (2013, 132–133), Hobbes thus holds that people should develop an attitude of respect for the law in general. Such a habit of obedience rather obedience to the law for fear of the sovereign power, is “a necessary feature of any relatively stable system of law” and the law’s continued legitimacy. Nonetheless, Hobbes empathically drives home the point that the sovereign “is absolute and the civil law is determined solely by the sovereign’s will” (Harrison 2012, 33). Hobbes’ voluntarist conception of law, reflecting legalism and formalism which may go at the expense of justice, seems to get the better of him. Indeed, a formalistic understanding of laws sits well with the legal device of a social contract, “a notion which is clearly a kind of legalistic reconstruction of a process which must have been considerably less rational” (Pangle 1973, 41). Law is thus treated as a formal, self-contained system of norms carefully separated from morality—law demanding mere conformity with letter of the law (Shklar 1964; Gribnau 2015a, 234–235). For Hobbes, human agency is based on the model of a “self-contained individual agent” (Gatens and Lloyd 1999, 73); and individuals, in advancing their self-interest, lack sustainable sociability. By creating the absolute sovereign, therefore, an artificial sociability mechanism seems to be established in order to bring about the civil condition and safeguard peace. Sovereignty is wedded to a system relying on absolute power; coercive enforcement allowed people to “safely enter into conditions of peace by terrorizing potential defectors into conformity” (Sagar 2018, 33). Laws can be unfair, but Hobbes argues, they must be complied with. After all, the sovereign power of command came about through the social contract—without legal obligations for the powerful sovereign. That is an agreement, and one should observe such agreements, which one has voluntarily entered into. Consequently, the sovereign commands should be comprehensively spelled out in rules since Hobbes’ account suggests for the sovereign to put every obligation very detailed and exhaustively into the law. In cases where the sovereign has not issued a rule, subjects have the liberty to act according to their own discretion. The Hobbesian approach breeds a rule-focus which may crowd out ethics: the focus of both

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legislature and taxpayer will be on rules, not on ethical behaviour (Gribnau 2015a, 233–234). Indeed, the lawgiver cannot rely on the willingness of citizens to cooperate, to benevolently interpret the law, and not to minimize their obligations towards the sovereign. Sovereign commands, such a tax legislation, may also be aimed at sustaining society. Obeying the command to pay taxes is thus contributing to society. Nonetheless, this horizontal relationship of reciprocity seems to be narrowed down to the reciprocal relationship between the ruler and the ruled—and the ensuing obligations. Paying taxes thus becomes determined by the vertical relationship characterised by a thin conception of reciprocity. The vertical relationship is reduced to commands from the ruler to the ruled. The same goes for the ensuing obligations like paying taxes. Taxes are levied by the sovereign and therefore part of the vertical, top-down relationship rather than seen as horizontal reciprocal obligations.

3.3.5 Hobbes: Conclusion For Hobbes sustainable sociability does not come naturally. Peace and stability have to be brought about by an unrestrained sovereign. Hobbes’ theory of political legitimacy and political obligation revolves around the legal device of the social contract. In this way, self-interested individuals driven by the fear of death leave the state of nature and enter the civil state (society). The sovereign being not part to the contract has almost absolute power to which subjects submit themselves. Justice is a matter of sovereign discretion, a quality defined by law rather than a quality of law (Letwin 2005, 106). In this will-centred view, without one single, unchallenged sovereign no society will subsist at all. This hierarchical, command conception of authority and law serves the end of order (Taylor 2018, 128). The law, the command of the sovereign, has to establish subjects’ (mutual) obligations. Hobbes’ voluntarist conception of law invites legalism and formalism reflected by legislation disconnected from social norms, detailed regulation and strict, minimalist obedience on the part of the subjects. The sovereign’s power to tax is almost unlimited—absent any natural property rights and (natural) distributive justice. This line of thinking will conceptualise the obligation to pay tax as an obligation towards the state which has nothing do with paying for public goods for society. This obligation has to be determined by the sovereign and be laid down in law. Law is seen as a command backed by sanctions which need not be connected to social values. Taxpayers may also adopt a legalistic, formalistic attitude. These calculating self-interested individuals will probably opt for compliance with the strict letter of the law. A Hobbesian approach based on a thin conception of natural sociability and horizontal reciprocity thus accounts for government (tax authorities) resorting to detailed tax legislation and enforced or coercive compliance. The legislature and revenue authorities have to enforce strict obedience on the part of the taxpayers as voluntary compliance cannot be relied on. Taxpayers, in turn, may be incited to minimalist compliance and be willing to exploit the letter of the law or loopholes.

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3.4 Spinoza 3.4.1 Introduction Benedict de Spinoza (1632–1672) was a modest and sober living philosopher who stood with both feet on the ground. Before and after his expulsion from the Portuguese Jewish community (1656), he maintained contacts with liberal-minded circles in Holland (sympathizers of the Dutch republican magistrates and brothers De Witt). He interrupted his work on his magnum opus, the Ethics, to plead for a tolerant society in the Tractatus theologico-politicus (further: TTP), without showing himself to be an uncritical mouthpiece of the patricians’ position. Spinoza is not very well known for his political philosophy which in turn is the basis for his legal philosophy. Nonetheless, his views are very topical (Gribnau 2015c). Spinoza’s political philosophy is systematically set out in the Tractatus Politicus (further: TP), a clear and logical work based explicitly on human experience and not on an ideal image of man and society. Straight at the beginning of his book, Spinoza points out that philosophers usually “conceive men not as they are, but as they would like them to be” TP Chap. 1, Sect. 9.1). Spinoza therefore advocates a realistic political theory that deduces the state from the laws of human nature. At the same time, however, he intends to go beyond “experience as an accidental starting point” (de Dijn 1970, 38 and 44). There are some points of agreement between Hobbes’ and Spinoza’s political theory. However, Spinoza disagrees with Hobbes in some remarkable ways. At first sight, he may seem to advocate a command theory of law in chapter four of the Tractatus theologico-politicus, but the reader is in for a surprise. Spinoza advocates a dynamic rather than a static conception of reciprocity. Other than Hobbes, Spinoza does not reduce reciprocity’s foundational nature to the (hypothetical) founding of society and state. Reciprocity does not dilute to one-way traffic in an asymmetrical power relationship dominated by an absolute sovereign over obedient and passive subjects. On the contrary, reciprocity fulfils a structural role in the dynamic interaction between citizens and state. Like Hobbes and Hume, Spinoza does not deal extensively with taxation. Nonetheless, his remarks are quite interesting. For one thing, paying taxes is a way of contributing to the public interest comparable to military service (TP 6.32). The sovereign has the right to tax people so as to meet all the expenses made for defence (“to levy militia”) and peaceful purposes (TP 4.2). Moreover, government spending revenue to the public good enhances people’s willingness to pay tax. With regard to the distribution of the tax burden, to meet the expenditure required for transacting public business, they are collected from the citizens “either by direct assessment, or what is much fairer, by indirect taxation” (TP 9.8). Like Hobbes, he probably was an advocate of the then popular benefit theory of taxation, according to which a person should pay for what he gets (Groves 1974, 14).

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3.4.2 Natural Law and State of Nature According to Spinoza, before starting to reflect on the state, one must give serious thought to the natural right of the individual. This right is closely connected to the supreme law of nature, which holds that “each thing endeavours to persist in its present being, as far as in it lies, taking account of no other things but itself” (TTP 16, 237). Spinoza clearly differs from Hobbes for whom the supreme—normative— law of nature is a precept of reason (see Sect. 4.2.2). In book 3, proposition 7 of the Ethics (E3P7) Spinoza’s—non-normative—supreme law says that the striving (conatus) for self-preservation is the actual essence of all things (not only of human individuals). The highest natural law indicates a way of behaviour that depends on the “necessity of nature”, since it is a law of nature. Spinoza thus advocates a naturalistic approach. It is a natural fact that everything strives for self-preservation (persistence) independent from human decision. Because this effort (striving) is an objective empirical fact, Spinoza concludes that every individual has the “sovereign right to do all that it can do; i.e. the right of the individual is co-extensive with its determinate power” (TTP 16, 237). The striving for self-preservation, to be conceived of as an objective rule that applies to everything, is the basis for Spinoza’s definition of—individualized—natural right: the rules [laws] that govern the nature of every individual thing, according to which we conceive it as naturally determined to exist and to exist in a determined way. So, the natural right of an individual thing is co-extensive with its power to survive—not just physically. Spinoza’s basic thesis is that right is coextensive with power. Lapidary summarized: someone’s right extends as far as his power does (TP 2.3-4).4 This power is determined by physical strength but also, for example, by money, influence on other people’s behaviour and the compassion one can arouse in others. The right of each individual as part of nature as a whole enables him to act on all the other parts of nature. This concept has no specific moral connotation since the natural right of the individual is determined by the laws of nature which govern human behaviour. What determines more concretely the ability to self-preservation and thus the natural right of an individual? Spinoza answers this question in his anthropology (which is based on his metaphysics): people are naturally subject to affects (defined as affections of the body; E3 Definition 3) or passions as they are often called, although Spinoza calls only the passive affects—which harm both individuals and society— passions.5 In the Ethics Spinoza sets out in detail the operation of the human affects and shows how they lead to social interaction. For example, besides fear, hatred and jealousy (all passive affects) there are also positive affects like fondness, hope and compassion that may entail survival, self-affirmation and a successful life. These 4 Spinoza does not identify the right and power; see Curley (1996), 318–322, also for a useful comparison with Hobbes. 5 Here terms such as passions and emotions, and natural inclinations are sometimes used in lieu of the more technical-philosophical term ‘affects’ because a precise equivalent in our spoken language is lacking. For Spinoza’s affects can be passive and active, but in the TP Spinoza does not apply this distinction consistently.

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passions, desires, according to Spinoza have much more influence than reason on human functioning and thus on human interaction. This means that the power and thus the natural right of the individual is determined by his passions (TP 2.5). Like Hobbes, Spinoza argues that the natural right of an individual in the state of nature is actually just a virtual right. Without the state it does not exist in fact. Indeed, that situation, viz. the state of nature, is most oppressive—something like despotism without a despot or anarchy (Matheron 1986, 116). There is no cooperation between individuals which makes it impossible for a man alone to preserve himself, let alone develop his intellectual faculties. It is in this sense that the individual has no power and, therefore, no right. However, Spinoza argues, people actually always live and work together in order to enable their survival. This makes the need for a social contract seemingly superfluous.

3.4.3 Cooperation Comes Quite Naturally, the Social Contract Inverted Most individuals act from passive affects, which are necessarily, i.e., to the extent these individuals perceive each other as competitors, at variance with one another. To the extent that they are governed by anger and hatred, men are by nature enemies (TP 2.14). But, at the same time, they are dependent on one another, for a human individual alone cannot defend himself against all. Without mutual assistance men are hardly able to preserve themselves and develop their mental ability (TP 2.15). Hence, they are naturally inclined to co-operate.6 In the state of nature, man’s conatus makes him choose the lesser evil, i.e., a smaller loss of power and freedom, by cooperating in a society where he submits to the constraints imposed by the authorities. Here, the social dimension of imagination, Spinoza’s first kind of knowledge, is at work which accounts for a natural formation of society driven by human imagination. In practice, therefore, we observe empirically that people, in spite of the differences and often conflicting interests among themselves, live together in a society. Thus, people are naturally inclined to unite in a collective body accepting that one has to hold back one’s natural inclinations. And the more men unite this way in a collective body, the more they increase their power to survive. The more they join forces, the greater their number, the more rights they have in common (TP 2.15; for this mechanism, see Ueno 1991; Blom 1993). Spinoza indeed saw “how an ethics of cooperation could show us how to increase our power and so show us how to live” (Baier 2010b, 187). The idea that this collective power implies more right follows from the naturalistic argument that the rights of individuals (and agencies) are coextensive with their powers—the premise of Spinoza’s political philosophy in general, as shown above.

6 This

does not necessarily go harmoniously, conflict between human beings being the inevitable (Lloyd 1996, 75).

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Cooperation empowers because it creates, by merging potencies’ (each in itself relatively impotent), actual power and, therefore, right. Spinoza calls this right of individuals working together communal right. People cannot survive without holding their rights in common, without some common code of law (TP 1.3). This communal right, “which is determined by the power of the multitude (the people)” serves to care for the affairs of the state and is called sovereignty (supreme authority) (TP 2.17). For Spinoza, freedom is possible only in the context of civil society, which is constituted by the cooperation of human beings. Given the lack of freedom in the state of nature, there is no real need for a justification of sovereign political authority by means of a contractual obligation. Liberty, in the sense of obedience to reason and freed from the bondage to passions, is possible only in civil society. Consequently, “freedom and political authority are not in opposition” (Frank and Waller 2016, 32). As shown, people naturally enter the civil state. Has Spinoza any need for the concept of a social contract? Indeed, he uses social contract language when he argues that men necessarily had to unite in one body, because the life of men “without mutual assistance must necessarily be most wretched and must lack the cultivation of reason.” In order to be able “to live harmoniously and be of assistance to one another” it is necessary that they “give up their natural right and to make one another confident that they will do nothing to harm others” (E4P37S2). They put their individual unrestricted rights “in common ownership” which will then be determined by “the power and will of all together” (TTP 16, 239). They therefore “pledged to direct everything according to the dictate of reason, and not hurt other people, to do nothing to anyone which they would not want done to themselves”, and finally, “to uphold another person’s right as they would their own” (TTP 16, 239). Spinoza talks of a social contract especially in his earlier political work. However, his approach seems to be an inversion from the classical model (Frank and Waller 2016, 29). First, a contract in itself has not much force, since “the validity of an agreement rests on its utility” (TTP 16, 240). Once the utility of the contract is taken away, the contract is taken away with it, and “it is null and void” (Curley 1996, 323). So, one cannot rely on a person’s good faith unless the promise is “backed by something else” (TTP 16, 241). Even more importantly, Spinoza reconceptualises the social contract. He conceives it not as a transfer of right (as in Hobbes) but as a transfer of power (TTP 16, 241). Indeed, as Curley (1996, 325) writes: “It is the transfer of power that generates the sovereign, not the [hypothetical; hg/cd] utterance of some magical words.” According to Spinoza, the sovereign power is “bound by no law, and all must obey it in all matters” (TTP 16, 241, cf. TP 4.6). This looks quite like Hobbes’ theory. However, we must not forget that “the natural right in its entirety” is always preserved in the state [see Spinoza (2002), Letter 50], since nobody “can so completely transfer all his right, and consequently his power, as to cease to be a human being” (TTP 17, 250). The state or commonwealth is bound by natural law, for the positive law in the state should reflect the balance of power (=natural rights) in the state. If this is manifestly not the case, government apparently has conferred insufficient rights to the citizens with the result that they will ignore the law or will revolt. De iure they do not have the civil rights which they de facto in the form of their combined

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natural rights (i.e., their power as a cooperating citizens) can maintain. When positive law becomes ineffective and deviates (too much) from the natural right, a civil war will follow. Governments should therefore be acutely aware that they can lose supreme power. They could try to enforce citizens’ compliance through the power of coercion, such as the threat of penalties, but mere force is not a sustainable basis for compliance. Hence, it is “exceedingly rare for governments to issue quite unreasonable commands”, Spinoza writes. In their own interest and to retain their rule they promote the public good—the welfare of the whole people being the supreme law—and “conduct all affairs under the guidance of reason” (TTP 16, 242). Consequently, the sovereign’s right to rule will depend on his power to persuade his subjects (in one way or another) that it is in their interest to obey. If the subjects believe that, they will comply. If not, no matter what promises they may have made, “they will not obey (and he, in virtue of his lack of power, will cease to be the sovereign” (Curley 1996, 324). In other words, “any ‘transferences’ empowering the common political sphere must be continuous and based on a continuous constituent power, rather than performed in a unique moment” (Santos Campos 2012, 143). Thus, there is “no unique foundational moment of politics” which often features in social contract theories—for good reason as will become clear (Santos Campos 2012, 144).

3.4.4 Egoism and Mutual Aid Spinoza’s political and ethical philosophy are rooted in his views about human nature. The starting point of Spinoza’s ethics is the conatus doctrine of E3P6. This doctrine holds that each thing, as far as it can by its own power, strives to persevere in its existence (Garrett 1996, 271). This striving for self-preservation is the actual essence of anything (E3P7). Moreover, for Spinoza, virtue is successful acting from one’s nature, i.e., striving for preservation (E4P18S and E4P20D; see Nadler 2014, 45). An ethical programme, therefore, will be feasible only if it appeals directly to each person’s self-interest. Spinoza’s ethical egoism is grounded in the idea that “the only motives anyone has are self-interested motives” (Cook 2007, 114). However, according to Spinoza, human beings are most useful to other persons when they are rationally pursuing their own self-interest. “When each man most seeks his own advantage for himself, then men are most useful to one another” (E4P35C2). And experience teaches us that by helping one another human beings “can provide themselves much more easily with the things they require” (E4P35S). Nadler succinctly summarizes this argument: “Enlightened egoism, in other words, leads to maximal mutual utility” (Nadler 2006, 242; see also Walther 2006). His ethical egoism is therefore compatible with altruistic concern and respectful treatment of others. Spinoza defends that this kind of “benevolence” is a kind of intrinsic value on ethical grounds, since he “holds that there is a natural law requiring us to act for

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the good of others” (Kisner 2011, 1357 ). Spinoza justifies this claim by arguing that our good consists in following the guidance of reason, which directs us to the good of others (E4P46). Humans share a rational nature, according to which they are ethically obliged to live. In virtue of this shared nature, acting for the good of others necessarily promotes our own good. Mutual aid is prescribed by reason (Lord 2017, 137). Unlike Hobbes, who conceptualises responsibility and agency “fixed on the model of a self-contained individual agent”, for Spinoza “there is no possibility of selfhood in isolation” (Gatens and Lloyd 1999, 73). Indeed, sociability is for Spinoza not merely incidental to rational selfhood, as Lloyd explains. Living according to the guidance of reason entails that we “agree in nature” with other human beings. Individuals thrive through dynamic collective action. “Individual powers are realised—and human identities are formed—under conditions of sociability” (Lloyd 1996, 89). Thus, Spinoza’s psychological and ethical egoism are not narrowly egoistic since they are not at odds with morality, that is, with “non-mercenary, benevolent concern for the real well-being of others.” Spinoza’s rational egoism leads in fact to “the highest ethical behavior” (Nadler 2006, 243). Spinoza relates morality to being guided by reason. “The desire to do good generated by one’s own living according to the guidance of reason, I call morality” (E4P37S1). Hence, one’s own living according to reason generates a desire to do good for others and help them in their striving for perfection. Indeed, Spinoza, himself argues that his doctrine contributes to “social life insofar as it teaches … [that each person] should be helpful to his neighbour, not from unmanly compassion, partiality or superstition, but from the guidance of reason, as the time and occasion demand” (E2P39S).

3.4.5 Civil Laws as Self-legislation According to Spinoza, ordinarily, we use the concept of law in the sense of a command which men can either obey or disobey. The legislature may establish laws with respect to an end to be achieved (TTP 4, 101). Such a law restricts the total range of human power within set limits and demands nothing that is beyond human power. This human law is a prescribed norm; it intends to steer the behaviour of people, but does not necessarily bring about that behaviour. Behaviour in conformity with the prescribed norm is not guaranteed by the mere existence of the norm. So, for Spinoza law is a command “which men can obey or disobey” (TTP 4, 102), but there is more to it. A law depends on human will and men ordain a law “for themselves and for others with view to making life more secure and more convenient, or for other reasons” (TTP 4, 101). He subsequently defines more specifically as “a rule of life which man prescribes for himself or for others for some purpose” (TTP 4, 102). Hence, law-making is a purposive enterprise, but there is more. 7 Kisner calls this the second natural law. Spinoza himself defines ‘benevolence’ in a different way:

‘the desire to benefit those whom we pity (E3, Definitions of the Emotions, no. 35).

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James (2012) shows that the aspect of command thus gives the human law a threefold meaning. First, a (normative) law issued by government not only refers to an intended actual result that can be described in a descriptive law, but also refers to the aspect of the reasonableness of the law. Indeed, the law regulates the behaviour of citizens which is often governed by passions and thereby forces citizens to act more reasonable than they (or most of them) are naturally inclined to do (De Dijn 1970, 37; Blom 1993, 335–338). The (human) law is a metaphor for the reasonable “decree of all” those who are living and working together in the state (TP 5.5). Second, as James (2012) has shown, Spinoza relaxes the stipulation that laws are commands by redefining them as prescriptions that can be obeyed or disobeyed. Men ordain these laws for themselves and for others. Those who see the true end of laws will support and obey these prescriptions—without the threat of punishment. Consequently, for rational persons, law is a matter of self-legislation rather than a command by an external legislator (TTP 16, 242–243). Third, Spinoza “presents law not merely as a prescription, but rather as a manner of living” (James 2012, 89). So, law is a prescription, a rather weak, less voluntarist kind of command, that is “fundamentally purposive, and is designed to achieve a specific goal” (James 2012, 90).8 This purpose is peace and “a secure and good life” (TTP 16, 239), for in a sovereign state “the welfare of the whole people, not the ruler, is the supreme law” (TTP 16, 243). For Spinoza law has a positive purpose, to enhance the common good, unlike Hobbes who argues that law is the expression of the sovereign’s will. Moreover, in Hobbes the sovereign’s commands are in essence based on the subjects’ fear of death. Most people however are driven by their passions, “by selfishness and short-term interest”, lacking understanding of the true purpose of laws. Therefore, legislatures “in order to constrain all men alike” will promise rewards and threat with sanctions in order to achieve compliance (TTP 4, 102). Laws will be issued as commands that subjects perceive as coercive force. This type of law-as-command “signals a weak form of sociability” (Gatens and Lloyd 1999, 98). However, a wise government tries to frame its laws according to the capacity of the citizens in order to enhance their understanding of the laws. Thus, subjects or citizens are enabled “to act from knowledge and virtue, rather than from fear of punishment” which is a hallmark of a good polity (Gatens and Lloyd 1999, 99). Sociability and horizontal reciprocity are accordingly promoted. In short, from Spinoza’s definition of “law” it follows that law posits a normative order created by human beings. Law contains rules with normative force regulating human behaviour. Because of short-sightedness or lack of understanding among the norm-addressees, however, compliant behaviour is not self-evident. Therefore, rewards and sanctions should be linked to legal norms. To be effective, the law must be accompanied by a system of coercive measures. Thus, the coercive nature of law is established. Nonetheless, one should not forget that laws to be effective must focus “on those matters which appear desirable or to which sanctions can be attached as adequate incentives” (Belaief 1971, 17). 8 Cf

Fuller’s view of law as a purposive enterprise (Fuller 1977, 145 ff.).

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Law thus serves the self-preservation of individuals, the common wealth and the public good. State and society being indispensable for the self-preservation of men, this form of collective will compels people to behave as if they were led by reason, which is to a certain degree the product of effective civil laws. This is best done by a state that is based on reason and directed by reason, for such a state “is most powerful and most in control of itself” (TP 3.7). Therefore, the state is useful for a man who is driven by his passions, for the state compels him to live a life which meets the demands of reason. Moreover, a man who is guided by reason “is more free in a state, where he lives according to a general law, than in solitude, where he obeys only himself” (E4P73). Spinoza’s overall definition of law implies that individuals who fall under that law will behave in the way as laid down in that law. If this is not the case, we cannot speak of a law. This means, according to Walther, that if a legal norm, i.e., some prescribed behaviour decreed by legal authorities, is en masse ignored, it cannot be called a law (Walther 1985). Since many individuals do not behave as intended, the issued command lacks the hallmark of law. Indeed, established laws are only valid, if “most of the citizens are restrained by them” (TP 3.8). In other words, effectiveness is considered a constitutive requirement for positive law. But this does not mean that the positive law and the personal moral beliefs that influence the behaviour of citizens are completely independent of one another. Indeed, insofar as people think and act rationally, they will choose the lesser of two evils when positive law is in conflict with their moral convictions. They will comply with the civil laws because the disadvantage of the infringement on their moral convictions “is far outweighed by the good he derives from the civil order itself” (TP 3.6), which is essentially the prerequisite for survival and self-development. Therefore, in a free republic, submitting to orders has nothing to do with slavery; it means obeying the law of reason, and thus being free. There is a more important point. One may argue that only a small number of citizens acts rationally and thus choose the lesser of two evils. However, according to Spinoza, nobody always acts rationally, which may endanger the stability of the political order. A sustained tension between the civil law and what the citizens consider to be the good life or the public good is not possible because a dialectical relationship exists between the stability of a political order and its civil law (ius civile), on the one hand, and the needs and interests of its citizens, on the other hand. If government routinely issues laws prescribing behaviour that violate vital interests, the desire for self-preservation and the laws of the human psyche, citizens will disobey these norms. Then, even exerting utmost compulsion upon the citizens will not result in obedience (TTP 17, 250–253). Positive law no longer meets the requirement that the laws of the commonwealth should be effective at large, and therefore they are rendered void (TP 3.8–9). The legislator, and more generally, political power, cannot exercise its absolute “right” without jeopardizing itself. From this, the government can draw a twofold conclusion. Government may restrict itself with regard to its formally unlimited regulatory powers in such a way that the dialectical relationship is observed. In this case, no structural tension with societal morality will arise. However, if the government (state) fails to recognize

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that this self-limitation is necessary to remain in power, it actually ceases to be summa potestas, and it loses the right of commanding. Government loses “the right of complete command, which passes to one man or a number of men who have acquired it and are able to retain it” (TTP 16, 242). Indeed, in this sense the legitimacy of the law-making power and law itself is “always a provisional achievement, emerging from the continual negotiation between the respective powers of state and subjects” (Skeaff 2018, 82).

3.4.6 Reciprocity Variations As shown above, human beings who are guided by reason are benevolent with regard to one another, and towards society (Sect. 4.3.4). In this way, horizontal reciprocity needs not to be substituted for a vertical reciprocal relationship (between state and citizens), since for human beings, as shown, cooperation comes naturally. This natural sociability may imply the acceptance of moral obligations. Indeed, Spinoza’s psychological and ethical egoism is compatible with altruistic concern and respectful treatment of others. Nonetheless, for those who are not guided by reason, the state has to institutionalize some external reasonableness. Unlike in Hobbes’ thinking, however, “natural” mutual obligations are not in large part replaced by obligations towards the rulers which have to be set out in laws. Moreover, despite the fundamental, conceptual separation between law and morality, positive (civil) law must consider the actual morality of the people and their views on the public good. There is a dynamic interaction between political power, on the one hand, and the demands and interests of the citizens, on the other hand (Sect. 4.3.4). Government, therefore, should not only heed the legality but also the legitimacy of its decisions—legislation should reflect citizens’ interests so as to qualify as selflegislation. Formally, it is bound by nobody, but in everyday reality it can only survive by taking the interests of its citizens as guidelines for the management of the state’s. Government therefore has to deliver public goods in the interest of society in order to be perceived by the people as legitimate. Spinoza’s state must be concerned about “whether and how its citizens can achieve a temporal and public happiness by subscribing to its laws” (Skeaff 2018, 108–113). Part of this concern is the maintenance of economic equality through redistributive measures (TTP 17, 265). Thus, in the long run, not naked exercise of power, but legitimate authority constitutes the only basis for viable government action. Political authority must continuously assert itself, based on continuous delivery of public goods in the interest of the citizens, in order to achieve peace and a secure and good life. The dynamic interaction between political power and the preferences and interests of the citizens, actually reflects the principle of reciprocity (Gribnau 2015b). Spinoza was acutely aware of the fact that in the end the power and the right of a government depends on the way it uses its powers (see, for example, TTP 16, 237 ff.). Spinoza argues that man transfers his rights to the sovereign but it can never be an absolute

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transfer. “Nobody can so completely transfer all his right, and consequently his power, as to cease to be a human being” (TTP 17, 250). Therefore, the power of the legislator is not unlimited, his commands have to consider the power of the subjects. This power is determined by the laws of nature, for “man, whether guided by reason or mere desire, does nothing save in accordance with the laws and rules of nature, that is, by natural right” (TP 2.5). Good laws enhance the citizens’ power which in turn increases the power of the commonwealth and the sovereign (Gribnau 2011). As the Italian political and legal philosopher Bobbio (1989, 143) observed, Spinoza sees things ex parte populi, from the “view of the ruled in order to justify their right not to be oppressed and the ruler’s duty to proclaim just laws”. Government and people mutually depend on one another. The people depend on the power of the sovereign who in turn represents and embodies the collective power of the people. For Spinoza, the right of the state is determined by a people which is guided as if by one mind (TP 3.1)—thereby depending on the power of the people. Government, therefore, should foster both fear and respect (TP 4.4). Fear, of course, is related to the notion of law as a command. But by stressing that the laws should give rise to respect, Spinoza makes clear that in the end law cannot be reduced to a command. Therefore, the legislature should make laws which inspire respect. Time and again law-making should be aimed at producing laws that rely on respect rather than power. Legitimate laws serve the public good thereby enhancing voluntary compliance, i.e., taxpayers’ willingness to comply. In the same vein, the art of legitimate law-making, taking the interests of the citizens into account, is an ongoing activity, carried out day in day out. Again, from the perspective of the ongoing interaction between citizens and government, reciprocity cannot be conceived of in a static way—only at play at the moment of the founding of society and state (Santos Campos 2012, 167–174). Reciprocity is a value which should be held permanently in high regard. Spinoza’s political philosophy considers the dynamic nature of reciprocity in political and legal communities. This conception of reciprocity has implications for taxation and the obligation to pay taxes. Legitimate government delivering on society’s expectations will bring about a kind of “thick” vertical reciprocity and enhance voluntary compliance. Taxpayers are to a certain degree willing to pay their taxes because government pays them back in the form of public goods. Taxes should be levied to promote the public interest. This enhances taxpayers’ willingness to pay their share of tax. “For however great may be the state burdens imposed on its citizens for the sake of safeguarding peace and freedom, yet they are borne and endured for the benefits of peace. What nation ever had to pay such heavy taxes as the Dutch?” (TP 8.31). When taxpayers get value for money, the tax authorities uphold vertical reciprocity in a continuous effort, encouraging citizens’ willingness to pay taxes towards government in the interest of society, but do not substitute horizontal reciprocity. Taxpayers also have to sustain the vertical reciprocal relationship with tax authorities which is indirectly aimed at supporting and strengthening the vertical reciprocal relationship with their fellow citizens. When tax legislation reflects social values, taxpayers will feel obliged to reciprocate.

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In the Hobbesian model, the obligation to pay tax can hardly be seen as an obligation to contribute to society via government (the state), since the almighty sovereign is free to rule as he pleases having only a very limited obligation towards the people. In the Spinozistic model, human beings who are guided by reason accept moral obligations, one being the obligation to pay tax to finance public goods. For rational people, horizontal reciprocity needs not to be substituted for a vertical reciprocal relationship (between state and citizens). Benevolence does not sit well with minimalistic compliance with the letter of the law. Government should inspire trust and respect in order to enhance cooperation and compliance of citizens who are not guided by reason. Legitimate tax laws should enhance voluntary compliance which may entail going beyond compliance with the letter of the law.

3.4.7 Spinoza: Conclusion Spinoza is more optimistic than Hobbes about human sociability since there are collective dimensions to selfhood. He emphasises the reciprocal relationship between state and citizen. He does not advocate a voluntarist conception of law according to which law is a command to be obeyed apart from its intrinsic (moral) quality. For Hobbes, law is conceptually separated from morality—inciting legalism, formalism and a calculating attitude on the part of legislature, tax authorities and taxpayers. Spinoza, also conceptually, separates law and morality. He does emphasize the importance of obedience. However, law is a prescription designed to achieve specific goals: peace and a secure and good life. Law-making is a purposive enterprise, serving the welfare of the whole people, not the ruler. Voluntarism is connected to legalism which sees moral conduct as a matter of rule following. Moral relationships consist of duties and rights are determined by rules (Shklar 1964, 1). Legalism does not sit well with Spinoza’s conception of reciprocity. In his approach, both tax legislature and taxpayers do not reduce law to a formal, selfcontained system of norms carefully separated from morality. Law is not a neutral instrument without intrinsic values demanding mere conformity with the letter of the law without considering fundamental legal principles. For Spinoza, legitimate tax law is aimed at the public good and reflects social values. When tax legislation reflects social values taxpayers will feel obliged to reciprocate. Legitimate legislation enhances voluntary compliance. Taxpayers will be willing to comply beyond the strict letter of the law. They may be willing to abstain from exploiting the letter of the law or loopholes and stay within the spirit of applicable tax legislation.

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3.5 Hume Which obligations has a citizen towards its community? Similar to Hobbes, for David Hume (1711–1776) the principle of social profit or reciprocity defines the relation between a citizen, his fellow human beings and the society in which he lives. In as much as citizens experience advantage from the society in which they live, a reasonable contribution can be expected from them. In order to regulate this reciprocity between the individual and its community, taxes are levied on citizens in exchange for, among others, safeguarding of their property and the protection of their lives. But, given the necessary existence of taxes in a social order, how to define the obligations of the citizen? In essence, this question is about the interplay between law, rights and morality. The answer of Hume is different from that of Hobbes (or Spinoza). Whereas for Hobbes regarding to taxes, reciprocity is nothing more than positive law and obeying the sovereign, for Hume reciprocity includes natural (but limited) benevolence or sympathy, at least towards next of kin and acquaintances (in primitive societies). Consequently, any Hobbesian formalism and legalism is absent in Hume’s theory. This different approach towards reciprocity results in a different ethical stance, and by consequence, a different fiscal morality. The fiscal obligations are more than the strict duties which are instructed by an absolute sovereign. For Hume, opposite to Hobbes, even voluntary taxes could become part of the moral obligations of a citizen, we will argue.

3.5.1 Hume in Context Born in 1711, it was in Edinburgh where young genius David Hume started his academic education at the age of ten. During his intellectual beginnings, he was introduced into the Aristotelian-scholastic epistemology and (Dutch) Calvinist theology. It is highly plausible that Hume also read Descartes, Locke, Hobbes, Bayle and Berkeley, the forefront thinkers of modernity. It has also been argued that Hume became familiar with Spinoza (Baier 1993, 237–252, Baier 2010b, 187). The diligent, radical Hume resided the rest of his life (more or less) in geographically isolated Edinburgh, Scotland which afforded him to work away from mundane but tumultuous London. Hume, a forerunner of the Scottish Enlightenment (Norton 1993a, 3–7), worked and lived under completely different social and political circumstances than Hobbes. This would likely explain their totally different conceptions of society and contrasting views on (tax) ethics. For Hobbes, ethics starts with the amorality of human nature, whereas Hume ascribes an inborn, yet limited, sympathy (nowadays: empathy) to human beings Hobbes who thought that peace could only be reached by the sword, however, Hume believed cooperation arises naturally among next of kin and is then further settled and expanded by education, custom, routine and the experience of its success. Hume was the first who could be coined as a naturalist. (Primitive) societies

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arise from a general feeling of common interest and are not based on a Hobbesian social contract, but on a convention. Next to a naturalist, Hume was a conventionalist (Beauchamp 2002, 223) with a nose for human emotions and was later credited to be the first emotivist (Beauchamp 2002, 222). To summarize, Hobbes’ main concern is how to exercise one’s rights without interfering with the rights of others, whereas Hume instead asks us how to lead a moral life of responsibilities in community with others (Gilligan 1982, 21). Based on convention, society is the outcome of, as Mackie (1977, 30) calls it, “moral codes (…) reflecting ways of life.” But, in order to understand Hume’s perspective on morality, more specifically tax ethics, the first question is: how are societies constructed from the natural, but limited, sympathy?

3.5.2 Hume’s State of Nature and Social Convention as the Main Ingredients for His Ethics Hume’s account of justice is less hypothetical than Hobbes’ state of nature. It places property within a historical, evolving framework (Baier 2010a, 80) but it is not, as with Locke, a ‘genuine’ account of civil history. As Haakonssen (1981, 38) points out: “Hume’s theory is of such a design that it fairly clearly points out the place of history, without itself being a historical theory.” But what precedes society in A Treatise of Human Nature? A starting point for Hume, which he shares with Hobbes, is that humans are in need. But whereas Hobbes, and to a certain degree Locke as well (Ashcraft 2006, 226–251), conclude that humans are characterized by innate egoism, Hume holds the opinion that human beings have a natural benevolence towards their next of kin. Family life shapes human beings through the formation of habit, into socially developed beings, aware of the advantages of society: In a little time, custom and habit operating on the tender minds of the children, makes them sensible of the advantages, which they may reap from society, as well as fashions them by degree for it, by rubbing off these rough corners and untoward affections, which prevent their coalition (Hume 1978, 486).

For Hobbes human beings are “monsters, which we meet with in fables and romances”. Hume, with his strong empirical attitude towards the world, corrects this pessimistic picture. These ‘monsters’ are, contrary to our observations: So far from thinking, that men have no affection for any thing beyond themselves, I am of opinion, that though it be rare to meet with one, who loves any single person better than himself; yet it is as rare to meet with one, in who all the kind affections, taken together, do not overbalance all the selfish. Consult common experience: do you not see, that though the whole expense of the family be generally under the direction of the master of it, yet there are few that do not bestow the largest part of their fortunes of the pleasures of their wives, and the education of their children, reserving the smallest portion for their own proper use and entertainment (Hume 1978, 487).

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On the other hand, human beings are not Biblical peace doves (Rousseau) because, according to Hume, our sympathy is limited to close relatives and acquaintances and is weaker or absent towards strangers. What rescues us from the primitive “uncultivated nature” (Hume 1978, 488), given our restricted empathy? According to Hume, ancillary difficulties in the most primitive societies are the scarcity of goods and the instability of property; consequently, the concept of “mine and thine” may become less valued. What does primitive man and his tribal acquaintances need to overcome their primal peaceful but vulnerable situation? Hume: This can be done after no other manner, than by a convention entered into by all the members of the society to bestow stability on the possession of those external goods, and leave every one in the peacable enjoyment of what he may acquire by his fortune and industry (Hume 1978, 488). “Leave every one in the peacable enjoyment (…)”? In Hume’s writings, we do not find anything like a Hobbesian “war of all against all” or a Lockean political history (Ashcraft 2006, 231).

Hume’s state of nature echoes the political philosophy of his close friend Rousseau. Rousseau was rather negative about the birth of society, which he saw as comparable to the Biblical fall. For Hume, the instability of property and scarcity of goods are a given and drive people to a certain social convention, liberating human beings from the ‘uncultivated nature’. Does Hume’s social convention differ from Hobbes’ social contract? In Hume’s view, a convention is primordial to a promise: keeping a promise is only reasonable after trust between parties is consolidated, just as two rowers agree to row together. In the modern language of evolutionary ethics this is referred to as: mutual altruism (Buskes 2006, 307). Henley (2012, 151) reasons that the way in which Humean conventions of promise-keeping evolve, serves the mutual advantage of individuals, securing to each what is in his interest. As Gauthier (1979, 12) argues, this makes Hume a different contractarian than Hobbes. Again, Hume’s approach is less formalistic and less legalistic. Compared to Hobbes, Hume can be considered as a liberal thinker. As human beings are not Rousseauian peace doves by birth, mature and complex societies cannot rely on mere trust and regulation of promise keeping is required. For this purpose, politicians (Hume: “magistrates”) are needed to guard the “rules of justice”. Each act of natural virtue, such as benevolence, is a brick in the building of happiness. Justice, in contrast, is like a vault—only the whole scheme, not individual parts, serves the purpose of promoting mutual advantage (Sobel 2009, 227–228 and Henley 2012, 153). By creating the vaults, the magistrates erect the framework of justice and execute its requirements (Henley 2012, 151). The magistrate is an architect, a designer of the edifice of the state (Snape 2015, 461). This demands coercion to remedy the short-sightedness of individuals and to coordinate their efforts in needed public endeavours (Henley 2012, 151). But according to Wiley (2012, 252) the role of the magistrates makes Hume an elitist, who sees hierarchy as a necessity for all societies. Do the magistrates equal Hobbes’ Leviathan? What is the precise

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role of the government, represented by the magistrates? Hume is quite clear about that: Men cannot live without society, and cannot be associated without government. Government makes a distinction of property, and establishes the different ranks of men. This produces industry, traffic, manufactures, law-suits, war, leagues, alliances, voyages, travels, cities, fleets, ports, and all those other actions and objects, which cause such diversities, and at the same time maintain such an uniformity of human life (Hume 1978, 402).

Basically, the government assists already existing processes. Hume’s focus is on benevolence, reciprocity, property, trade and economic stability; the focus of Hobbes and Locke is on safety, obedience and political legitimacy. The government is on the background for the “precautionary conservative” Hume (MacArthur 2007, 124). A conservatism shared with Hobbes, but does that equal Hume with Hobbes? In essence, the differences between Hume and Hobbes can be reduced to their respective views on mankind and the consequences of these views on their respective ideas about legalism. So, how does Hume see the “uniformity of human life” and how does it affect his (tax) ethics?

3.5.3 Hume’s Moral Psychology as Preamble on His Ethics What captures Hume’s moral psychology? Probably the question what is the interplay between reason and experience. Unlike his contemporaries (for example Kant), the Humean answer is as simple and as puzzling as it can be: passions precede reason. We speak not strictly and philosophically when we talk of the combat of passion and of reason. Reason is, and ought only to be the slave of passions, and can never pretend to any other office than to serve and obey them (Hume 1978, 415).

Hume never became a romantic sentimentalist, but Cohon (2008, 14) speaks about the inertia of reason when it comes to human actions. According to Mason (2005, 352), Hume is not an anti-rationalist but rather a sceptic of practical reason. Or, in Hume’s own words: The consequences are evident. Since passion can never, in any sense, be called unreasonable, but when founded on a false supposition or when it chooses means insufficient of the designed end, it is impossible, that reason and passion can ever opposite each other, or dispute for the government of the will and actions (Hume 1978, 416).

Reason provides us with information, but practical reason as such is useless according to Hume. According to Singer (2015), Hume’s denial of the usefulness of practical reason and his argument that morals cannot have a rational basis alone would have been enough to earn him a place in the history of ethics. Irrefutable, Hume was the great iconoclastic genius in metaphysics and epistemology (Cohon 2008, 12), and inevitably, Hume’s emphasis on passion and experience has its consequences for his ethical theory, which he unfolds first in his Treatise, but mainly in his later (and more practical) An Enquiry concerning the Principles of Morals.

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3.5.4 Hume’s Ethical Theory: An Overview Cohon (2008, 12) states that: “(…) Hume may be a great iconoclastic genius in metaphysics and epistemology”, but then continues that he was as well “a clumsy (…) ethical theorist.” The same could be said of Locke (Schneewind 2006, 199). All the same, according to Beauchamp (2002, 422) Hume’s ethical theory in his Enquiry consists of three main aspects: (1) Reason plays a subordinate role in moral judgment. Prior to it are the passions; (2) Moral virtues, as qualities of the mind, are universally approved by an (imaginary) impartial observer; and (3) Morality is rooted in historical traditions and the contingent decisions of a society (conventionalism). The first two aspects are connected: The hypothesis which we embrace is plain. It maintains, that morality is determined by sentiment. It defines virtue to be whatever mental actions or quality gives the spectator the pleasing sentiment of approbation; and vice versa (Hume 1998, 85–86).

Hume holds a virtue theory here: a virtue is a quality of the mind. Traits are virtues in as much as they evoke moral approval. In absence of moral approval, it would not be a virtue for Hume. Or to put it more reserved: virtues, according to Hume, communicate pleasure because they tend to obtain ends to which the spectator is not by nature indifferent (Vodraska 2002, 29). But how are these mental qualities necessarily recognized by the impartial spectator (which we all are)? The answer is the vague concept of humanity. Or in Henley’s words, Hume creates a “sentimentalist version of virtue theory” (Henley 2012, 150): Whatever conducts gains of approbation, by touching my humanity, procures also the applause of all mankind, by affecting the same principle in them. But what serves my avarice or ambition pleases these passions in me alone, and affects not the avarice and ambition of the rest of mankind (Hume 1998, 76).

Due to the principle of humanity, virtues are recognized and praised by others. But similar to Aristotle’s virtue theory, Hume’s moral philosophy has strong consequentialist elements, because virtues aim to the ultimate goal in life: happiness. Speaking about virtues, Hume writes: But the ultimate point, in which they all professedly terminate is the interest of happiness of human society (Hume 1998, 23).

Happiness and utility appear to be one and the same, which is an element in Hume’s philosophy that is difficult to grasp (Penelhum 1993, 118–144; Norton 1993b, 164–176). Here, Hume’s conventionalist stance takes part in his moral philosophy when he speaks about happiness or utility: But if by convention be meant a sense of common interest; which sense each man can feel in his own breast, which he remarks in his fellows, and which carries him, in concurrence with others, into a general plan or system of actions, which tends to public utility; it must be owned, that, in this sense, justice arises from human conventions (Hume 1998, 98).

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Virtues are relative qualities of the mind but are generally approved within a certain society. But on the other hand, the principle of humanity diminishes the diversity of “the primary sentiments of morals” (contra cultural relativism). Combine his focus on human passions, the universality of virtues and the conventionalist stance, which conclusion could be drawn for his ethics of taxation and what value does it have for the current debate on tax ethics, in particular aggressive tax planning?

3.5.5 Hume and the Ethics of Taxation Unlike Hobbes or Spinoza, Hume wrote separately on taxation in his essay ‘Of Taxes’ (Hume 1985, 342–349). However, the main disadvantage of this essay is its lack of consistency. This might explain his absence in the history of tax philosophers (Groves 1974, 15). His thoughts about taxation resemble more an assemblage of separate thoughts than a consistent exposition on taxation. Another disadvantage is that Hume neglects to embed his view on taxation in his moral theory. The consequence of this neglect is a ‘detached’ explanation of taxation, without a moral foundation. In addition, Hume’s views on property and taxation are difficult to interpret as he seeks to reconcile elements that are in tension, such as liberty and equality of wealth (Henley 2012, 159). According to Dees, this tension makes Hume both conservative and liberal, although these terms are anachronistic, when it comes to the politics of taxation (Dees 2010, 388–405). In a nutshell, Hume’s short essay on taxation does not unfold a consistent (moral) theory of taxation nor does it overcome its speculative character, as it is founded on tenuous assumptions or even prejudices. If Hume contributes anything to the debate on tax ethics, the sources of his contribution should not be found in his essay on taxes but in his ethical theory laid down in his Treatise and his Enquiry, as discussed in the former section. A first remark is that taxation as such is not mentioned in Hume’s Treatise and Enquiry. But one could argue that the Treatise and the Enquiry equips us with an outline of a Humean theory of tax ethics, based on his general ethical theory. The key concepts of a Humean tax theory are the profit principle and the concept of social reciprocity. But to construct a Humean ethics of taxation, we should go back to his general ethical theory. To recapitulate: Hume’s moral psychology is rooted in the empirical experience that passions (feelings) precede reason and are subordinated to it. Moral virtues, as a quality of the mind, are universally approved by an (imaginary) impartial observer. This implies on the one hand universal sentiments and on the other hand “moral resonance” between people in the person of the impartial observer. Rather than eliminating his sentiments, the impartial observer utilizes his moral sentiments by means of sympathy, which equips him with the rejoice and woes of fellow human beings (Taylor 2015, 189–194). This fits the idea that the observer cannot be separated from social conventionalism, as the impartially approved virtues are rooted in historical, contingent traditions.

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How do these characteristics apply to and ethical theory of taxation and the current debate on aggressive tax planning? Snape argues that Hume, generally, does not raise useful questions about taxation for today’s policy-makers. Nevertheless, according to Snape (2015, 422), Hume made some contributions to tax law philosophy. The remaining principal question is what moral obligations, according to Hume, an individual taxpayer has towards the society? The differences in Hume’s work with the legalistic and formalistic Hobbesian approach are striking: in Hume’s philosophy the role of the government is on the background; absolute sovereignty is not an issue. The relationship between the sovereign and the citizens can be qualified as collaborative instead of being based on absolute obedience. The magistrates are appointed to oversee the common good and to supervise all kinds of social initiatives in a complex society, in which political power, at its best, is a remedy for the limited sympathy. In a naturalist reading of Hume’s view, attributions of (fiscal) responsibility are made via feelings of approval and disapproval, not by commands or judgments of the sovereign (Russell 1995, 60–64). In light of a shared sense of common interest, taxes are levied and might even be payed voluntarily for the common good. Well informed citizens, aware of the need of cooperation, may agree with voluntary taxes in order to fund an expenditure they support. In more complex societies, accurate information about the common good and its costs could contribute to the willingness to pay taxes. A different approach could also be defended. Unlike Hobbes, Hume is not presenting a legalistic theory of tax ethics. Hume recognises that not everything which is allowed under the law, is desirable from the perspective of the common good. What undermines the common good, notwithstanding its lawfulness, is undesirable. Aggressive tax planning, for example, would diminish trust and benevolence and, as a consequence, it might lead to social instability and disintegration. This would weaken Hume’s convention, which is based on trust and limited benevolence. So, it could be argued that from Hume’s theoretical perspective, aggressive tax planning is weakening the common good and society.

3.5.6 Hume: Conclusion The starting point of Hume’s political philosophy is his ethics, which is based on trust and (limited) benevolence. Unlike the Hobbesian model of social contract, conventions arise naturally from primitive societies. By consequence, in Hume’s philosophy, limited benevolence accounts for the need of limited government. The “organic model” of Hume, focusing on human benevolence and (parental) education, offers us an entirely different view on human sociability and the modern state. Prior to any sovereignty human cooperation in Hume’s philosophy human cooperation starts with cooperation with (primitive) kinsfolk. Cooperation results from a shared sense of the common good. Enduring cooperation creates trust and therefore conventions. State power (‘the magistrates’) is only developed after these primitive

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societies become more complex and need more supervision. In Hume’s philosophy the role of the government is in the background; absolute sovereignty is not an issue. In light of a shared sense of common interest, taxes are levied and might even be payed voluntarily in favour of the common good. Well informed citizens, aware of the need of cooperation might agree with voluntary taxes in order to finance communal projects. In more complex societies with more complex projects, accurate information about the common good and its costs could contribute to the willingness to pay taxes. Coercion of ‘free riders’ might also be needed, but appears to be on the background of Hume’s political philosophy. But Hume’s ‘organic’ model has its disadvantage compared to Hobbes and Spinoza when it comes to taxation: for Hume counts that not everything which is allowed under the law, is desirable from the perspective of the common good. What undermines the common good, notwithstanding its lawfulness, is undesirable. Aggressive tax planning for example would diminish trust and benevolence and by consequence the convention. In absence of a strong Hobbesian sovereign with extensive and may be even repressive legislation focussed on enforced obedience aggressive tax planning would weaken the common good and the society.

3.6 Conclusion The research question of this chapter was whether various concepts of reciprocity result in different approaches to the legal obligation to pay tax? We answered this question by exploring the moral, political and legal theories of three major thinkers: Hobbes, Spinoza and Hume. Hobbes has hardly any confidence in human sociability. He, therefore, advocates for an artificial sociability mechanism: unrestrained sovereign power based on a social contract which creates (legal) obligations for the subjects but not for the sovereign. A thin concept of societal and political reciprocity is an important feature of the Hobbesian approach to law, obedience, obligation and compliance. Law is defined as a command without any reference to moral content. Hobbes treats law as a formal, self-contained system of norms carefully separated from morality—law solely demanding conformity with letter of the law. This kind of legal positivism incites legalism, formalism and a calculating attitude on the part of legislature, tax authorities and taxpayers. For Hobbes, the obligation to pay tax exists towards the sovereign, whose commands require absolute obedience. The subjects’ freedom is limited to what the sovereign has not legislated on (“the Silence of the Law”). In cases where the sovereign has not issued a command, prescribed no rule, a subject has the liberty to act according to his own discretion. In this model, it is hard to conceive of any moral responsibility beyond what is regulated by the tax law. In short, everything is allowed and nothing forbidden as long as the sovereign and the law are silent. As a consequence, aggressive tax planning within the letter of the law is not (morally) prohibited.

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Spinoza is more optimistic than Hobbes about human sociability. He does not conceptualise human agency and individuality on the basis of the model of a selfcontained individual agent. Humans share a rational nature, in virtue of which acting for the good of others (altruistic concern) necessarily promotes our own good. Respectful treatment of others, i.e., benevolence, is an intrinsic ethical value. He strongly emphasises the reciprocal nature of the relationship between state and citizen. He does not advocate a voluntarist concept of law, according to which law is a command to be obeyed apart from its intrinsic (moral) quality. Spinoza does emphasise the importance of obedience. However, law-making is a purposive enterprise: a prescription designed to serve the general interest and achieve peace and a secure and good life. Thus, we see a shift away from the Hobbesian will-centred view, which constituted a hierarchical, command concept of order. Hobbesian voluntarism is connected to legalism and formalism which see moral conduct as a matter of rule following. Relationships are reduced to duties, and rights are determined by rules. Spinoza, however, adheres to a rather thick concept of reciprocity. In his approach, tax legislature and taxpayers should not reduce law to a formal, self-contained system of norms, carefully separating law from morality. Law is not a neutral set of technical rules without intrinsic values demanding mere conformity with the letter of the law. Rather, at its core, the law consists of fundamental legal principles. For Spinoza, legitimate tax law is aimed at the public good and reflects social values. Tax legislation that reflects social values should evoke a sense of obligation in taxpayers to reciprocate. Legitimate legislation, thus, enhances voluntary compliance. The obligation to pay tax may be perceived as promoting our own good as well as the public interest. Taxpayers may be willing to abstain from exploiting the letter of the law or loopholes and stay within the spirit of applicable tax legislation. Charles Taylor wrote that in the eighteenth century, Hume’s century, social harmony was more and more seen as already realised. Thus, the point of departure for philosophers like Hume became the harmony of interests as written into human nature from the start. “Sympathy, and a community of interests was enough to establish a non-conflictual order of things” (Taylor 2018, 130). Unlike Hobbes, Hume has confidence in human sociability and his treatment of law is less formal and less legalistic compared to Hobbes. For Hume social harmony starts with upbringing, unwritten conventions and trust. This totally different approach has its consequences for his view on taxation. Above all, the relationship between the sovereign and the citizens can be qualified as collaborative instead of being based on absolute obedience (Hobbes). In light of a shared sense of common interest, taxes are levied and might even be paid voluntarily for the common good. Well informed citizens may agree with voluntary taxes in order to finance communal projects. However, in absence of a strong sovereignty, Hume’s philosophy has to face the problem of aggressive tax planning. Despite its lawfulness, aggressive tax planning is undesirable from the perspective of Humean social conventionalism. Reducing the obligation to pay tax to what is due according to the letter of the law, would diminish trust and benevolence. However, it is doubtful

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whether Hume’s moral philosophy provides the final answer to aggressive tax planning. In the end, social conventions are based on trust and not backed by law. They do not constitute enforceable contractual obligations.

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Snape, John. 2015. David Hume: Philosophical Historian of Tax Law. In Studies in the History of Tax Law. Studies in the History of Tax Law. Volume 7, ed. Peter Harris and Dominic de Cogan, 421–464. Oxford: Hart Publishing. Sobel, Jordan. 2009. Walls and Vaults: A Natural Science of Morals: Virtue Ethics According to David Hume. Hoboken: John Wiley. Sommerville, Johann P. 1986. Politics and Ideology in England, 1604–1640. London & New York: Longman. Spellman, William M. 1998. European Political Thought 1600–1700. New York: St. Martin’s Press. Spinoza. 2002. Ethics. In Spinoza, Complete Works. trans. S. Shirley, 213–382. Indianapolis & Cambridge: Hackett. Spinoza. 1989. Tractatus Theologico-Politicus. trans. S. Shirley. Leiden: E.J. Brill 1989. Spinoza. 2000. Political Treatise. trans. S. Shirley. Indianapolis & Cambridge: Hackett. Spinoza, 2002. The Letters. In Spinoza, Complete Works. trans. S. Shirley, 755–960. Indianapolis & Cambridge: Hacket. Springborg, Patricia. 2007. Introduction. In The Cambridge Companion to Hobbes’s Leviathan, ed. Patricia Springborg, 1–26. Cambridge: Cambridge University Press. Steedhar, Susanne. 2012. Private judgment. In The Bloomsbury Companion to Hobbes, ed. Sharon A. Lloyd, 198–210. London: Bloomsbury. Taylor, Charles. 2018. A Secular Age. Cambridge, MA & London: The Belknap Press of Harvard University Press. Taylor, Jacqueline. 2015. Sympathy, Self and Others. In The Cambridge Companion to Hume’s Treatise, ed. Donald Ainslie and Annemarie Butler, 188–205. New York: Cambridge University Press. Ueno, Osamu. 1991. Spinoza et le paradoxe du contrat social de Hobbes, “Le reste”. Cahiers Spinoza 6: 269–295. Vodraska, Stanley. 2002. Hume’s Moral Enquiry: An Analysis of its Catalogue. In David Hume— Critical Assessments, vol. IV, ed. Stanley Tweyman, 188–205. London: Routledge. Waldron, Jeremy. 1994. John Locke: Social Contract versus Political Anthropology. In The Social Contract from Hobbes to Rawls, ed. David Boucher and Paul Kelly, 51–72. London: Routledge. Walther, Manfred. 1985. Die Transformation des Naturrechts in der Rechtsphilosophie Spinozas. Studia Spinozana 1: 73–84. Walther, Manfred. 2006. Grundzüge politischen Philosophie Spinozas. In Baruch de Spinoza: Ethik in geometrischer Ordnung dargestellt, ed. Micheal Hampe and Robert Schnepf, 214–236. Berlin: Akademie Verlag. Watkins, JWN. 1973. Hobbes’ System of Ideas. London: Hutchinson & Co [1965]. Wiley, John. 2012. Theory and Practice in the Philosophy of David Hume. New York: Palgrave Macmillan. Wolin, Sheldon S. 2004. Politics and Vision: Continuity and Innovation in Western Political Thought. Princeton and Oxford: Princeton University Press. Wootton, David. 2018. Power, Pleasure, and Profit: Insatiable Appetites from Machiavelli to Madison. Cambridge, MA & London: The Belknap Press of Harvard University Press. Worden, Blair. 2009. The English Civil Wars 1640–1660. London: Phoenix.

Hans Gribnau is professor of Tax Law at Tilburg University and at Leiden University, both in the Netherlands. He is an external member of the Board of Professors of the University of Bologna Law School. He published more than 150 journal articles. His research focus is taxation, tax methodology, philosophy of tax law, procedural tax law, tax law principles and tax ethics. Recent publications dealt with topics such as corporate tax governance, corporate social responsibility and voluntary compliance beyond the letter of the law, codes of conduct, public tax governance, cooperative compliance, tax transparency, reciprocity, trust, and fair play. His most recent book is Rebuilding Trust in Taxation (co-edited with Bruno Peeters and Jo Badisco).

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Hans is a member of the editorial board the Journal of Tax Administration (JOTA) and of various Dutch tax journals. In 2007 he received the Jan Giele-award for his ‘substantial contribution to just taxation in the Netherlands.’ In 2013 he was visiting professor at Antwerp University. He is currently the president of the Dutch Spinoza association (Vereniging Het Spinozahuis) and member of the advisory board of the Dutch Taxpayers Association. His publications are available at http://ssrn.com/author=441648 and http://www.researchgate. net/profile/Hans_Gribnau/contributions?ev=prf_act. Carl Dijkstra is tax inspector with the Dutch Tax Authorities and lecturer and Ph.D. researcher at the Tax Law Department of Radboud University in Nijmegen, the Netherlands. After studying philosophy (MA), educational sciences (MA) and tax law (LLM), he began his career at PwC’s Knowledge Centre in Rotterdam before joining the staff of the Dutch Supreme Court, first at the Office of the Advocate General, later at the Office of the Justices. Since 2016, he regularly writes on income tax, environmental and local taxes for the Nederlands Tijdschrift voor Fiscaal Recht (NTFR). He has published in several Dutch tax journals on income tax, formal tax law and local taxes. Since 2017, he lectures income tax at Radboud University. His research focus is on the philosophy of (tax) law, environmental and local taxes and income tax. Since January 2019 Carl works for the Dutch Tax Authorities as an environmental tax inspector. Recent publications cover topics such as (early) modern contractualism in tax law (with Hans Gribnau), tax refusal as civil disobedience, and state aid in local taxes. He also made several contributions to the Etty Hillesum Studies, in which he compared the Etty Hillesum diaries with the memoires of Comtesse d’Osmond (Etty Hillesum Studies no. 10) and Mme de Staël (Etty Hillesum Studies no. 11).

Chapter 4

Libertarian Perspectives on the Ethics of Taxation Walter E. Block and Christian Torsell

Abstract We provide a survey of significant libertarian contributions to the discussion surrounding ethics and taxation. By significant contributions, we mean those which have exerted a strong influence both on libertarianism, popular and academic, and on political and ethical discourse more broadly. Our discussion centers on the work of three prominent libertarians: Robert Nozick, Ayn Rand, and Murray Rothbard. For each, we present his or her position concerning some ethical aspect of taxation and evaluate objections to it. Section 4.2 discusses Nozick’s analogy between taxation of labor from earnings and forced labor and applies his argument against the fairness principle to fairness-based justifications of such taxation. Section 4.3 focuses on Rand’s view that compulsory taxation as such is unjust and considers her proposed scheme of voluntarily-funded minimal government. We argue that she failed to convincingly argue for either the feasibility or desirability of the latter. Section 4.4 addresses Rothbard’s similar position concerning the injustice of taxation per se and defends his view against possible justifications of that institution. Keywords Taxation · Libertarianism · Justice · Coercion JEL Classification H21

4.1 Introduction The scope of this chapter is too broad to provide an exhaustive account of the topic we propose to cover. Though its adherents occupy a minority position both in global politics and academia, libertarianism comprises a wide diversity of ethical, political, and legal views. The variety of libertarian perspectives on any one such issue cannot be adequately covered in a single article-length treatment. In light of this fact, we do not propose to offer a single, definitive statement of The Libertarian Position on the ethics of taxation. Instead, we discuss perspectives on this issue from three figures whose work has been particularly influential on libertarianism in both its W. E. Block (B) · C. Torsell College of Business, Loyolo University, New Orleans, USA e-mail: [email protected] © Springer Nature Singapore Pte Ltd. 2020 R. F. van Brederode (ed.), Ethics and Taxation, https://doi.org/10.1007/978-981-15-0089-3_4

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popular and scholarly forms: philosopher Robert Nozick, novelist Ayn Rand, and economist Murray Rothbard. A secondary aim is to highlight certain criticisms of these views which have received relatively little attention in the literature but which prompt interesting discussion of their merits and potential failures. Where it follows naturally from this discussion, we attempt to amend and, in some cases, extend the libertarian arguments under consideration to take account of the objections leveled at them or cover new territory related to ethics and taxation. Section 5.2 recounts two well-known arguments made by Nozick in Anarchy, State, and Utopia. The first, considered in Sect. 5.2.1, is directly concerned with the ethics of taxation. There, we discuss Nozick’s famous comparison of taxation of earnings from labor with forced labor. We defend his view against an objection posed by Michael (1997), namely, that Nozick’s argument relies on the unstated and unjustified assumption that the principle of self-ownership entails a worker’s entitlement to all of his earnings from labor rather than some subset of that total. Michael’s argument turns on the plausibility of his alternative account which identifies the fruit of labor with only the results of labor associated with conscious choice rather than luck. We contest the plausibility of that account on the grounds that it is not, as its author holds, consistent with self-ownership and offer an alternative objection to taxation of earnings from labor that does not rely on the kind of reading of the fruit of labor that Michael attacks. Section 5.2.2 is concerned with Nozick’s rejection of the Hartian/Rawlsian fairness principle, an argument indirectly related to the essay’s main topic. We relate it to the topic at hand by extending Nozick’s case against the fairness principle to potential arguments in favor of an obligation to contribute to tax-funded public services possessed by the beneficiaries of those services. We highlight Bell’s (1978) criticism of Nozick’s position, that Nozick argues against a misrepresentation of the fairness principle and therefore fails to undermine a reading of it that either Hart or Rawls would accept, and argue that, even if it is valid, there is reason to doubt that the fairness principle can justify taxpayer obligations of the kind we discuss. Section 5.3 considers Ayn Rand’s case against compulsory taxation as such and her suggested alternative means of financing the minimal government she endorsed. We provide an overview of her reasons for believing in the necessity of the State and examine Sechrest’s (1999) contention that this view is problematic. We conclude, with Sechrest, that Rand successfully reconciles her proposed scheme of voluntary financing with Objectivist ethics, but fails to adequately show either that that scheme is feasible or that government is necessary to achieve the ends she sets for it. Section 5.4 addresses Rothbard’s claim that all taxation constitutes theft and is therefore unjust. We first outline his position and then extend his project of confronting various potential justifications for taxation. We consider four such justifications which rely on (1) comparison between taxation and club dues, (2) conceptual unanimity in the original formation of governments, (3) the special case of immigrants’ contractual agreement to be subject to a state’s sovereignty, and (4) voting in political elections as an ostensible conferral of consent to the tax-collecting activities of one’s government. We conclude that none of these adequately defends the institution of taxation against Rothbard’s charge.

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4.2 Nozick on Taxation Robert Nozick’s Anarchy, State, and Utopia (1974, henceforth ASU) is a cornerstone of libertarian thought. Like his Harvard colleague John Rawls, whose A Theory of Justice (1972) virtually singlehandedly re-established political philosophy as a legitimate area of inquiry in an academy dominated by non-normative fields of philosophy, Nozick applied the strict standards of precision and clarity practiced by analytic philosophers working in those fields to the classic questions of political philosophy. Whereas Rawls’ work makes the case for generally egalitarian principles of justice on contractarian grounds, ASU argues from Lockean natural rights principles that no government more extensive than the minimal state, limited to defending its citizens against force and fraud and enforcing contracts, can be justified. Central to ASU is Nozick’s historical entitlement theory of justice. According to this theory, the justice of a given distribution of holdings does not depend on its degree of adherence to any specified pattern of distribution (e.g., perfect equality of holdings, distribution according to individual moral virtue, etc.), but on the manner in which that distribution was realized. If a distribution obtains as a result of just acts of acquisition and transfer, it is just, regardless of its relation to any distributional pattern. Nozick specified justice in acquisition and transfer as, respectively, original appropriation by mixing one’s labor with unused resources (or “homesteading,” à la Locke), and voluntary gift and exchange. As an extended discussion of the justification and legitimate extent of government in light of these principles of natural rights and distributive justice, ASU examines taxation through the lens of those principles.

4.2.1 Taxation on Earnings from Labor and Forced Labor In ASU, Nozick (1974, 169) famously declares that “[t]axation of earnings from labor is on a par with forced labor.”1 He defends this claim on the grounds that legally requiring a person to give up a portion of what he earns from laboring is equivalent to forcing that person to work for the number of hours required to earn the amount of money taken from him. In the case of taxation, it is the government that demands 1 Nozick

acknowledges that his use of the ambiguous phrase “on a par with” suggests multiple interpretations. Do his arguments establish that taxation of earnings from labor is identical with forced labor? Or do they merely highlight similarities between the two to “show it is plausible and illuminating to view such taxation in the light of forced labor” (1974, 169)? Determining the precise nature of the parity between taxation of earnings from labor and forced labor established by his arguments would go far in determining their force. However, consistent with his treatment of similar interpretive difficulties, the author offers his reader material for consideration, but does not conclude which of these views is correct. To fully make such an interpretive determination lies outside the scope of the present essay; nor is it entirely clear that a definitive conclusion could be reached. Nevertheless, it is important to highlight the challenges inherent in interpreting the arguments we consider. However, in our view, taxes on labor is far more akin to plain, old, ordinary, theft, rather than slavery.

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part of the laborer’s income, and the amount of money demanded is set by the rate of the tax imposed on him. Nozick argues that taxing a person for earnings from n hours of his labor is equivalent to forcing him to work n hours. Because such taxation takes some of the fruits of one’s labor for another’s purposes, it is equivalent to forcing one to work for another against one’s will. The nature of this arrangement is unaffected by the particular uses to which the State puts laborers’ taxes. Nozick writes that, “even those who find this claim [drawing an equivalency between taxation of labor-income and forced labor] absurd … would object to forcing each person to work five extra hours each week for the benefit of the needy” (Nozick 1974, 169). The injustice of the type of taxation under discussion is neutral with regard to whether or not taxes are expended on some persons’ legitimate needs, just as forced labor is unjust regardless of the end of the coerced labor. It may be objected that the situation faced by a citizen subject to taxation on laborincome differs from that of a forced laborer in that the first is free to choose how to employ his labor. However, the taxed worker’s condition remains fundamentally unchanged even if he may freely choose among several options as to how he spends his time laboring for the State. The relationship between a forced laborer and his master is no more voluntary if the latter allows the former to choose among work in farming, construction, academic philosophy, or any number of other alternatives. Analogously, the labor by which a person earns income taxed from him is not voluntarily undertaken only because he may choose to expend it in one or more of multiple alternative occupations. Nozick also addresses the counterargument that “something like a proportional tax on everything above the amount necessary for basic needs” would avoid the objectionable character of other forms of taxation on earnings from labor (Nozick 1974, 169). Under such an arrangement, the laborer is free to stop working before his earnings over a given period exceed the established tax threshold, thereby avoiding the tax. Therefore, if he pays the tax, it is because of his own free and voluntary choice to work extra hours not required of him. Nozick points out that, contrary to this view, the laborer’s alternatives are made considerably worse (paying the tax or undergoing bare subsistence)2 by an outside intervention that violates his natural right against aggression, rendering the situation unjust. Although the worker may choose an alternative that does not involve paying the tax, the options he faces are constrained by rights-violating interference of the tax-collecting government. Importantly, what Nozick takes issue with is not the limitation of choices per se, but that this limitation is brought about by means that violate natural rights, or “side constraints.” He considers the state of affairs we examine to be a “forcing” (an imposition of force on the potential taxpayer). This author also believes that there are “other cases of limited choices which are not forcings” (Nozick 1974, 169). This part of Nozick’s case against taxation on income from labor also involves a secondary argument. Taxes that apply to earnings from labor only above a specified level (whether or not the threshold is set at what is necessary for bare subsistence) differently affects people with dissimilar preferences in an arbitrary and unjustified 2 The

amount of penury would of course depend upon the point at which the tax kicks in.

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way. Suppose there is a weekly level of labor-income n above which an incomeearner must pay a share of his earnings to the government, and that there exist two persons, A and B, each of whom receives the same hourly wage. A chooses to work exactly the number of hours required to earn n, while B chooses to work more hours than A and therefore attains an income above the tax threshold. In this scenario, some of B’s remuneration will be taxed and A’s will not. The different choices made by A and B reflect divergent preferences: A demonstrates that he prefers leisure activities to the goods and services he could purchase with a higher income, while B reveals a preference for consumption of goods and services over non-consumptive leisure. Why, Nozick wonders, “should we treat the man whose happiness requires certain material goods or services differently from the man whose preferences and desires make such goods unnecessary for his happiness?” (Nozick 1974, 170). A tax of this kind effectively penalizes any individual with a set of preferences that can only be fulfilled by earning a money income higher than n. His most favored alternative can only be achieved by consumption. Insofar as this consumption relies on earning an income above the tax threshold, he is made worse off relative to the person whose preferences can be satisfied via non-pecuniary means. What is particularly odd about this arrangement is that the person who prefers to work more hours to realize his consumption-related desire thereby provides a service to the consumers whom his labor ultimately serves, whereas the individual with non-consumption desires (presumably) provides no comparable service.3 Why are the options of the former constrained relative to those of the latter? Why are his efforts to achieve his most highly valued end impeded by taxation while the latter is left free to pursue his without penalty? Nozick sees no good reason that would justify this tax-produced disadvantage. Michael (1997) criticizes Nozick’s view for uncritically assuming that a worker is always entitled to the full value of his earnings from labor. He argues that there is at least one plausible construal of the “fruits of labor” on which this is not the case, but which is compatible with the Lockean/Nozickean view of self-ownership grounding legitimate acquisition by “mixing one’s labor” with unowned resources. (Labor is defined as manipulation or alteration of resources by non-harmful use of a person’s body.) Michael’s argument turns on the thesis that there could exist a gap between the amount of money a worker receives for his labor and the actual value of “that part of the product of one’s labour which one may not be forced to give up according to the principle of self-ownership” (the “fruit of one’s labor”) (Michael 1997, 137). In any such instance of overpayment to a worker, the government would be justified in expropriating the part of the worker’s earnings constitutive of this gap. If it can be demonstrated that “there is at least one reading of the fruit of labour which identifies it with some subset of the results rather than all the results, which is not wildly implausible, and which can serve as a competitor to the libertarian interpretation,” then there is not necessarily an inconsistency between the principle of self-ownership and taxation of earnings from labor. For the libertarian to demonstrate that seizure of 3 This is not necessarily so. Perhaps this person satisfies his preferences by volunteering at an animal

shelter, cleaning up highways, or performing some other socially valuable service.

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the results of one’s labor is equivalent to forced labor due to considerations of selfownership, he “must show that any non-libertarian interpretation which identifies the fruit of labour with anything less than the full set of the results is inconsistent with self ownership” (Michael 1997, 141). Michael proposes an alternative interpretation which identifies the fruit of labor with “that subset of the results which are somehow associated with the conscious choice of the worker, as opposed to those results which come about by luck” (Michael 1997, 139). The part of the results of one’s labor that is identifiable with one’s choices rather than luck cannot be legitimately expropriated from one; therefore, whatever percentage of a worker’s earnings is somehow imputable that portion of the results of his labor is similarly protected. However, if some of one’s earnings from labor are due instead to luck, then that portion may be legitimately taken from one in a scheme of redistributive taxation, according to Michael’s suggested principle. While there may be no means of determining the precise fraction of the results of labor that are due to luck in any given case, Michael maintains that “it is clear that for those persons with superior natural talents, some part of the results of their labor will be due to luck and so will not count as the fruit of their labor” (Michael 1997, 139). Insofar as Michael’s suggested conception fails to include results of one’s labor associated with natural talent as part of the fruit of one’s labor, it is inconsistent with self-ownership. This is because, in at least some cases, natural talent is inseparable from what it is asserted that one naturally has a property right over according to the principle of self-ownership, namely, one’s body. On one plausible definition, natural talent consists of or depends on a certain intrinsic arrangement in one’s body or mind that enables one to achieve some desirable end, or develop some desirable ability or feature, more easily than less talented persons A musician is naturally talented if he is able to attain a higher level of musical skill than his peers with an equal amount of practice time, focus, etc. If he instead attained virtuosity by spending more time practicing or exerting a greater effort than others, then his musical skill would be a result of choice rather than talent. This illustrates that our definition takes into account the essential feature of natural talent that it be a product of “lucky” natural endowment rather than conscious choice. The inconsistency between Michael’s view and selfownership arises because a person is no less the legitimate owner of the components that comprise his self merely because those components are advantageously arranged. The talented person is entitled to use his body in any non-harmful way4 equal to that of the untalented person. For both talented and non-talented people, the right to whatever payment they receive for the fruit of their (contracted) labor on others’ property comes ultimately from each individual’s property claim over his own body. It is then no more legitimate to dispossess talented people of their labor-earnings than to subject the non-talented to the same treatment.5 Michael’s view that labor earnings imputable to natural talent may be justly expropriated through redistributive taxation, then, amounts to a partial denial of naturally talented persons’ self-ownership. 4 That

is, in any way which does not violate the rights of others. talents relevant to our discussion include any which allow their possessors to more easily develop skills property owners seeking hired labor are willing to pay for.

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Nor is the conclusion of Michaels’ illustration of the cobbler and the pill compatible with self-ownership. In this scenario, a talentless cobbler stumbles upon and consumes a pill (made by God) that vastly increases the quality of his work (Michael 1997, 138, 139). As a result of his increased productivity brought about by swallowing the pill, the cobbler earns significantly more money than he could have prior to his pharmaceutical windfall. The portion of the cobbler’s earnings attributable to genuine choice as opposed to luck is conveniently isolable; according to Michael’s alternative conception of the fruits of labor, it would be permissible for the State to expropriate however much of the cobbler’s income which was solely the result of consuming the pill. If Michael wants to square his account with the libertarian view that self-ownership grounds the legitimacy of acquisition by mixture of labor with unowned resources, then he must concede that the cobbler’s consumption of the pill was an act of just acquisition as much as it was one of luck. To call the cobbler’s action a “mixture of labor” with the magic pill satisfies Michael’s definition of labor as “alteration [of raw materials or other goods] … causally produced by a worker using his body in a non-harmful manner,” and is in any case no more distortive of the ordinary-language notion of the concept “labor” than are Locke’s examples of just acquisition by picking up a handful of acorns or drinking from a stream. But the pill may not have been unowned when the cobbler took it. If it remained the property of its maker when the cobbler came upon it and he mistakenly (or maliciously) swallowed it anyway, then the question of his entitlement to earnings imputable to pill consumption is one of justice in transfer, not of luck. To ask whether he is entitled to earnings that he would not have received had he not swallowed the ill-gotten pill is equivalent to asking whether a thief is entitled to earnings from employing stolen goods. We do not ask if the thief was lucky in constructing an answer to that question (nor would we want to concede the legitimacy of his earnings only because his thievery did not involve luck). If, on the other hand, God gifted the pill to the cobbler or offered it to him in voluntary exchange, then again luck exits the picture: the cobbler’s right to exclusive control over the pill is morally and legally secured by falling into his hands in a legitimate transfer from its previous owner to him. To ignore this is to “focus only upon the recipient role and its supposed rights” to the exclusion of the rights of givers. This is because to deny that the recipient’s right to use the gift in any non-harmful way (even as a supplement to his wage-earning labor) is equal to that guaranteed by his right in any article of property acquired by less “lucky” means is to deny, at least in part, the legitimacy of the transfer of property rights by gift or voluntary exchange. Whether the cobbler is entitled to what he earns in consequence of his good fortune depends on whether he is entitled to what he fortunately stumbles upon, not on whether or not his stumbling across it was fortunate. It appears that all such problems of labor-augmenting luck in which the lucky outcome is a product of someone making use of some physical good can be reduced to problems of justice in acquisition and transfer. We need only consider the ownership-status of that good and the manner in which the lucky person acquired it. Even if the foregoing arguments are unconvincing and Michael’s account of the fruit of labor is indeed at least as plausible as its libertarian competitor, there is

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a libertarian argument against such taxation that does not call upon the laborer’s entitlement to the entirety of the results of his labor. Let us illustrate from a perhaps unusual starting point. It seems obvious that your right to bequeath would be violated if you (and your inheriting offspring) were made subject to a one-hundred percent inheritance tax.6 Is your right no longer violated if the rate is reduced to ninety-nine percent? What if it is lowered to seventy percent? To fifty percent? Ten percent? At any of these rates, you are formally free to sign a contract specifying that your wealth be passed on to your children—only the state will seize some of it once they receive it. The government, then, interferes with the execution of the terms of a legitimate contract when it imposes an inheritance tax. It similarly abrogates labor contracts by taxing earnings from labor: such taxation violates the rights of both employer and employee to carry out legitimate contracts. If this is not immediately clear, consider the above questions posed about inheritance, replacing the “right to bequeath” with, say, the right to enter into a contract with your neighbor to mow your lawn at a given rate of pay. If the two of you agree that he will cut your grass weekly in exchange for twenty-five dollars and the government unilaterally declares its entitlement to five of those dollars each week, then it unjustly frustrates the execution of your contract. The inconsistency with self-ownership arises because “[p]ersons are exclusive owners of what they own only if they are entitled to set the terms on which they will exchange what they own with one another” (Cohen 1995, 221) without interference from a third party demanding that certain of their own terms be carried out.7 Even if Michael is right about the fruits of labor, a libertarian may object to such taxation on the grounds that it interferes with the execution of just contracts. This objection is weaker than Nozick’s; it fails to invoke an injustice as intuitively objectionable as forced labor. Nor does it rescue Nozick’s claim of equivalence between forced labor and taxation of earnings from income if Michael’s criticisms are valid. It does, however, show that the case against taxation on earnings from labor is not damned by those criticisms, valid or not.

4.2.2 The Principle of Fairness The principle of fairness defines a special case of cooperative undertaking in which curtailment of individual liberty would be justified. The principle was first articulated by H. L. A. Hart: “When a number of persons conduct any joint enterprise according to rules and thus restrict their liberty, those who have submitted to these restrictions when required have a right to a similar submission from those who have benefited

6 Buchanan

(1983) advocated this very policy. For a critique, see Block (2012). (2000) offers an illuminating commentary on Cohen’s rejection of self-ownership in the latter’s argument against Nozickian libertarianism. He points out that Cohen, despite identifying as a Marxist of sorts, “is convinced that it is futile to attempt to show that taxation, despite appearances, does not amount to forced labor and therefore does not really conflict with self-ownership” (225).

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by their submission” (Hart 1955, 185). Nozick rejects this principle. His formulation of it closely mirrors Hart’s: When a number of persons engage in a just, mutually advantageous, cooperative venture according to rules and thus restrain their liberty in ways necessary to yield advantages for all, those who have submitted to these restrictions have a right to similar acquiescence on the part of those who have benefited from their submission. Acceptance of the benefits (even when this is not a giving of express or tacit undertaking to cooperate) is enough, according to this principle, to bind one. (Nozick 1974, 90)

Nozick illustrates this concept with an example of neighborhood broadcast programming. Imagine that you live in a neighborhood with 364 other people, some of whom choose to start up an entertainment program to be broadcast over a public address system. They post a list of every person in the neighborhood, each name corresponding with a day on which that person is to host the broadcast. You sometimes benefit from listening to the neighborhood program—are you on that account obligated to take your turn when your day to run the show arrives? “As it stands,” says Nozick, “surely not” (Nozick 1974, 93). He objects that your preferences might be such that although you benefit from the program, the total value you place on everyone else’s contributions is less than that of one day uninterrupted by having to contribute yourself. In other words, “You would rather not have any of [the program] and not give up a day than have it all and spend one of your days at it” (Nozick 1974, 93). Nozick questions the notion that someone with such a set of preferences has incurred an obligation to participate in the arrangement merely because he received benefits that are small relative to his more highly-valued alternatives. He restates this objection interrogatively and in more general terms: “Whatever you want, can others create an obligation for you to do so by going ahead and starting the program themselves?” (Nozick 1974, 94). In light of these considerations, he calls for at least an alteration of the fairness principle to incorporate “the condition that the benefits to a person from the actions of the others are greater than the costs to him of doing his share” (Nozick 1974, 94). But even with the addition of this strong condition, Nozick considers the principle objectionable. A person may value the benefits from the joint venture marginally higher than the cost of contributing to it, but still benefit from it far less than all the others who enjoy it. In Nozick’s illustration, the principle of fairness requires the least benefitted person to contribute to the cooperative arrangement equally to the other beneficiaries. Further, a person may value the benefits of a cooperative arrangement more highly than the costs of contributing, but prefer not to cooperate because of his strong preference for the group conducting a different freedom-limiting joint enterprise from the one currently being undertaken (“by lending the institution … the support of your cooperating in it, you will only make it harder to change or alter”) (Nozick 1974, 95). Nozick takes issue with the fact that people in these positions would be obligated to contribute just as much as others to a joint venture that they either (1) are the least benefitted by, or (2) would strongly prefer be replaced by an alternative arrangement. Following these arguments, Nozick presents his prima facie case against the principle:

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You may not decide to give me something, for example a book, and then grab money from me to pay for it, even if I have nothing better to spend the money on …. One cannot, whatever one’s purposes, just act so as to give people benefits and then demand (or seize) payment. Nor can a group do this. (Nozick 1974, 95)

This passage suggests a plausible application of the fairness principle to our central discussion of taxation. A slight modification of Nozick’s original neighborhood scenario illuminates the connection more clearly. Imagine that your neighbors once again decide to set up an entertainment program, but instead of assigning the task of hosting the broadcast to the neighborhood’s inhabitants, they choose to hire a team of professional sportscasters, disc jockeys, and comedians to do the deed. Their goal is no longer to conscript labor, but to raise money to hire others. They draw up a second list, this one consisting of each neighbor’s name with a corresponding expected payment for a proportional share of the program’s expense. The remainder of the scenario plays out like the first: you occasionally passively benefit from the arrangement, prompting the question of whether or not you are obligated to pay your prescribed share of the program’s cost. We may translate the essentials of our new scenario into more general terms: If a person has accepted benefits from an arrangement brought about by others’ surrendering some of their money for the provision of a public service, then he is obligated to similarly relinquish a portion of his own money to the cooperative venture from which he has gained. The connection of our generalized scenario to taxation should be obvious. The only intervening factor we need introduce to make it explicit is the State as an intermediary collector of funding for the public service. Relating the principle of fairness to taxation, we may say the following: the taxpayers who produce benefits that a person enjoys conduct a joint enterprise in which their liberty to use their money as they wish is limited, producing in the beneficiary a symmetrical obligation to recognize the same limitation on his own liberty. According to the principle expressed above, the State may not provide highways, public radio, (compulsory) elementary education, etc., and then legitimately demand payment from its citizens for those services. The government’s role in a scheme of compulsory taxation for the purpose of the provision of so-called public services8 is analogous to that of a gift-giver who, upon giving a benefit to his friend, demands and seizes payment from him. Nozick adds, importantly, that the gifter’s treatment of the recipient (and the State’s treatment of the taxpayer) is made no more just if the recipient can see no better use of his money than what the gift-giver makes of it. Nozick’s other arguments against the fairness principle can be similarly applied here. Just as a neighbor might passively enjoy benefits from a social arrangement 8 For

a critique of the public goods fallacy, see (Barnett and Block 2007; Block 1983a, b, c, 2000, 2003; Cowen 1988; De Jasay 1989; Holcombe 1997; Hoppe 1989; Hummel 1990; Osterfeld 1989; Pasour 1981; Rothbard 1997; Schmidtz 1991; Sechrest 2003, 2004a, b, 2007; Tinsley 1999). Rothbard’s (1997, 178) reductio ad absurdum of the standard view on public goods is as follows: “A and B often benefit, it is held, if they can force C into doing something … [A]ny argument proclaiming the right and goodness of, say, three neighbors, who yearn to form a string quartet, forcing a fourth neighbor at bayonet point to learn and play the viola, is hardly deserving of sober comment.”.

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that he nevertheless values less highly than his cost of contributing, so might a taxpayer value the benefits he receives from a tax-funded public service less than alternative uses of his money. Even if the benefits the taxpayer enjoys exceed his cost of contributing, he may nonetheless strongly prefer a different tax-funded service to the one he is currently required to help pay for, or benefit from the arrangement far less than others without less being required of him as a contributor. The same objections Nozick holds to neighborhood members being placed in these situations in his public address broadcast example apply with equal force to the present case. Thus, his arguments against the fairness principle in general appear to undermine its application as a justification of compulsory taxation.9 Nozick criticizes this principle based on the claim that “[a]cceptance of benefits (even when this is not a giving of express or tacit understanding to cooperate) is enough, according to this principle, to bind one” (Nozick 1974, 90). According to philosopher Bell (1978), this characterization is misrepresentative of the Rawlsian/Hartian formulation of the fairness principle. She rejects Nozick’s definition because “[i]n both Hart and Rawls the obligations which arise from the principle of fairness are all voluntarily incurred and result from an action which puts one squarely in the social practice.” The behavior which gives rise to obligations is not, as Nozick holds, a passive enjoyment of benefits from a cooperative endeavor, but an active, voluntary acceptance of gains in which the beneficiary “actually portrays himself as engaging in the social practice” (Bell 1978, 68). Her argument calls upon a passage from Section 52 of A Theory of Justice in which Rawls speaks of obligations arising from the fairness principle “as ‘freely assumed’ and as those ‘that apply to us because we have freely done certain things as a rational way of advancing our ends’” (Rawls, 113 quoted in Bell 1978, 68). In Nozick’s example, the behavior of the neighbor who occasionally enjoys strains of music floating through his window from the neighborhood public address system surely does not meet the fairness principle’s requirements for obligation-producing action, according to Bell’s corrected definition of it. Thus, Nozick is burning a straw man when he attacks what he calls the “principle of fairness.” If Bell is correct, then Nozick’s arguments fail to the extent that they rely on the assumption that the fairness principle holds that obligations can be incurred merely by inactively reaping the benefits of a collective enterprise conducted by others. But his points are still applicable to taxation insofar as potentially obligationproducing enjoyment of benefits from many of tax-funded services can be only dubiously termed “freely assumed.” Let us take public education as an example. If a person benefits from public elementary through secondary schooling, can that person truly be said to have “freely [done so] as a rational way of advancing [his] ends” if such schooling is compulsory? If we answer in the negative, it may be objected that the student (or, more likely, his parents) had the opportunity to attend (or enroll him in) private schools or an approved homeschooling program without running afoul of the law, and therefore his (parents’) choice to (have him) enroll in public schools 9 “Appears

to” is inserted to indicate our doubts in light of criticisms of Nozick’s characterization of the fairness principle discussed below.

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was “freely assumed.” Thus the enjoyment of the benefits of his public education produces an obligation to pay taxes for the provision of public schooling.10 But the alternatives faced by families making educational choices are artificially constrained and distorted by (1) the legal requirement that all children of a certain age attend some school that meets government-defined educational standards, and (2) the fact that public education is “free” in that direct payment from students or their families is not required for enrollment. If (1) were not the case, then families might have chosen some alternative program or arrangement that did not meet legal educational standards instead of the government-approved alternatives. The relative value they would place on such an arrangement would be altered by the threat of force facing violators of the legal requirement that children receive a state-approved education. Because public education is “free,” families will be more likely to choose it over private alternatives involving out-of-pocket expense, other things being equal. The government can only offer its service without expense to participants because of its unique position among providers of education in being able to acquire funding with the threat of force to non-payers. Furthermore, both (1) and (2) distort the composition and volume of educational alternatives available to families. (1) disincentivizes the provision of alternative educational arrangements outside of state standards. Because of (2), private education companies will be less likely to provide low-cost educational alternatives because their potential customers will be drawn to a public competitor that offers its service at no direct cost to them. Thus, profit opportunities in the provision of cheaper private education are significantly reduced by the introduction of a “free” public alternative, and fewer inexpensive private alternatives are supplied. Thus both (1) and (2) exert a distortive influence on both the demand and supply sides of the market for education by altering families’ educational preference scales and constraining the alternatives available to be ranked within them. It would be odd to view decisions made under these constraints as freely and voluntarily chosen. This argument against the fairness principle as a justification of compulsory taxation in this case could be extended to cover any case in which the consumer of benefits from a tax-funded service faces such constraints.11 Likewise, the popular case for public assistance for higher learning on the grounds that an educated citizenry produces general benefits for all inhabitants of a country (e.g., more innovation in industry, better-informed voting in political elections) breaks down even in light of Bell’s modified (or corrected, depending on one’s view) formulation of the fairness principle. A person who benefits from a general increase in productivity, or knowledgeability, or voter rationality in his country as a result of his fellow citizens’ higher level of education, has only passively gained from others’ receiving an education at his taxpaying countrymen’s expense. He has not portrayed himself as a participant in the institution or actively “freely assumed” its benefits. 10 Whether the obligation is assumed by the student or parents is immaterial to the present discussion. 11 There

is also the point that, to the extent that the government is considered a thief, it would be justified not to “steal” services from it, but, to liberate them from this entity. On the former, see Spooner (1966[1870]). On the latter: (Block 1972, 2002a, b, c, 2004a, b, 2006, 2007, 2008, 2009a, b, 2010, 2011a, b, c; Block and Arakaky 2008).

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According to both Bell and Nozick, he is thus not obligated to contribute to it. Even operating with Bell’s amended formulation of the fairness principle, Nozick’s arguments against the principle are applicable to many potential arguments in favor of an obligation to contribute to tax-funded institutions.

4.3 Ayn Rand: Government Funding Without Compulsion Unlike Nozick’s work, the philosophy of Ayn Rand has received relatively little scholarly attention.12 Where it has been considered by academics, it has typically been viewed with derision, or at least rejected as deeply flawed, even by libertarian scholars who share her commitment to capitalism, natural rights, and limited government. Nozick’s “On the Randian Argument” (1971) criticizes her meta-ethical arguments for failing to bridge the is-ought gap (Rand believed she had successfully resolved it), and therefore inadequately justifying her ethics of rational egoism. Ethicist and libertarian political philosopher Michael Huemer claims that Rand’s arguments in favor of the principles of Objectivist ethics “depend on contradictory assumptions, and/or that are extremely implausible empirically” (Huemer 2002, 259), rendering her ethics logically incoherent. Goldberg (1961) went so far as to accuse her of being a knot on the tree of knowledge. But the near-ubiquity of rejection of Randian arguments among libertarians is to a great extent bound by the walls of the academy. Her thought has exercised a profound influence on popular libertarianism. For this reason alone, her contribution is worthy of inclusion in a survey of libertarian views on ethics and taxation. Rand’s endorsement of the necessity of government identifies a state limited to the protection of its citizens’ natural rights as the ideal means of securing man’s survival and prosperity. She concludes that this institution is essential for a morally good society. This claim relies on her judgment that man’s life is the standard of all moral value (Rand 1964, 1–20). Government is necessary because it furthers man’s natural end by securing his survival. It contributes to his well-being by providing an environment in which he can leverage the benefits of social interaction. The government she envisions is defined as “the means of placing the retaliatory use of physical force under objective control” (Rand 1967, 381). She argues that (1) man possesses a right to his life, (2) “the necessary consequence of man’s right to life is his right to self-defense,” and (3) “[i]f a society left the retaliatory use of force in the hands of individual citizens, it would degenerate into mob rule, lynch law, and an endless series of bloody feuds or vendettas.” She concluded that (4) a government as defined above is necessary in virtue of man’s right to life (Rand 1967, 379–381). Further, such an institution can maintain the conditions in which man can flourish by taking advantage of social gains—if man’s life is the measuring-stick of value, 12 Her novels have not received much if any scholarly attention, either. Literary reviewers tend to be on the left, and they revile her and her works. However, they, particularly Atlas Shrugged (1957), have all been best sellers.

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and a “social environment is most conducive to man’s successful survival,” then this is a valuable service indeed (Rand 1967, 378). Thus, Rand concludes government is morally necessary. Even the minimal state Rand describes would require funding to perform its limited operations. Rand addresses this in “Government Financing in a Free Society.”13 Objectivism holds private property rights as absolute, and therefore proscribes all initiation of force. Compulsory taxation, therefore, is impermissible (135). To this end, Rand writes, “In a fully free society, taxation—or, to be exact, payment for government services—would be voluntary” (135). This is as far as Rand dare go, since she believes determining the specific scheme by which voluntary financing would be obtained “belongs to the philosophy of law,” rather than to the narrowly defined field of political philosophy to which she constrains herself.14,15 One outcome of Rand’s proposed fiscal arrangement is what she describes as “free protection for the non-contributors” (139). The benefit of protection enjoyed by non-payers is a positive externality—a spillover benefit that arises from an activity and accrues to a third party uninvolved in that activity. It may appear that, given the central place of rational self-interest and self-sufficiency in Rand’s moral philosophy, she would consider such an arrangement to be an intolerable case of parasitic nonpayers attaching themselves to a more productive (paying) “sacrificial animal.” To the contrary, she takes no issue with the fact that some benefits accrue to non-payers because “[t]hese benefits may be regarded as a bonus to the men of lesser economic ability, made possible by the men of greater economic ability—without any sacrifice of the latter to the former” (139). The voluntary financing scheme Rand proposes is in no way discordant with the moral principles of Objectivism that undergird it. This is because engaging in the exchange that gives rise to non-payers’ benefits does not require the payers to deviate from the pursuit of their own self-interest. The security enjoyed by their non-paying counterparts is solely a product of the payers’ choice to follow the dictates of their own rational self-interest. Sechrest (1999) contests the viability of Rand’s vision of voluntary “taxation.” He contends that if we assume that Rand is right about government’s essential role in securing a free society but her proposal of voluntary government funding is not 13 Chapter

in Rand (1964).

14 She does, however, propose a government lottery as one possible method for government funding

(135–136). This hypothetical solution prompts the difficult question of how government in a free society would fund the initial investment required of such an undertaking. It could not fund the production of lottery tickets, billboards announcing the lottery, etc. by imposing a compulsive tax on its citizens, nor could these expenses be covered by revenue from a previous lottery—this would require an infinite regress of lotteries. Rand’s neglecting this puzzling problem has no bearing on her general argument about the illegitimacy of coercive taxation. 15 Rand also suggested another voluntary means of financing the state: it could sell tags, or tickets, to those engaged in commercial activities. Then, in a case of a dispute, the government would serve as an intermediary, or judge. This, scheme, too, is problematic. First of all, contracting parties could ignore this service, leaving the state high and dry. Second, private parties could offer their competing services. Rand neglects to offer any reason why the government would outdo groups like the Better Business Bureau, or the American Arbitration Association, or private courts such as the Bet Din for Jews, or the ecclesiastical court for Catholics in terms of comparative advantage.

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practicable, then we are left with only three alternatives: we may “give up on the dream of a free society, concede that a free society is a society without government, or admit that taxation cannot be voluntary” (Sechrest 1999, 91). It is not entirely clear how Sechrest distinguishes the first alternative from the third. If a free society requires (1) a government (according to Rand’s definition) and (2) the absence of coercion, and his third alternative stipulates that (1) can only obtain by a violation of (2), then it appears that accepting his third alternative, logically commits us to the first. Thus, we are left with only two alternatives, should Rand’s solution be demonstrated to be infeasible. First, we may accept that Rand is correct that both (1) and (2) are necessary conditions of a free society. Second, we may reject that either or both is/are necessary for a free society. Redundancy of his alternatives aside, Sechrest suggests that there are economic reasons to doubt the feasibility of any fully voluntarily funded government. This would force us to accept one of those alternatives. There are difficulties here. First, the provision of government protection without expense to its consumers will lead to problematic overconsumption of those services. Other things being equal, every person will consume more of a good16 he values when its price is lower rather than higher (law of demand). If government protection is priced at zero, the quantity of that service demanded will rise, while the quantity and kind supplied will presumably remain unchanged (Sechrest 1999, 91). Demand will exceed supply, indicating a shortage. Further, the scarce resources employed in the production of those services will tend to be used to serve relatively less urgent uses when the consumer faces no monetary expense to benefit by them. Sechrest illustrates: [I]f the public police patrol residential neighborhoods, what is to prevent a citizen who pays no “voluntary taxes” from calling them for assistance whenever the most trivial (or even imaginary) problem arises? The police cannot know in advance whether it is trivial or lifethreatening, so they must respond. Every time this happens, the total cost of providing police protection rises above the level required for dealing with actual criminal activities, while payment for it does not. Moreover, since all the resources used for protective services are scarce, frivolous demands would increase the probability that the police might not respond in a timely fashion, or at all, to a true crime being committed at a different location. Any such failure would constitute a serious breach of the government’s promise to combat all violations of rights and would encourage individuals either to turn to private security agencies or to take the law into their own hands. (Sechrest 1999, 91)

Second, although Sechrest concedes that Rand successfully reconciles Objectivist ethics with the apparent (and, according to Rand, illusory) moral problem of non-payers’ benefiting by others’ payment, he contends that she fails to adequately address the practical challenge presented by this problem. If payers and non-payers alike benefit from government protection services, and no one is compelled to pay for those services, “it seems that this asymmetry must almost certainly lead to an increased incidence of non-contribution” (Sechrest 1999, 92). When this tendency toward non-payment prevails, state protective services become increasingly poorly 16 Strictly speaking, the law of demand states that, ceteris paribus, price and quantity vary inversely.

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funded relative to the number of consumers using them due to the high number of consumers “free riding” on the contributions of others. Third, Rand offers no account of the fate of “private security agencies, private arbiters, and so forth” under her ideal government (Sechrest 1999, 93). Although the roles open to private security agencies would be greatly constrained by government’s monopoly on the use of retaliatory force, many of a government’s citizens might prefer the arbitration and security services offered by private providers subject to the market pressures of profit and loss over the State’s public alternative, which, being free from those pressures and their accompanying incentives, “exhibit a strong tendency to be ineffective and inefficient” (Sechrest 1999, 93) there is no room in Rand’s ideal scheme for such private agencies; they would need to be prohibited so as to preserve the government’s monopoly position. She problematically assumes that the illegality of private options will remove them from customer’s consideration. However, Sechrest points out, this might not be the case, and the suppression of private security provision could instead give rise to a black market for such services.17 He claims that the existence of this black market paired with the tendency toward greater efficiency in private over public production will lead to a problematic consequence: When consumers can choose whether or not to pay for government services, if private arbiters are seen to be generally more effective or inexpensive than their public counterparts, “then government revenues will decline as the frequency of private adjudication rises” (Sechrest 1999, 193). Sechrest’s three objections18 offer good reason to doubt the feasibility of Randian voluntarily-funded minimal government. Rand’s position is further undermined by the fact that her rejection of anarchism rests on a bald assertion rather than a justified premise. She claims that “[i]f a society left the retaliatory use of force in the hands of individual citizens, it would degenerate into mob rule, lynch law, and an endless series of bloody feuds or vendettas,” but offers no empirical or theoretical evidence to support that view. Yet if she cannot justify this assertion, then her case in favor of government topples, leaving us wondering why a voluntarily-funded government would be desirable in the first place. Rand’s argument, then, would require at least two additional features to be reasonably convincing: (1) a stronger defense of government as necessary to a free society (one which includes reasons why a stateless society would be less free than one under the minimal state she proposes) and (2) an argument that either undermines Sechrest’s economic objections or demonstrates their inapplicability to her favored scheme.

17 Further, it is difficult to reconcile her concern that violence not be initiated against innocents with the suppression of private security provision. Surely, firms in this industry would not necessarily violate the non-aggression principle. 18 His three alternatives melt down into two, but his three objections remain.

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4.4 Rothbard: “Theft on a Grand and Colossal Scale” Murray Rothbard was an economist by trade, but he is equally known for his work as a libertarian political philosopher and natural rights theorist. Much of his writing in this area is concerned with defending anarchism as a just and moral political arrangement as a corollary to his economic defense of it as a feasible and economically desirable one. As an economist, Rothbard worked within and extended the “Austrian” theory of his teacher, Ludwig von Mises, which emphasizes methodological individualism, value subjectivism, and the aprioristic nature of social science. He elaborated on the system of free exchange and private property from this methodological perspective in his grand treatise Man, Economy, and State, and concluded that State intervention can only diminish the great benefits that unhampered markets confer upon their participants. In considering natural rights and political institutions, he came to a similar conclusion: the State by its nature violates and erodes respect for the rights of the people it ostensibly serves. Rothbard’s views on taxation are not difficult to discern. He was outspoken on many issues, but on none more than this. While he may not have invented the phrase “taxation is theft,” he may be credited with catapulting it to the position of nearubiquity it enjoys in popular libertarian rhetoric. He writes: Taxation is theft, purely and simply even though it is theft on a grand and colossal scale which no acknowledged criminals could hope to match. It is a compulsory seizure of the property of the State’s inhabitants, or subjects (Rothbard 1998, 162).

It is difficult in the extreme to be more pellucidly clear than that. Both the content and polemical tone of Rothbard’s denunciation of taxation echoes what individualist anarchist Lysander Spooner had to say on the subject, nearly one hundred years before Rothbard’s pronouncement: If taxation without consent is robbery, the United States government has never had, has not now, and is never likely to have, a single honest dollar in its treasury. If taxation without consent is not robbery, then any band of robbers have only to declare themselves a government, and all their robberies are legalized. (Spooner 1886).19

This similarity highlights Spooner’s influence on Rothbard. Indeed, Rothbard calls Spooner and his fellow contemporary Benjamin Tucker “unsurpassed as political philosophers,” and singles out Spooner’s No Treason No. VI as “[having meant] a great deal to [his] intellectual development.” Rothbard (1977) constitutes this author’s most thorough analysis of taxation. He organizes the chapter dealing with the subject into seven sections, the first six considering taxation primarily as the object of economic rather than moral or legal analysis. The seventh section, “Canons of ‘Justice’ in Taxation,” recounts, and rejects, a number of arguments in favor of the proposition that taxation in at least some forms

19 Others

publications that share this perspective include (Block 2001; Chodorov 1962; DiLorenzo 2012; Rothbard 1977, 1978, 1981, 1998, 2007; Vance 2006, 2007).

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is just. The present treatment is too limited for a consideration of all these issues. We shall consider only the topic of Rothbard’s concluding section in greater detail.20 On the face of it, there can be no such thing as just taxation. Under normal circumstances, when a robber breaks into another person’s car or house to take her wallet, we call his action unjust. By normal circumstances, we mean that he is not in a position in which his survival, the survival of a loved one, or some similarly weighty outcome depends on his possession of what he steals. Under such circumstances, our intuition that the robber’s action is unjust holds whether he takes all or only a portion of his victim’s money and whether or not he uses what he takes for a socially beneficial cause (even if it is one by which his victim benefits). Nor would it appear just only because the robber is a member of a well-organized group of thieves, nor because this group calls itself an official bureau. Even if his thievery is endorsed by some or all of the victim’s neighbors, we would call it unjust. If this is so, then what about taxation absolves it from the objectionable character of robbery? If the activities of the IRS were carried out by an organization not operating under the auspices of the government, then we would call that group’s actions unjust. Rothbard writes: It would be an instructive exercise for the skeptical reader to try to frame a definition of taxation which does not also include theft. Like the robber, the State demands money at the equivalent of gunpoint; if the taxpayer refuses to pay, his assets are seized by force, and if he should resist such depredation, he will be arrested or shot if he should continue to resist. (Rothbard 1998, 163)

So much for the prima facie case against any and all taxation. It falls upon taxation’s apologists to show what exculpatory or justificatory factors might overcome these considerations. On one attempted justification, taxation is fashioned as akin to club dues. When a person joins the golf or tennis club, he is required to pay fees for the upkeep of the enterprise. In the view of those who promulgate the “Club Theory,” we are all analogously members of a quite similar club, namely, the United States Government Club. A more accurate name, then, for “taxes” would be “dues.” On this account, government taxation can be no more morally objectionable than payments demanded of members of a country club. But there are serious objections that can be leveled at this explanation. When someone joins the golf or tennis club, he does so explicitly. He first applies for membership; he signs the application form. Then, he is inducted to the private club when he agrees to join.21 By explicitly expressing his desire to join the private club, he communicates that he consents to the terms of membership, including being made to pay certain dues. Thus, he consents to paying those dues. Here, the two systems diverge, and sharply so. Whereas the golf or tennis club member voluntarily chooses membership, at the creation of our country, in 1776, very few people living in the newly-formed United States explicitly agreed to take part in any club. All legitimate contracts are unanimous. The golf club, and its new member, both agree 20 We will not be summarizing Rothbard’s brilliant insights into this matter. Instead, we will move in a different direction, one that will, we hope, retain the spirit of his analysis. 21 This is done, usually, explicitly, with a signature on the dotted line. Sometimes it is only a verbal agreement, but this, too, is explicit, as in the case of virtually all contracts.

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to the new arrangement. Since these two are the only participants in this commercial interaction, it constitutes a unanimous agreement. However, in the setting up of the nation, only nine of the thirteen colonies approved of the organization, and in none of these nine colonies was anything like unanimity achieved. There were only majority votes in each case. But by what legerdemain can a majority of people obligate a minority to do anything whatsoever, let alone join a club?22 The Public Choice school of thought has played a pivotal role in offering such a justification for government, and hence for its coercive taxation.23 However, even they cannot square the circle: they cannot render unanimous something patently not unanimous. So they have concocted the phrase “conceptual unanimity” in an attempt to liken political action, which is virtually never unanimous, with market transactions, which necessarily are.24 However, sad to say,25 there is no such thing as conceptual or virtual unanimity in practice: either an agreement is unanimous on both sides26 or it is not.27 There is no middle ground.28 That an actor, satisfying some definition of rationality, would have agreed to an institution under certain hypothetical circumstances, does not mean that persons actually subject to the rules of that institution are subject to it voluntarily in reality. If, then, an arrangement is just only if it arises by voluntary means, then conceptual unanimity alone cannot justify any state or its tax-collecting activities. But what about the immigrant? He, surely, signs a piece of paper acknowledging the sovereignty of the nation he is entering. In addition, he is likely to be required to pledge an oath of allegiance to the government that is taking him in. Can it be denied that, at least in this case, the proprieties are being respected, and that when he pays taxes, it is not only similar to club dues, it is indistinguishable from that institution? Yet it can be objected that the organization which is demanding this of him as a price of entry has no right to do so in the first place, at least not if we are strictly adhering to libertarian principle. The argument in favor of the immigrant’s taxpaying obligations begs the question. It assumes, in its major premise, the very issue under dispute,29 namely, the legitimacy of the state demanding his loyalty. What gives that government the right to do so in the first place? We have just demonstrated that the State as an institution is unjust for having been born, as it were, in the sin 22 There were also non-voters, who either refused to participate, or, quite possibly, did not even know anything about these plebiscites. This is all too likely, given the lack of communication in the 18th century. 23 This is a redundancy. 24 If a commercial interaction is not unanimous, it is not part of the free market, strictly speaking. 25 That is to say, destructive to the intellectual coherence of this school of thought. 26 All sides, in the case of more complex contracts. 27 For a critique of public choice in general, and of this concept in particular, see DiLorenzo and Block (2017). 28 Either you are pregnant or you are not pregnant; either you are alive or dead; either you have two feet or you do not have two feet. Voluntariness and non-voluntariness are binary in this sense. Either your contract is unanimous, or it is not a voluntary contract. Of course, it cannot be denied, that in virtually all human affairs, there are indeed gray areas. 29 Rather, the very issue on the basis of which the archists (statists) have lost.

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of non-unanimity. It has compelled those who voted against it, or did not vote at all, to join with it and pay taxes to it. Thus, the argument that it is just to demand taxes of immigrants because they are made to “voluntarily” recognize their destination country’s sovereignty fails. Let us consider one last justification for government, and, hence, for the obligation to pay taxes to it. This argument is that when people vote, they agree to be bound by the decision of the majority. Thus, if the majority were to choose for a country’s citizens to be subject to a tax, voting members of the dissenting minority would be obligated to contribute. This position is also problematic. Spooner explains: In truth, in the case of individuals, their actual voting is not to be taken as proof of consent, even for the time being. On the contrary, it is to be considered that, without his consent having even been asked a man finds himself environed by a government that he cannot resist; a government that forces him to pay money, render service, and forego the exercise of many of his natural rights, under peril of weighty punishments. He sees, too, that other men practice this tyranny over him by the use of the ballot. He sees further, that, if he will but use the ballot himself, he has some chance of relieving himself from this tyranny of others, by subjecting them to his own. In short, he finds himself, without his consent, so situated that, if he use the ballot, he may become a master; if he does not use it, he must become a slave. And he has no other alternative than these two.

Because voting is done under duress, Spooner likens it to something more akin to an act of self-defense than a free expression of consent to the will of the majority. Since the government’s coercive power will be wielded whether or not one participates in its decision-making, one might vote with the intention of deflecting that power away from oneself. In such a case, one’s vote would not reveal his voluntary acceptance of the outcomes of democratic choice and thus could not burden him with the obligation to abide by those outcomes. For this reason, voting as such does not confer any taxpaying obligation on the voter.

References Barnett, William, and Walter Block. 2007. Coase and Van Zandt on lighthouses. Public Finance Review 35 (6): 710–733. Bell, Nora K. 1978. Nozick and the Principle of Fairness. Social Theory and Practice 5 (1): 65–73. JSTOR, JSTOR, www.jstor.org/stable/23557710. Block, Walter E. 1972. The Polish Ham Question. In The Libertarian Forum, vol. 4, no. 6–7, p. 5. Block, Walter. 1983. Public Goods and Externalities: The Case of Roads. The Journal of Libertarian Studies: An Interdisciplinary Review VII (1): 1–34 (Spring). Block, Walter E. 1983a. How Immigrants CREATE Jobs. In North Shore News, p. A6, January 30. http://tinyurl.com/2xklvn. Block, Walter E. 1983b. Protect Canadian Jobs From Immigrants? Dollars and Sense. January 2. Block, Walter E. 2000. Word Watch, April 20. http://www.mises.org/fullstory.asp?control=414& FS=Word+Watch. Block, Walter E. 2001. The Moral Dimensions of Poverty, Entitlements and Theft. The Journal of Markets and Morality 4 (1): 83–93. http://www.acton.org/publicat/m_and_m/2001_spring/block. html. Block, Walter E. 2002a. Accepting Government Subsidies, Fraser Forum, February 27.

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Block, Walter E. 2002b. Homesteading City Streets; An Exercise in Managerial Theory. Planning and Markets 5 (1): 18–23. September. http://www-pam.usc.edu/volume5/v5i1a2s1.html; http:// www-pam.usc.edu/. Block, Walter E. 2002c. On Reparations to Blacks for Slavery. Human Rights Review 3 (4): 53–73. Block, Walter E. 2003. National Defense and the Theory of Externalities, Public Goods and Clubs. In The Myth of National Defense: Essays on the Theory and History of Security Production, ed. Hans-Hermann Hoppe, 301–334. Auburn: Mises Institute. Block, Walter E. 2004a. The State Was a Mistake. In Democracy, The God that Failed: The Economics and Politics of Monarchy, Democracy and Natural Order, ed. Hoppe, Hans-Hermann, 2001 May 25. http://www.mises.org/fullstory.asp?control=1522. Block, Walter E. 2004b. Radical Libertarianism: Applying Libertarian Principles to Dealing with the Unjust Government, Part I. Reason Papers 27: 117–133. Block, Walter E. 2006. Radical Libertarianism: Applying Libertarian Principles to Dealing with the Unjust Government, Part II. Reason Papers 28: 85–109. Block, Walter E. 2007. Ron Paul and Matching Funds, October 1. http://archive.lewrockwell.com/ block/block86.html. Block, Walter E. 2008. Replies to Readers, September 23. http://archive.lewrockwell.com/block/ block108.html. Block, Walter E. 2009a. Libertarian Punishment Theory: Working for, and Donating to, the State. Libertarian Papers 1 (17) http://libertarianpapers.org/2009/17-libertarian-punishment-theoryworking-for-and-donating-to-the-state/. Block, Walter E. 2009b. Toward a Libertarian Theory of Guilt and Punishment for the Crime of Statism. In Property, Freedom and Society: Essays in Honor of Hans-Hermann Hoppe, ed. Jorg G. Hulsmann and Stephan Kinsella, 137–148. Auburn, AL: Ludwig von Mises Institute. Block, Walter E. 2010. You are a Rotten Kid (Rent Control and Libertarianism). February 27. http:// archive.lewrockwell.com/block/block150.html. Block, Walter E. 2011a. Hoppe, Kinsella and Rothbard II on Immigration: A Critique. Journal of Libertarian Studies 22: 593–623. http://mises.org/journals/jls/22_1/22_1_29.pdf. Block, Walter E. 2011b. Rejoinder to Hoppe on Immigration. Journal of Libertarian Studies 22: 771–792. https://www.mises.org/library/rejoinder-hoppe-immigration; http://mises.org/journals/ jls/22_1/22_1_38.pdf. Block, Walter E. 2011c. May a Libertarian Take Money From the Government? March 11. http:// archive.lewrockwell.com/block/block175.html. Block, Walter. 2012. James Buchanan on Inheritance: A Critique. Journal of Entrepreneurship and Public Policy 1 (2): 159–165. Block, Walter E., Chris Arakaky. 2008. Taking Government Money for Grad School? May 23. http://archive.lewrockwell.com/block/block100.html. Buchanan, James M. 1983. Rent Seeking, Noncompensated Transfers, and Laws of Succession. The Journal of Law and Economics 26 (1): 71–85. Chodorov, Frank. 1962. Taxation Is Robbery. In Chodorov, Frank. Out of Step: The Autobiography of an Individualist, 216–239. New York: The Devin-Adair Company. http://www.mises.org/etexts/ taxrob.asp. Cohen, G.A. 1995. Self-Ownership, Freedom, and Equality. Cambridge: Cambridge University Press. Cowen, Tyler (ed.). 1988. The Theory of Market Failure: A Critical Examination. George Mason University Press. De Jasay, Anthony. 1989. Social Contract, Free Ride: A Study of the Public Goods Problem. London: Oxford University Press. DiLorenzo, Thomas J. 2012. The Rothbardian Analysis of the State. September 14. https://mises. org/library/rothbardian-analysis-state-0. DiLorenzo, Thomas J., Walter E. Block. 2017. An Austro-Libertarian Critique of Public Choice. Addleton Academic Publishers.

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Feser, Edward. 2000. Taxation, Forced Labor, and Theft. The Independent Review 5 (2): 219–235. JSTOR, JSTOR, www.jstor.org/stable/24562647. Goldberg, Bruce. 1961. Review of Rand’s ‘For the New Intellectual’. New Individualist Review, November: 17–24. objectivistliving.com/forums/topic/10595-bruce-goldbergs-reviewof-for-the-new-intellectual/. Hart, H. 1955. Are There Any Natural Rights? The Philosophical Review 64 (2): 175–191. https:// doi.org/10.2307/2182586. Holcombe, R.G. 1997. A Theory of the Theory of Public Goods. The Review of Austrian Economics 10 (1): 1–22. Hoppe, Hans-Hermann. 1989. Fallacies of the Public Goods Theory and the Production of Security. Journal of Libertarian Studies 9 (1): 27–46. Huemer, Michael. 2002. Is Benevolent Egoism Coherent? The Journal of Ayn Rand Studies 3 (2): 259–288. JSTOR, JSTOR, www.jstor.org/stable/41560189. Hummel, Jeffrey Rogers. 1990. National Goods Versus Public Goods: Defense, Disarmament, and Free Riders. The Review of Austrian Economics 4 (1): 88–122. Michael, M.A. 1997. Redistributive Taxation, Self-Ownership and the Fruit of Labour. Journal of Applied Philosophy 14: 137–146. https://doi.org/10.1111/1468-5930.00050. Nozick, Robert. 1974. Anarchy, State and Utopia. New York: Basic Books. Nozick, Robert. 1971. On the Randian Argument. Pacific Philosophical Quarterly 52 (2): 282. Osterfeld, David. 1989. Anarchism and the Public Goods Issue: Law, Courts and the Police. The Journal of Libertarian Studies 9 (1): 47–68. Pasour Jr, and C. Ernest. 1981. The Free Rider as a Basis for Government Intervention. The Journal of Libertarian Studies 5 (4): 453–464. Rand, Ayn. 1967. Capitalism: The Unknown Ideal. Signet. Rand, Ayn. 1964. The Virtue of Selfishness. Signet. Rothbard, Murray N. 1977. Power and Market: Government and the Economy. Menlo Park, CA: Institute for Humane Studies. https://mises.org/library/man-economy-and-state-power-andmarket/html. Rothbard, Murray N. 1978. For a New Liberty. New York: Macmillan. Rothbard, Murray N. 1981. Taxation: Is It Voluntary? Libertarian Party News, March–April: 13–15. Rothbard, Murray N. 1997. The Logic of Action: Applications and Criticism from the Austrian School, vol. II. Cheltenham, UK: Edward Elgar. Rothbard, Murray N. 1998[1982]. The Ethics of Liberty, New York: New York University Press. http://www.mises.org/rothbard/ethics/ethics.asp; https://mises-media.s3.amazonaws.com/The% 20Ethics%20of%20Liberty_0.pdf?file=1&type=document. Rothbard, Murray N. 2007. Can There Be a ‘Just Tax’? http://mises.org/daily/2510. Schmidtz, David. 1991. The Limits of Government: An Essay on the Public Goods Argument. Boulder, CO: Westview Press. Sechrest, Larry J. 1999. Rand, Anarchy, and Taxes. The Journal of Ayn Rand Studies 1 (1): 87–105. JSTOR, JSTOR, www.jstor.org/stable/41560112. Sechrest, Larry. 2003. Privateering and National Defense: Naval Warfare for Private Profit. In The Myth of National Defense: Essays on the Theory and History of Security Production, ed. HansHermann Hoppe. Ludwig von Mises Institute: Auburn, AL. Sechrest, Larry., 2004a. Private Provision of Public Goods: Theoretical Issues and Some Examples from Maritime History. ICFAI Journal of Public Finance 2 (3): 45–73. Sechrest, Larry. 2004b. Public Goods and Private Solutions in Maritime History. The Quarterly Journal of Austrian Economics 7 (2) (2004): 3–27. Sechrest, Larry. 2007. Privately Funded and Built US Warships in the Quasi-war of 1797–1801. The Independent Review 12 (1): 101–113. Spooner, Lysander. 1966[1870]. No Treason: The Constitution of No Authority and A Letter to Thomas F. Bayard, Larkspur. Colorado: Rampart College. http://jim.com/treason.htm.

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Spooner, Lysander. 1886. A Letter to Grover Cleveland, on his false Inaugural Address, the Usurpations and Crimes of Lawmakers and Judges, and the consequent Poverty, Ignorance, and Servitude of the People. http://oll.libertyfund.org/titles/spooner-a-letter-to-grover-cleveland-1886. Tinsley, Patrick. 1999. Private Police: A Note. Journal of Libertarian Studies 14 (1): 95–100. Vance, Laurence M. 2006. The Fraudulent Tax. October 9. http://www.mises.org/story/2327. Vance, Laurence M. 2007. Real Tax Reform. April 16. http://www.mises.org/story/2552.

Walter E. Block is Harold E. Wirth Endowed Chair and Professor of Economics, College of Business, Loyola University New Orleans, and senior fellow at the Mises Institute. He earned his PhD in economics at Columbia University in 1972. He has taught at Rutgers, SUNY Stony Brook, Baruch CUNY, Holy Cross and the University of Central Arkansas. He is the author of more than 500 refereed articles in professional journals, two dozen books, and thousands of op eds. He lectures widely on college campuses, delivers seminars around the world and appears regularly on television and radio shows. He is the Schlarbaum Laureate, Mises Institute, 2011; and has won the Loyola University Research Award (2005, 2008) and the Mises Institute’s Rothbard Medal of Freedom, 2005; and the Dux Academicus award, Loyola University, 2007. He is a contributor to such scholarly journals as The Review of Austrian Economics, Journal of Libertarian Studies, The Journal of Labor Economics, and the Quarterly Journal of Austrian Economics. Block is a leading Austrian School economist and an international leader of the freedom movement. His earliest work Defending the Undefendable (first edition Fleet 1976, latest edition Mises 2008, translated in 12 languages) is now, more than 30 years later, still regarded as a classic of libertarianism. Block’s latest book is: Yes to Ron Paul and Liberty. Block has been a fixture in the libertarian movement for some four Decades. He actually met Ludwig von Mises and F. A. Hayek, and was friends with, and mentored by, Murray Rothbard. His contributions to academic libertarianism and to Austrian economics have been prodigious. Block’s writings continue to challenge the conventional wisdom (or ignorance) of how economics works and will retain its freshness for decades to come. His public speaking style has been described as a combination of that of Woody Allen, Lenny Bruce and Murray Rothbard. Christian Torsell is a student in philosophy and economics at the University of Notre Dame. Prior to entering Notre Dame, he studied economics at Loyola University New Orleans, where he served as research assistant to Dr. Walter Block. Christian’s academic interests lie at the intersection of philosophy, politics, and economics, especially in the areas of constitutional political economy, contractarianism, and classical liberalism. His research up to this point has centered on economic methodology, focusing in particular on the economics of Ludwig von Mises and the Austrian school. Within this field, he has presented research on the Kantian influence in von Mises’ work on epistemology and has co-authored, with Block, an article on the historical and intellectual context in which von Mises’ epistemological innovations appeared, “Misesian Epistemology,” 2019 MEST Journal 7(1): 118–126.

Chapter 5

Head, Proportional, or Progressive Taxation: An Evaluation Based on Jewish and Christian Ethics Ronald M. Green

Abstract Following a theoretical prologue that seeks to define and critically understand the moral logics that support head, proportionate and progressive taxation, I examine the presence of each of these taxing options in Jewish and Christian thinking. Beginning with the Hebrew Bible this examination proceeds to the texts and practices of classical (Talmudic) Judaism, the Christian New Testament, and the later Jewish, Roman Catholic, and Protestant teachings that derive from these key textual resources. I conclude that while there are significant differences within and between these traditions, and while each type of taxation has a presence, the advocacy of progressive taxation as a means of serving the least-off members of society and promoting social equality and opportunity is a leitmotif of the biblically informed religious traditions.

5.1 Introduction The standard definition of a tax as “any contribution imposed by government upon individuals, for the use and service of the state” (Black’s Law Dictionary 2004, 1496) tells us that taxation is necessarily a moral issue. Governmental coercion must always be morally justified, and the uses to which governments put citizens’ resources also raises questions of justice and fairness. In the words of the economist Lorenz von Stein, taxation represents a community’s “entire civic sense on the economic plane” (Musgrave and Peacock 1958, 28). Western civilization has its roots in the biblical tradition. How taxation is viewed in the Bible thus tells us something about the moral foundations of our own culture’s understanding of taxation. This is true even when biblical injunctions represent only idealized religious visions of just taxation, as they do in some of the foundational Hebrew legal texts, or when, in contrast, they express bitter criticisms of existing tax practices, as we will see in the prophetic writings or some New Testament texts. R. M. Green (B) Dartmouth College, Hanover, NH, USA e-mail: [email protected] © Springer Nature Singapore Pte Ltd. 2020 R. F. van Brederode (ed.), Ethics and Taxation, https://doi.org/10.1007/978-981-15-0089-3_5

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In what follows I trace the course of Jewish and Christian teachings about taxes from their origins in Hebrew Bible, into the later interpretive texts of Judaism’s rabbinic tradition, through the texts of the Christian New Testament, and in the teachings of later Catholic and Protestant moral theologians. Note that I say “Jewish and Christian” traditions as opposed to the “Judeo-Christian tradition.” The latter term presumes a singularity of perspective, but as we will see, while this millenniaold body of teachings displays some important continuities, there are also significant changes of direction and emphasis, including those between Judaism and Christianity (Neusner 1990, 28).

5.2 Theoretical Prologue Because the world of biblically shaped teachings is so complex, it is useful to begin with a conceptual framework to help us identify the forms of taxation being proposed or reviewed. Here I outline three types of tax policy and indicate the moral logic (or logics) underlying each one of them. Following this I intend to apply this typology to our understanding of the actual tax policies found in the biblical materials.

5.2.1 Head Taxes These are the perhaps easiest types of taxes to ethically understand. They express equality in its strictest sense, as “one person, one tax, one amount.” In government policy, the head or poll tax reflects this logic. Outside of government the equal dues of many voluntary organizations do the same. Head taxes are often pejoratively labeled as “regressive,” since they require payment of a higher proportion of the resources of the poor than they do of wealthier individuals, and this is widely regarded as unfair. Those defending head taxes must appeal to a nearly absolute right of property ownership and the wrongfulness of most unconsented social contributions, as do some libertarian theorists.1 But not all head taxes are unfair. Just schemes of military conscription can be thought of as a head tax since each conscript brings to the common defense the same value—life and liberty—and receives back the same value, the protection of life and liberty. We will see that head taxation has a presence in the Bible and in the biblically derived traditions.

1 In

his Anarchy, State and Utopia (1974, 52), the libertarian Robert Nozick accepts taxes when agreed upon for mutual protection, but rejects as immoral “redistribution through the compulsory tax apparatus of the state.” He adds that “taxation of earnings from labor is on a par with forced labor.” (169).

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5.2.2 Proportional Taxation Long ago, Aristotle observed that justice consists not of treating everyone alike, but of treating equals equally (McKeown 1941, 1006f.). According to this logic, someone with three times the income (or property) of another person should pay three times the tax. Proportional taxes impose roughly the same tax burden as a percentage of taxable resources at all income or wealth levels. This logic underlies the property taxes used to fund schools and services in most American municipalities. Defenders of proportional taxation often draw on common sense moral maxims in order to provide justification of it, such as holding that taxes should be based on one’s “ability to pay” or should reflect “equal benefit.” The former maxim is reasonably self-explanatory, since one’s ability to contribute to the common fund is usually proportional to one’s available resources, though it is not ethically clear why someone with greater ability to pay should pay more for the same governmental services. Nor is the logic of “equal benefit” always compelling. It derives from the assumption that common projects like fire departments or military defense disproportionately benefit those with more assets to protect and who should therefore pay (proportionately) more. But of course, this is not always the case and the inverse is often true. As one writer notes, the wealthy owner of a solid brick mansion may have less need of public fire protection than the pauper in a ramshackle wood hovel (Groves 1948, 74).

5.2.3 Progressive Taxation Progressive (or graduated) taxation imposes a greater tax burden as a percentage of resources as the taxpayer’s resources rise to higher levels. The degree of progressivity can vary greatly from very mild to steep. Progressivity can sometimes be achieved within ostensibly head or proportionate tax schemes, if exemptions are carved out for those at the lowest rungs of the economic order. Such taxes are sometimes termed “degressive.” Sales taxes that exempt food and other basic vital commodities are an example. Progressive taxation can be morally justified by appeal to the same common-sense moral maxims used to justify proportionate taxes, ability to pay or equal benefit. This casts doubt on the validity of these maxims and their usefulness as justifications. Some believe that a deeper and more thoroughly grounded moral justification of progressive taxation can be found in utilitarian moral theory. This holds that the fundamental principle of morality requires us to produce the “greatest amount of happiness altogether” (Mill 1870, 31, 32), or, as it is more commonly put, “the greatest happiness for the greatest number of people.” In a negative form, this principle requires social policies to impose “minimal sacrifice” on the population as whole. Thus, the best tax policy according to utilitarianism is one that inflicts the least aggregate injury on all members of society taken together. To arrive at progressivity, one need only make the reasonable assumption that each unit of taxation imposes

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greater hardship on persons struggling to survive on the lowest rungs of the income ladder. Sometimes, this is supplemented by a principle of “diminishing marginal utility,” according to which each increment of wealth (above some level of reasonable comfort) provides less and less net satisfaction. Both assumptions justify imposing higher rates of taxation on higher income individuals in order to minimize aggregate social sacrifice. As compelling as its grounding for progressive taxation seems to be, utilitarianism raises many questions. It is not clear, for example, that the “benefit curve” for the utility of added wealth or income has the downward slope assumed by the principle of diminishing marginal utility. Complex psychological assumptions are at work here that may not always be correct. Furthermore, in some cases, increments of income at higher levels may open up opportunities for satisfaction not otherwise available. Thus, the sacrifices imposed by progressive taxation may actually be greater than they initially appear to be. A deeper problem is the questionability of utilitarian theory as a whole, with its stress on aggregate satisfaction as a measure of social policy. Critics have pointed out that such aggregation, because it does not take seriously the vital interests of each member of society, can theoretically justify the gross victimization of minorities for the benefit of the social whole. Where taxation is concerned, utilitarian theory can justify the impoverishment of the few for the benefit of a many. In contrast to utilitarianism, the most compelling justification for progressivity, I believe, and for tax policy as a whole, is found in John Rawls’s social contract theory of justice (Rawls 1971). I say this because Rawls provides a convincing groundup argument for how we should arrive at just social policies generally, including taxation. He asks us to deliberate from a standpoint of strict fairness, where we are deprived of knowledge of or influence by the contingent and arbitrary circumstances of our actual life positions. If we think it unfair for abled people to make policy for the disabled or wealthy heirs to set tax policy for the middle class, then we must put aside such contingencies and make policy as though we could find ourselves in any of these possible conditions. This requirement is expressed in Rawls’s theory by the imaginative device of the “original position of equality,” where individuals deliberate about social policy from behind a “veil of ignorance” that deprives them of knowledge of the conditions of their birth, their family circumstances, or actual economic status (Rawls 1971, Sect. 4). From this standpoint, Rawls arrives at two principles of justice that are meant to govern the basic institutions of a just society. The first principle holds that “each person is to have an equal right to the most extensive total system of equal basic liberties compatible with a similar system of liberty for all.” The second principle, which Rawls calls “the difference principle,” requires that “social and economic inequalities are to be arranged so that they are both: (a) to the greatest benefit of the least advantaged consistent with the just savings principle, and (b) attached to offices and positions open to all under conditions of fair equality of opportunity (Rawls 1971, 302). Rawlsian justice does not rule out social inequalities, especially those needed to foster economic productivity, but it holds that each increment of inequality is justified only if it improves the circumstances of the least-off members of society.

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Rawls’s theory has direct implications for tax policy. He conceptualizes this by imagining four functional “branches” of government that compose the background institutions for distributive justice (Rawls, Sect. 43). Each branch has its own tax policy. The allocation branch, for example, whose function is to keep the price system competitive, can impose “suitable taxes” to correct “the failure of prices to measure accurately social benefits and costs” (Rawls 1971, 276). The “stabilization branch” strives to bring about reasonably full employment, and presumably uses public fiscal resources when needed to stimulate the economy and achieve this end. The “transfer” branch “guarantees a certain level of well-being and honors the claims of need” as required by the difference principle. This branch is necessary, Rawls tells us, because “a competitive price system gives no consideration to needs and therefore it cannot be the sole device of distribution” (Rawls 1971, 276). “Whether the principles of justice are satisfied,” he adds, “turns on whether the total income of the least advantaged (wages plus transfers) is such as to maximize their long-run expectations” (Rawls 1971, 277). Fourth and finally there is the distribution branch. Rawls describes the work of this branch in considerable detail. Its task, he tells us, “is to preserve an approximate justice in distributive shares by means of taxation and the necessary adjustments in the rights of property.” As such, this branch has two aspects: First of all, it imposes a number of inheritance and gift taxes, and sets restrictions on the rights of bequest. The purpose of these levies and regulations is not to raise revenue (release resources to government) but gradually and continually to correct the distribution of wealth and to prevent concentrations of power detrimental to the fair value of political liberty and fair equality of opportunity. For example, the progressive principle might be applied at the beneficiary’s end. Doing this would encourage the wide dispersal of property which is a necessary condition, it seems, if the fair value of the equal liberties is to be maintained. (Rawls 1971, 277)

Rawls adds that the unequal inheritance of wealth is acceptable to the extent that it satisfies the difference principle, but when resulting inequalities jeopardize political liberty and fair equality of opportunity they must be checked by the taxes imposed by this part of the distribution branch (Rawls 1971, 278). In its second aspect, the distribution branch imposes the taxes that a just society requires to function. “Social resources must be released to the government so that it can provide for the public goods and make the transfer payments necessary to satisfy the difference principle” (Rawls 1971, 278). Noting that he is “leaving aside many complications,” Rawls here suggests that “a part of the best tax scheme” may be a proportional expenditure tax of the sort proposed by Nicholas Kaldor (1955). Such a tax is preferable to an income tax, Rawls observes, because “it imposes a levy according to how much a person takes out of the common store of goods and not according to how much he contributes (assuming here that income is fairly earned)” (Rawls 1971, 278). The underlying assumption in Rawls’s proposal of a proportional expenditure tax is that wages and income shares in his “ideal scheme for a well-ordered society” are working effectively to satisfy the two principles of justice and that the other three and a half taxing branches are fulfilling their functions. He adds that in a real society marked by significant injustice and departures from this

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ideal scheme, “It does not follow that …. even steeply progressive income taxes are not justified when all things are considered” (Rawls 1971, 280). Rawls’s advocacy of a proportional expenditure tax has been described as “inexplicable” by at least one of his commentators (Fried 1999, 195). How can a tax that takes the same percentage of disposable income out of the pockets of the poor as it does the well-to-do be seen as fair in a Rawlsian society? Part of the answer to this, we have just seen, is that Rawls proposes this tax only in the context of a well-ordered, just society where incomes and wealth all correspond to the limits set by the difference principle’s requirement that they are tuned to maximize the wellbeing of the least-off. As Linda Sugin has noted, such a tax “would not preclude satisfaction of the difference principle in a society in which all economic institutions were coordinated” (2004, 1995). Also important is the observation that a tax system must be regarded in its entirety. Although Rawls supports a proportionate tax for the basic revenue gathering function of the state, other parts of the system directly serve the difference principle. The transfer branch ensures that the needed portion of all revenues goes to establish a “social minimum” for those at the bottom of the economic ladder. The first part of the distribution branch reduces inherited social inequalities and ensures that these do not obstruct the social or political positions of the less advantaged. Viewed in its entirety, Rawlsian logic supports a highly progressive fiscal system. His observation that steeply progressive income taxes may be justified in the absence of his finally tuned, idealized society supports this conclusion. The observation that a tax system must be judged in its entirety is particularly relevant as we turn to the biblical materials. Almost every tax system has a combination of taxes, some of which are head-type, some proportional, and others progressive. In evaluating, a system, we must therefore look to the preponderance of its taxes to assess their effect. Do they burden the poor by either being substantially head-type or, though seemingly proportional, prove to be actually regressive because they fall more on the poor than on the well-to-do? Or are they on balance progressive (or degressive), whether by exempting the poor from the burden of otherwise proportionate taxes or by directly transferring income or wealth to the least off? Before concluding this theoretical prologue, I must note that I have presented these tax options and their underlying moral logics in what I regard as an ascending order of justifiability. Head taxation makes appeal to a concept of strict equality that is challenged by the more compelling concept of proportional equality. The common-sense moral maxims of “ability to pay” and “equal benefit,” often used to justify proportionate or progressive taxation, raise more questions than they answer. Utilitarian justifications of proportionate or progressive taxation depend on questionable factual assumptions (such as diminishing marginal utility) or carry the burden of utilitarian theory as a whole, with its seeming neglect of vital individual interests. Rawlsian theory, in contrast, builds upward from the most basic requirements for fairly considering principles of justice to concrete arguments about the tax policies of a just society. As Rawls points out, nowhere in this process of reasoning does he rely on the common-sense maxims of tax reasoning such as ability to pay or equal benefit. “The conventional maxims are seen to have no independent force …. To suppose otherwise is not to take a sufficiently comprehensive point of view (Rawls 1971,

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280). That “comprehensive point of view” is what his theory seeks to provide. As we wade into the complex materials of the biblical, Jewish, and Christian traditions, we will find this comprehensive viewpoint a useful tool for evaluating the array of teachings we encounter.

5.3 The Hebrew Bible2 Sometimes characterized as an “anthology of anthologies” (Clements, 14), the Hebrew Bible contains scores of texts (and texts within texts) originating over about a millennium of historical experience and several different types of communities (Oden 1984, 163). Within these texts are mentions of various taxes and levies ranging from those encountered among Israel’s foes to others dating from different periods in Israel’s national existence (Elon 2007, 534). Fundamentally bound up with Israel’s religious law from the earliest to later periods are two distinct types of taxes, one a head tax, the temple tax, and the other seemingly proportionate, the tithe. But each of these taxes is only one component of a complex religious fiscal system whose total significance is not the same as its constituent parts. To understand that system as a whole, moreover, one must first consider the Bible’s overarching theology of land.

5.3.1 God’s Ownership From the beginning of Israel’s national existence, the idea of salvation is connected with the land. The promise of the land sustains the patriarchs during their wanderings, and that same land is the Israelites’ destination when they flee slavery in Egypt. By obeying God, the Israelites are told that they will be able to enter and stay in the land. But Israel’s god, Yahweh, remains the ultimate owner of that land. Psalm 24:1, “The earth is the Lord’s, and everything in it” is not a pious expression but a fundamental component of Israel’s constitution. The Israelites are always merely “guests and residents” in the land, who reside there at Yahweh’s pleasure and may do so only if they keep his ordinances (Wright 1990, 73). The Book of Numbers (33:54) depicts a division of the land taking place at the time of the Israelites’ entry into it from Jordan. Holdings are given to each of twelve tribes according to their size. Within the tribes, parcels are distributed by lot to each kin group (miˆsp¯ah.â) and within kin groups, to extended families. Once distributed, land becomes an unalienable sacred inheritance, as Leviticus 25:23 commands, “The land must not be sold permanently, because the land is mine and you reside in my land as foreigners and strangers.” Each family is thus guaranteed its holdings in perpetuity. Only the Levites, dwelling in cities or towns and appointed as priests of Yahweh’s cult, are excluded from landed inheritance. 2 Note

that I deliberately avoid the confessionally driven term “Old Testament.”.

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Because land in this era is the principal source of income and wealth, what results is an essentially egalitarian economic order. The sacredness of this order and the duty of its preservation are illustrated later in Israel’s history in the story of Naboth’s vineyard (1 Kings 21) during the ninth century (BCE) reign of Ahab. Naboth’s property is adjacent to the royal palace, and the king, wishing to use it for a vegetable garden, offers to exchange it for a better vineyard or buy it from Naboth. But Naboth refuses, saying “The Lord forbid that I should give you the inheritance of my ancestors.” When Ahab’s wife Jezebel arranges Naboth’s judicial murder and Ahab appropriates Naboth’s land, God’s anger is kindled, and deadly retribution ultimately befalls Ahab’s lineage. Any understanding of taxation in the Hebrew Bible must be set within the framework of this land theology because, in the strictest sense, in Israel there is neither private wealth nor income to tax. All wealth, as land, and the land’s fruitfulness are God’s possession. The ordinary Israelite is, in a sense, God’s “tenant farmer” (Brooks 1983, 18). He works God’s land and is permitted to enjoy a large portion of its yield. The remaining portion, which includes mandated levies like the tithe, is best thought of as rent paid to God for his generous gift of the use of the land. Seen this way, the Hebrew social conception radically undercuts the idea that taxes are an imposition on morally deserved private property. Instead, the levies mandated to preserve the righteous social order are grateful acknowledgements of the gifts that make that order possible. It might be objected that all the levies deriving from the assertion of God’s ownership are voluntary religious duties and therefore not taxes. But these levies supported whole classes of Israelites and sustained the cult of Yahweh the maintenance of which was seen from the earliest times as essential to the safety of the nation. As Robert Oden notes, “The priests in ancient Israel were clearly royal employees, subject to the orders of the king … and they were themselves supported by taxes paid to the state sanctuary” (1984, 165). Nor were these payments voluntary. Oden observes, they were “a prerequisite for those who wished to remain full members of the ancient Israelite community.” Those not paying the tithe, for example, “suffered ‘ritual declassification’” and “were removed from the religious community” (1984, 163). In the strictest sense of the definition, all these levies were payments “imposed by government upon individuals, for the use and service of the state” (Black’s Law Dictionary 2004, 1496).

5.3.2 The Temple Tax This larger religious framework helps us understand the meaning and scope of specific levies. First among these is the temple tax (Exod 30:11–16). Set at a half shekel for each male twenty years or older (later reduced to one-third shekel) and dedicated both to atoning from sin in order to avoid plague and to supporting the temple rites, this levy represents strict equity—“The rich are not to give more than a half shekel and the and the poor are not to give less” (Exod 30:15). As Adam Chodorow points out, “it would

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be inappropriate for modern readers to claim that the method chosen reflects JudeoChristian notions of distributive justice.” This is true for at least several reasons. As an atonement payment and support for communal prayer, the tax expressed the idea that “all souls are valued the same in the eyes of God.” It also represented a relatively small amount, “more of a token than the significant burden traditionally associated with taxation.” Finally, the tax emerged from a context in which conducting of a census of the Israelites is prohibited (1 Chronicles 21:1–16). Since people could not directly be counted, the number of Israelites could be established by totting up the net amount of the temple tax collected (Chodorow 2007a, 129–131).

5.3.3 The Tithe Deuteronomy 14:22–29 establishes the obligation to tithe, stating: “Be sure to set aside a tenth of all that your fields produce each year” (Cf. Lev 27: 30–33; Numbers 18: 21–32). Operating as a proportional income (or consumption) tax, the agricultural tithe was designated for various religious and social purposes. In years 1, 2, 4, and 5 of each seven-year cycle, the farmer was to take this tithe to Jerusalem and eat it before the Temple, sharing a portion with the Levites who were excluded from landed inheritance. In years 3 and 6, the farmer was to give the tithe to the Levites and to “the foreigners, the fatherless and the widows who live in your towns” (Deut 14:29).3 In year 7, known as the Sabbatical year, the land was to lie fallow, obviating the need for tithes (Exod 23:11; Lev 25:1–7).4 Some evangelical Christians, for whom biblical teachings are often taken as direct guides for contemporary policy, have seen the tithe as a warrant for proportionate income taxes only. Thus, one critic of progressive taxation asks, why “Christians” in his state have “ignored the specific Biblical injunction—that God gets ten per cent, and the government shouldn’t get a penny more?” Another affirms, “God imposes a flat income tax or tithe, so it must be fair. If people do not pay the same tax rate then obviously the rates must be arbitrary and capricious.”5 But these conclusions ignore the larger context of land-related enactments in which the tithe stands. As Chodorow observes, “Agricultural tithing was part of a larger obligation to care for the poor. Thus, like the flat rate social security tax, which is joined with the progressive income tax, agricultural tithing forms a part of a larger system in which progressivity plays a large role” (Chodorow 2006b, 31). Reckoning

3 Oden

(1984, 175) observes that inclusion of the resident foreigner (ger) in this standard list of the unfortunate is particularly significant, since it means that distributive justice in ancient Israel was extended beyond even the formal Jewish community.”. 4 For a fuller discussion of the agricultural tithes, see Chodorow (2006a). 5 Manion (2003); Gary Palmer, “Where’s the Fairness in Tax System, Thomasville Times, 4 (Sept. 3, 2003). Quoted in Chodorow (2007a, 109). For similar statements, see Livingston (2006, 7–11).

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all the components of the agricultural tithes together, some rabbinic commentators estimated the fiscal burden not at ten but at twenty percent (Chodorow 2007a, 120).6 In addition to the tithes, the Bible set forth four obligatory agricultural requirements that apply during the harvest. The first of these was pe’ah, the obligation to leave the corners of one’s fields unharvested so that the poor and the foreigner could partake of the remaining produce (Lev 19:9–10; Lev 23:22.). Second was leket, which required that produce falling to the ground during harvest be left for the poor and the foreigner (Lev 19:10). Third was shikhah (Deut 24:19). This stipulated that any produce forgotten in the field, such as a sheaf of wheat, must be left for the foreigner, the fatherless, and the widow.7 Fourth, bikurim, specified that the first fruits of each crop were to be marked and brought to Jerusalem where they were to be given to the Levites and resident foreigners (Deut 26:1–11). Accompanying the fulfillment of this last obligation is the requirement to publically remember and declare how God redeemed the people from Egyptian slavery and “gave us this land, a land flowing with milk and honey” (vss. 6–9). The theology of land thus explicitly underlies these enactments. The Book of Ruth affords us some insight into the importance of these commandments to the survival of the rural poor. The widow Ruth (a Moabite woman and therefore a resident foreigner) sustains herself and her elderly Israelite mother-in-law Naomi by gleaning from early morning to evening in the barley and wheat fields of the well-to-do farmer Boaz. Ruth finds favor with Boaz who instructs his field hands to deliberately leave some sheaves behind them for Ruth to gather. Ruth’s eventual marriage to Boaz raises her out of poverty, but it is the agricultural commandments that save her and Naomi’s life.

5.3.4 The Sabbatical and Jubilee Redemptions To these specific agricultural commandments must be added the Sabbatical year. Every seventh year fields must be left fallow and open to gleaning by the poor (and wild animals), a not inconsiderable sacrifice by landowners where continuously productive fields such as vineyards or fruit trees are involved (Exod 23:10–11; 6 Chodorow

(2007a) also points out how difficult it would be to apply progressivity to the agricultural tithe. Doing so would require complex scaled measurements of agricultural produce from different sources and different fields. In addition, “Proportions were difficult enough to calculate in a society which had not yet discovered the zero. To suggest that such a society might have adopted a progressive income tax, with multiple brackets, changing percentages, and (presumably) a large zero bracket amount, seems a bit fantastic” (133). He concludes, “Given these difficulties, the decision to use a flat ten percent rate to determine the tithe likely reflects the need to make the tithe workable under the conditions of ancient agriculture and was not a conscious decision that proportionate taxation reflects a divine sentiment regarding distributive justice” (136). 7 Because this commandment cannot be consciously fulfilled and its occasion must therefore be seen as a blessing from God, one later rabbinic commentary describes its fulfillment as a reason for the greatest rejoicing in the fulfillment of all the 613 commandments in the Hebrew Bible (Tosefta Online, Chap. 3, Tosefta 13).

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Lev 25:1–7, 18–22). In this year as well, Israelites who have purchased a fellow Hebrew as a slave or indentured servant must release him without requiring payment (Exod 21:2–6). The command, as stipulated in Deuteronomy (15:12–15) is even more demanding.8 The master must give the servant generously from his flock, threshing floor, and winepress, “whatever the Lord your God has blessed you with.” All these obligations have direct fiscal effect on the landowner and must be added to the sum total of his “tax” obligations. All are justified by direct reference to Israel’s theology of land and its history of salvation: “Remember that you were a slave in the land of Egypt and the Lord your God redeemed you; that is why I am giving you this command today” (Deut 15:15). This same theology underlies and reinforces what is possibly the largest single fiscal obligation confronting any Israelite landowner: the Jubilee law of return (Lev 25). Occurring in the fiftieth year (at the end of seven Sabbatical cycles), it requires those who have purchased land that has been lost through mortgage default or sale to return that land to its original owners. In the Jubilee year, Leviticus tells us, “everyone is to return to their own property.” The aim of the Jubilee is thus to restore the original kin group (miˆsp¯ah.â) holdings that were the mark of Israel’s relatively egalitarian founding social order. Its theological basis is the affirmation, “The land must not be sold permanently, because the land is mine and you reside in my land as foreigners and strangers” (Lev 25:23). As Christopher Wright observes, when this statement is made in the light of its immediate context, it becomes clear that Yahweh’s ownership of the land is affirmed to ensure the security of individual families by preventing permanent alienation of their land. It is not simply a grand statement of national belief about the national territory, but the theological sanction of an internal economic system of land tenure. The primary feature of this system was the preservation of multiple family holdings in relative equality and freedom (Wright 1990, 63). Although Leviticus makes provision for a reduced price for the sale or purchase of land as the Jubilee approaches (Lev 25:14–17) and also exempts from release houses in walled cities (Lev 25:14), property that presumably lacks the productive capacity of agricultural land, it still imposes a significant financial burden on those who had acquired others’ land as a result of their own hard work or good fortune. It can be thought of as a massive inheritance tax with at least two distinct purposes. On the one hand, it aimed at restoring the essential productive capacity to members of a lineage that had lost it through bad luck or mismanagement. On the other, it sought to redistribute accumulated wealth that represented a threat to Israel’s egalitarian social foundations. Wright, again, makes this clear: The Jubilee existed as a safety valve to release the pressure of economic forces on the poor. What it meant, in effect, was that the insolvency of one generation in a family for whatever reason should not mean debt slavery for their descendants forever. The effect of one person’s economic collapse should he limited, roughly to the next generation only. The Jubilee was 8 Leviticus 25:40–41 sets the Sabbatical manumission at the Jubilee year. For a discussion of possible

reasons for the differences between the relevant texts, see Wright (1990, 167–173).

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an attempt periodically to halt the relentless economic forces in society whereby the rich get richer and the poor get poorer. (Wright 1990, 178)

Earlier, in developing Rawls’s position, we noted the several distinct components of his system of just taxation. These included transfer taxes to provide funds for the “social minimum” or welfare floor under the least-off, and other taxes to generate revenue for public goods. In a functioning just society both of these types of taxes might be proportionate. Then there were inheritance and gift taxes, including restrictions on the rights of bequest, taxes that, if necessary because of resulting inequities, could be steeply progressive. These taxes “encourage the wide dispersal of property which is a necessary condition, it seems, if the fair value of the equal liberties is to be maintained” (Rawls 1971, 277). It is not unreasonable to conclude that the tax system laid out in the Hebrew bible is roughly Rawlsian in its contours. Necessary public functions, including the maintenance of the vital national cult and its functionaries, were funded by a proportionate (land) income tax, the tithe. To a modest extent, the tithe was degressive since those with no landed property, a population that increased as Israel’s history unfolded, were exempt from paying it. The agricultural commandments such as pe’ah and leket and the important Sabbatical year liberation of indebted servants or slaves placed an important welfare floor under the least advantaged members of the society, including non-Israelite resident aliens. Each represents an important loss of revenue for well-to-do landowners. Finally, the Jubilee requirements corresponded to the inheritance and gift taxes of Rawls’ theory. Although the Jubilee might not help an individual, it sought in good time to restore lineages to economic self-sufficiency, and it aimed to prevent persistent economic, social, political inequalities that threatened Israel’s obedience to its divinely mandated justice. Of course, the Sabbatical and Jubilee requirements were ideals. There is evidence that from the earliest periods they were either evaded or neglected in practice.9 But Rawls’s conception, too, is an ideal, designed to sketch the tax structure of a “well ordered” society. In Rawls’ case, the ideal is a template for just taxation and also serves to indicate the shape of tax policy in a less ideal society, where steeper progressive taxation may be needed. In the case of the Jubilee, its failure becomes part of the narrative of Israel’s tragic history, including a growing social divide, prophetic protests, and the ultimate loss of national sovereignty. Failure to implement the Jubilee does not so much invalidate the Hebrew tax ideal as it illustrates the importance of this ideal as a prerequisite of social flourishing.

5.3.5 Prophetic Protests The rise of monarchy under kings David, Solomon and their successors marks the apogee of Israel’s national power as well as the beginning of its decline from the 9 Citing

several studies, Oden states, “In general, the research done in this area indicates that the Sabbatical Year may have been observed occasionally but only occasionally” (1985, 168).

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relative egalitarianism and unity of the pre-monarchical Era of the Judges. 1 Samuel 8:10–18 records a bitter prophesy of the outcome of Israel’s abandonment of its early social and fiscal order. Speaking for the God, Samuel laments the people’s turn from the kingship of Yahweh to a human monarch, and he predicts the outcome. The king, he says, will take your sons and make them serve with his chariots and horses, and they will run in front of his chariots …. He will take your daughters to be perfumers and cooks and bakers. He will take the best of your fields and vineyards and olive groves and give them to his attendants. He will take a tenth of your grain and of your vintage and give it to his officials and attendants. Your male and female servants and the best of your cattle and donkeys he will take for his own use. He will take a tenth of your flocks, and you yourselves will become his slaves. When that day comes, you will cry out for relief from the king you have chosen, but the Lord will not answer you in that day.

Samuel’s prophesy was probably retrodictive, dating from a later era when the monarchy with its abuses was already well established and when the nation’s disintegration had led to its division into the two rival kingdoms of Judah and Israel. W. A. L. Elmslie observes that during the period 800–600 BCE the political and economic conditions in Palestine changed disastrously, and the family ideal that had been the bond of society dissolved. Battles with Syrian and Assyrian armies decimated the peasantry and ruined them economically. Authority and wealth rapidly concentrated in a few hands. New classes of men, lacking the old instinct of kinship-obligation, sprang up. The kings encouraged foreign trade; and now there were merchants pitilessly intent on gain … large landowners needing slaves and hirelings to work the fields which the impoverished peasants sold or forfeited for debt …; officials of the court ready to take bribes and deny justice to the landless, the widows, and the orphans now multiplied in both the kingdoms. The two royal cities … were shockingly corrupt (1938, 283, 284).

Among the prophets of this era we find a direct and contemporaneous criticism of this social and fiscal order. In their mouths, the tithe and taxation have become dirty words. Amos, prophesying in the mid-eighth century in the northern kingdom of Israel against its monarch, Jeroboam and his corrupt court and followers, typifies the prophetic diatribe: There are those who hate the one who upholds justice in court and detest the one who tells the truth. You levy a straw tax on the poor and impose a tax on their grain. Therefore, though you have built stone mansions, you will not live in them; though you have planted lush vineyards, you will not drink their wine (Amos 5:10–11).

Prophets like Amos were not social innovators or revolutionaries. They were religious conservatives, calling the people back to obedience to the demands of the covenant relationship (Wright 1990, 108). Foremost among these demands was the maintenance of the laws and practices that preserved each kin group’s inheritance of land. A frequent target of prophetic denunciations were those who amassed landholdings at the expense of their economically distressed kinsmen. Isaiah of Jerusalem, active about the same time as Amos but in the southern kingdom of Judah, typifies this protest: “Woe to you who add house to house and join field to field till no space is left and you live alone in the land” (Isaiah 5:8). In this context, we can understand the curse uttered in Deuteronomy against “anyone who moves their neighbor’s

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boundary stone” (27:17. Also 19:14). In the prophetic and later texts (Hosea 5:10, Proverbs 23:10), the moving of boundary stones becomes synonymous with willful subversion of the just economic order. Thus, in a bitter lament Job sets the moving of boundary stones at the top of the long list of transgressions, from oppression of the widow, orphan and needy, to theft and murder, that he accuses God of not acting swiftly enough to punish (Job 24). To this history of decline we must add one further abuse related to taxation: the extensive resort under Solomon (1 Kings 5) and his royal successors to the practice of forced labor.10 The Hebrew word is mas, which happens to be the same as the modern Hebrew word for taxation (Elon 2007, 534). 1 Kings 12 records the popular discontent against this corvée under Solomon’s son, Rehoboam, ruler of the southern kingdom Judah. We read that “the whole assembly of Israel,” went up to the king and said, “Your father put a heavy yoke on us, but now lighten the harsh labor and the heavy yoke he put on us, and we will serve you” (vs. 4). But Rehoboam spurns their pleas, rejects his advisors’ advice to conciliate, and increases the people’s burden. This sparks a rebellion that leads the ten northern tribes to break away and form a separate kingdom. In desperate circumstances, both military conscription and forced labor can be just, but they must be equitably applied and clearly oriented to serve the common good. As such they constitute a just head tax. Indeed, it may be that Israel’s egalitarian founding order was the result of a fair military conscription scheme. As Wright (1990, 72) observes, at least in the early period, before the organization of professional and standing armies under the monarchy, the military levy was based on the natural units of society—“kin groups” (or “clans”) and households …. This suggests that the holding of land involved liability for military service.

But no such picture emerges of the use of mas under the monarchy. Although Solomon is once said to have applied his mas to “all Israel” (1 Kings 5:13) it is also said that his enslaved conscripts were the non-Hebrew residents of the land (1 Kings 9:21), In reality, we can imagine that those conscripted, whether Hebrews or resident foreigners, were among those with the least power and fewest resources. This forced labor was used to build the temple as well as Solomon’s lavish palaces, the latter, at least, of questionable value in terms of to the common good. Ironically, therefore, while a head-type conscription tax may have helped establish Israel’s egalitarian founding tax scheme, under the monarchy forced labor came to be emblematic of the decline and injustice of the resulting fiscal order.

10 Although

there is evidence that David used forced labor (2 Samuel 20), compared with Solomon and his successors it was “on a modest scale” (Oden 1984, 165).

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5.3.6 Classical Judaism With the Roman conquest of Palestine in 70 CE and the subsequent, centuries-long Diaspora, the conditions of life changed dramatically as Jews became urban dwellers and often (under coercion) exchanged agriculture for commercial endeavors. The challenge facing the rabbinic decisors and jurists whose thinking composes the Talmud and later commentary tradition was to adapt the body of biblical legislation designed for a rural agricultural environment to the new conditions of urban commercial life and to forge a body of enactments that would guide Jewish life in this new environment. Together, these enactments, containing biblical commandments and new rabbinic interpretations and extensions, form Halacha, the authoritative body of Jewish law. It is a measure of the seriousness with which the traditional obligations were taken that, in a radically different setting, the older laws were adapted to suit the new situation, and commandments were sometimes made even more stringent. Most Jewish life transpired within autonomous communities known as kehillot (singular, kehillah) which made and administered their own laws based on rulings by rabbinic decisors. Among the most pressing communal obligations requiring funding was the support for the poor. To this end, the kehillah established an almsfund whose distributions were available to the local poor, orphans and widows, and to transient Jews in need. So prevalent was this institution that the great medieval commentator Moses Maimonides remarked that he had “never seen or heard of an Israelite community that does not have an alms fund” (1979, 85). Revenues for the poor fund were collected from all Jewish inhabitants of a community through the tax of maaser kesafim, literally “a tenth of money.” The rabbis based this tax on what they perceived as the biblical mandates Zedekah and Gemilut Hasadim. The former term may be translated as “right” or “justice.” It describes the biblically mandated and institutionalized support of the poor (Deut 15:7–11). Gemilut Hasadim, the duty to “walk in the ways of the Lord” (Deut 5:32–33), is often translated as “loving kindness.” It refers more to “charity” in our sense of the term, involving those forms of voluntary alms and personal giving that go beyond the letter of the law. Although the rabbis sought to base maaser kesafim on biblical ordinances it was in reality a new fiscal system replacing the Bible’s land-based obligations. But it did preserve two key features of the biblical system. First, although maaser kesafim incorporated a voluntary component, the requirement of Zedakah represented not a favor that might be withheld but like the biblical ordinances, “specific, legally binding obligations which everyone must heed” (Hertzberg 1991, 145, 146). From the standpoint of the poor, assistance is a right, and from the standpoint of the giver it is a religious duty enforced by a rabbinic court (Bet Din). As Isadore Twersky observes, “The community initially appears as a modified welfare city-state, with its special functionaries who collect the compulsory levy and act as trustees for the poor and needy” (Twersky 1963, 146).11 11 For

further discussion of Talmudic requirements for Zedekah, see Chodorow (2007b) and Dorff (2002, 140–150).

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Maaser kesafim was based on annual income, including gifts and inheritances (Chodorow 2006b, 39). Collection was the responsibility of special administrators of charity and the amount owed by each household was carefully stipulated. Fairly generous criteria were established for who could receive assistance and how much they could receive. A family did not have to forfeit its home or utensils to be eligible for aid. Individuals who were accustomed to a higher standard of living might be given more from the fund than those accustomed to less (Green 1993, 948). Second, maaser kesafim, like the totality of biblical levies, was largely progressive in its effect. Chodorow observes that while no one is required to give more than 10%, the rate structure is progressive, with the poor allowed to give under 10%,12 the average person allowed to choose between 10 and 20%, and the wealthy allowed to give as much as he desires, so long as he does not beggar himself in the process … [Some rabbis considered] 20% … appropriate because it approximates the total amount of agricultural tithes (2006b, 36).13

Without ignoring the differences between the tax policies of the Hebrew Bible and its successor rabbinic tradition, it seems reasonable to conclude that there was substantial continuity between the tax ideals of the Hebrew Bible and those of the classical Jewish tradition.

5.4 The New Testament 5.4.1 Introduction When we turn to early Christianity, we are literally and figuratively in a new world. The opprobrium directed against unjust taxation by the prophets has become a cultural norm. Any idea that Israel’s religious or political leaders might oversee a just tax order is gone. As Pheme Perkins notes, “Early Christian thinking about taxation was shaped by an environment in which taxes were oppressive and rapaciously administered.” The land of Israel (Erez Israel) was under the yoke of Rome and most tax revenues throughout the Empire “flowed out of the local communities into imperial or royal coffers” (1984, 195). The Jews still residing in Israel regarded the Romans as conquerors and tax evasion was prevalent (Elon 2007, 535). In Rome itself, “the governmental and military needs met by taxation did not include any equivalent to the social programs,” while in Israel, centralization of the cult in Jerusalem from 12 Chodorow

(2006b, 67) points out that while those who were destitute were largely absolved of the obligation to tithe, as an affirmation of the importance of Zedekah, even the poor were required to give the token amount of 1/3 of a shekel per year. 13 Elsewhere, Chodorow warns, “the example of maaser kesafim is sufficiently distinguishable from a modern tax system that it would be difficult to look to the progressive rate structure as a clear model for such tax systems, but he adds, “At the same time, it should not be read to preclude governmental charity, including progressive taxation (2006a, 137).

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the second century BCE had led to neglect of country priests and the local poor (Perkins 1984, 182, 195, 186).

5.4.2 The Gospels In the Gospel narratives of the New Testament, the term “tax collector” has become synonymous with “sinner” (Matt. 5:46–47; cf. Luke 6:32–34; 19:7). Jesus’s foes are able to besmirch him by accusing him of associating with them (Matt. 11: 18–19; Luke 7:33–34; 15:1–2). These accusations have a basis since Jesus’s association with tax collectors seems to have been deliberate part of his message: the call to acknowledgement of sin and the need for repentance. Tax collectors, unlike the prideful Pharisees, at least acknowledged their sin. This message is clearly illustrated in Luke 18:9–14, “The Parable of the Pharisee and the Tax Collector.” To some who were confident of their own righteousness and looked down on everyone else, Jesus told this parable: “Two men went up to the temple to pray, one a Pharisee and the other a tax collector. The Pharisee stood by himself and prayed: ‘God, I thank you that I am not like other people—robbers, evildoers, adulterers—or even like this tax collector. I fast twice a week and give a tenth of all I get.’ “But the tax collector stood at a distance. He would not even look up to heaven, but beat his breast and said, ‘God, have mercy on me, a sinner.’” “I tell you that this man, rather than the other, went home justified before God. For all those who exalt themselves will be humbled, and those who humble themselves will be exalted.”

This parable indicates that the rigorous payment of taxes had come to be seen as a means of prideful self-assertion. We see this, too, in the story of the widow’s offering (Mark 12:41–44). Jesus, sitting opposite the place where offerings are made to the temple treasury, watches as many rich people throw in large amounts. When a poor widow comes along and puts in “two very small copper coins, worth only a few cents,” Jesus states, “Truly I tell you, this poor widow has put more into the treasury than all the others.” It is highly significant that a widow serves in this story as a symbol of humility and generosity. The widow, of course, along with the orphan, the poor and the resident foreigner, was a principal object of the support funded by the traditional system of tithes. Mistreatment or neglect of her is a major theme in the prophetic denunciation of political and economic abuses. As Perkins observes, this story “issues a sharp condemnation of religious traditions which—even under the guise of piety—deprive her of subsistence …. Clearly, offerings to the temple do not serve to support the poor in this context” (1984, 188). Jesus thus stands squarely in the prophetic tradition with its defense of Israel’s least-off and its criticism of a tax financed religious order that has become subversive of its intended purpose. Two other themes emerge in the Gospels and Book of Acts that will profoundly shape the subsequent Christian tradition. The first is evidenced in another tax collector story, the account in Luke 19:1–10 of the encounter in Jericho between Jesus and Zacchaeus, described as “a chief tax collector and wealthy.” Because Zacchaeus

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is short, he cannot see Jesus over the crowd, so he runs ahead and climbs a tree. Jesus tells Zacchaeus to come down, saying, “I must stay at your house today.” The tax collector welcomes Jesus gladly, though all the people mutter “He has gone to be the guest of a sinner.” Zacchaeus stands up and defends himself, saying “Look, Lord! Here and now I give half of my possessions to the poor, and if I have cheated anybody out of anything, I will pay back four times the amount.” Despite his scorned profession, therefore, Zacchaeus represents a generosity far in excess of what is required by tithing enactments. Perkins spells out the story’s implications: Zacchaeus’ great wealth did not stand in the way of his response to Jesus’s invitation. Nor is it necessary for him to abandon all of his wealth in order to receive salvation. He must cease from the unjust acquisition of such wealth and must show his piety in almsgiving and hospitality …. For Luke’s largely Gentile audience this story also taught the importance of almsgiving, a theme that occurs frequently in his narrative. (1984, 187)

Thus, a subtle transition has been made. Care of the poor remains the touchstone of piety. But in a context marked by unjust Roman and Jewish taxing practices, the Hebrew Bible’s formal institutions of just taxation have been abandoned and replaced by a new emphasis on voluntary almsgiving. This theme resonates throughout the entire New Testament. It underlies the Apostle Paul’s persistent efforts to collect funds from the Diaspora communities to provide support for the poor of the Christian community in Jerusalem (Gal 2:10; 1 Cor 16:1–4; 2 Cor 8 and 9; Rom 15:25–28, 31). This is never presented as a tax. Paul describes it as free work undertaken by his communities out of their desire for unity. “It represents a leitourgia (divine service) that will result in praise of God by those who receive it (2 Cor 9: 12f). Or it is the repayment in material goods of the spiritual debt that the Gentiles owe the originating Jewish Christian community (Rom 15: 25–28) (Perkins 1984, 192).

5.4.3 The Book of Acts In its most extreme form, this spirit of generosity underlies the koinonia, the quasiutopian Pentecost fellowship described in the Book of Acts. Filled with the Holy Spirit, members “sold property and possessions to give to anyone who had need [and] … They broke bread in their homes and ate together with glad and sincere hearts” (Acts 2:45–46; 4:32–36). When two members, Ananias and his wife Sapphira, sell a parcel of land they promise it to the community but they deceptively hold back a portion. God then strikes the two dead. The text makes clear that their punishment is not for failing to pay a required levy but for deceiving the community about the extent of their generosity. When Ananias appears before him, the Apostle Peter asks, “Didn’t it belong to you before it was sold? And after it was sold, wasn’t the money at your disposal? What made you think of doing such a thing? You have not lied just to human beings but to God” (Acts 5: 4). We are thus fully in the world of Christian love, where heartfelt compassion for and fellowship with the neighbor, including the least-off neighbor, have replaced laws and ordinances.

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5.4.4 Obedience to Rulers A second theme to emerge in the Gospels, and one reinforced in the letters of Paul, is that Christians are to obey rulers and pay taxes without regard to the justice or religious acceptability of those taxes. This theme emerges within a context of Roman oppression and the need of a mistrusted community to avoid accusations of disloyalty. In Mark 12, the Pharisees and Herodians ask Jesus, “Is it right to pay the imperial tax to Caesar or not? Should we pay or shouldn’t we?” (vss. 14–15). The question is a snare because answering it either way will anger either Jesus’s Roman listeners or his radical (Zealot) Jewish listeners. But Jesus avoids the trap. Asking his interrogators to being him a Roman denarius stamped with the image of Caesar, he says, “Give back to Caesar what is Caesar’s and to God what is God’s.” This ambiguous answer affirms the priority of obedience to God while avoiding an outright call to resistance to Roman levies.14 The theme of obedience to government and payment of taxes comes to the fore in Paul’s Letter to the Romans, Chap. 13. Paul is writing in the context of Nero’s rule, and a general tax revolt is brewing (Swartley 1980). Resistance to the payment of taxes would jeopardize the presence of Christians in Rome, and possibly trigger an edict of expulsion, as had happened once before. Thus, Paul counsels almost unqualified obedience to government. After stating, “Let everyone be subject to the governing authorities, for there is no authority except that which God has established,” he adds, “This is also why you pay taxes, for the authorities are God’s servants, who give their full time to governing. Give to everyone what you owe them …” (Rom 13: 1, 6–7). Christianity emerges from its formative biblical period, therefore, with a series of subtle but significant changes from the traditions that were established in the Hebrew Bible and that were continued in classical Judaism out of the rabbis’ intense fidelity to biblical commandments. Concern for the poor and least-advantaged remains to the fore. Paul even justifies the collection of funds for Jerusalem’s Christian poor as imitation of the sacrificial self-giving of the Lord (2 Cor 8:9; cf. Phil 2:5–8). However, support for the least-advantaged has systematically ceased to be a matter of institutionalized fiscal policy and has, instead, become a matter of voluntary generosity and almsgiving. Wealth is accepted, and Christians are encouraged to give out of their “plenty.” Finally, tax policy has been significantly untethered from its biblical moral foundations. Christians must pay taxes, even taxes that make no contribution to the welfare of the poor, whose needs are left to private generosity.

14 Swartley (1980) reviews various interpretations of this highly ambiguous text, ranging from those

that see it as approving taxpaying to those that see it as a subtle counsel of resistance. Swartley observes that the very possession of the hated denarius with its image of Caesar, was deemed a sin in the teachings of the Pharisees themselves. Thus, when, at Jesus’s request, his questioners produced such a coin, they were already self-condemned as compromisers with their own law. Perhaps reflecting his Mennonite pacifism and discomfort with war taxes, Swartley concludes, “Jesus thus forbade the payment of the tax for those who are faithful, implying that once one has compromised so much as to possess the idolatrous coin, then the tax matter has already been settled in principle.”

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5.5 Later Traditions The traditions that stem from these biblical foundations, Judaism, Roman Catholicism and Protestantism reflect their origins but also evolve as the historical and social circumstances in which they find themselves undergo change.

5.5.1 Judaism The tax policies of Jewish communities established during the Talmudic period (70–640 CE) remained in place until the dawn of modernity. But increased persecutions, particularly from the 11th century onward, placed added stress on the finances of these communities. Repeated pogroms and expulsions (from Western Europe in the 13th and 14th centuries and from Spain at the end of the 15th), resulted in widespread impoverishment of the communities. As a condition of residence, local rulers frequently imposed burdensome collective taxes (“toleration money”) which the entire community had to pay under duress.15 Within Jewish communities, this burden was usually allocated according to each individual’s means, with the well to do paying proportionately more and persons of limited means (orphans, widows, the disabled) exempted from payment (Elon 2007, 533, 535, 545). From the late eighteenth century Enlightenment on, emancipation movements in many Western nations eased the oppression, and Jews began to enjoy full inclusion in national communities. Internally, Judaism fractured into several branches. At one extreme stands the centuries old rabbinic tradition, defended today by the Orthodox movement and various Hasidic sectarian groups. At the other extreme is the Reform movement, whose teachings generally break with traditional Jewish law (Halacha) and seek to adopt a modern approach to all areas of ethical concern, from sexuality to economic life. In between are the Conservative and Reconstructionist movements, which, congregation by congregation, adopt various mediating stances on the central issue of Halachic observance. This diversity of views has replaced any consensus about what are normative communal values and institutions. Although Jewish charitable organizations remain vibrant almost everywhere, the institutionalized and legally enforceable funding activities of the autonomous Jewish community (kehillah) declined in importance or vanished. Specific religious institutions (the synagogue and its functionaries) were financed by membership fees or voluntary contributions. Social support payments for the disadvantaged were largely replaced by national programs of progressive taxation and social welfare, which Jews, perhaps reflecting their social marginality as much as their prophetic heritage, tend to support politically. In general, Jews remain committed to the welfare of the poor and disadvantaged, a commitment they now tend to express in both private charities 15 The Halachic

basis for this obligation was found in the principles of dina de-malkhuta dina (“the law of the land is law”) and pikku’ah. nefesh (the duty to save lives) (Elon 2007, 535, 537).

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and progressive political commitments.16 The Conservative Rabbi Elliot N. Dorff expresses the attitude of many modern Jews when he states that “collecting and distributing aid for the poor through governmental agencies is the rough equivalent of the power granted Jewish courts in pre-Enlightenment times” (2002, 154).

5.5.2 Roman Catholicism Until the Reformation in the 16th century, Christianity was synonymous with Roman Catholicism. During the Middle Ages, from about 500 to 1500 CE, Christian values played an important role in shaping life. Medieval society as a whole was hierarchical and exhibited great differences in wealth, but Christian values inherited from the New Testament worked to moderate the extremes. At the edges of feudal society, monastic communities were organized on a basis of economic equality and voluntary sharing. They sought to replicate the early Jerusalem community’s koinonia fellowship and, among other things served as a retreat for the landless or economically disinherited. Charitably-funded Christian organizations staffed by dedicated religious, such as the hospice at Beaune, France, provided vital nursing services for the destitute. The spirit of New Testament teachings persisted in an emphasis on charity and almsgiving. According to Charles Curran. The traditional Catholic teaching going back to the very beginning insisted on the obligation of the rich to give to the poor. In medieval times some insisted …. that the obligation to give of one’s superfluous goods was an obligation of justice. The individual had a right to keep for oneself not only what was necessary for decent human living but also what was required to live in accord with one’s state in life, but what was then leftover or superfluous had to be given to the poor (1984, 122).

Most of this charity was voluntary, but, drawing on the work of Brian Tierney, Curran adds that in ecclesiastical canon law as it emerged in the High Middle Ages the obligation to give to the poor was conceived as one of justice that could be legally enforced. “The poor person could denounce the offending rich person to the church which could compel the rich to give to the poor through church censures and even excommunication as a last resort” (1984, 122f.). Like biblical religious forays into tax policy, these norms often remained only ideals. The noblesse oblige obligation to give out of one’s superfluity did little to ease the harsh realities of vast economic inequalities, and the right of the poor to compel sharing was probably rarely exercised. Up until the modern era there are very few theoretical treatments of tax policy by Catholic moral theologians. Manuals of moral theology, which had the narrow purpose-of training confessors as judges in the sacrament of penance, focused largely 16 Since at least the 1920s, American Jews have overwhelmingly supported progressive social policies and the Democratic Party. Polling places them as the most liberal American religious group (Pew Research Center 2013, Chap. 6).

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on the question of whether one had an obligation to pay just taxes and what spiritual penalties attached to tax evasion (Crowe 1944). In the 17th century John deLugo (d. 1660), one of the best-known theologians of his day, dealt at length with the question of the obligation to pay just taxes, but he did so in a way that offered a sketch of what constitutes a just tax.17 Such a tax, said deLugo, must satisfy three conditions. In addition to being levied by the proper authority, it must first serve the common good, not the private good of the ruler. Second, it must be proportional to the cause for which it is levied and not be excessive for the needs it meets. Third, if the tax is meant to fund a shared necessity then it should be levied in “geometric” proportion, with those having more paying more and those having less paying less.18 Finally, deLugo addressed the question of whether taxes should be imposed on the common necessities of life such as bread, wine, oil, or meat. DeLugo prefers that taxes be levied on luxury items, not on things that are necessary for ordinary life (Curran 1984, 114). On balance, it appears that deLugo’s tax policy is modestly degressive: proportionate but with exemptions for those at the bottom of the economic ladder. The pre-modern period contributed one other idea that has been reflected in much Roman Catholic thinking about economic justice in our day. Influenced by GrecoRoman speculation (Walsh and Langan 1977), this idea is that all the goods of the earth were primordially ordained for the common good of humankind. Private property is a second-best solution to the problem of economic life. It emerges after the Fall as a corrective for the sins of greed and sloth and to prevent the “tragedy of the commons” to which these sins lead (Hardin 1968). This conception has several important moral implications. It undermines the sanctity attached to property when it is viewed as morally deserved. It throws open to question the validity of private possession when it no longer adequately serves the purpose of preserving widespread access to vital goods. Finally, it says that the right of private property is suspended in circumstances of great need when some face severe want and others have a surplus. In such circumstances, Catholic moral theory does not regard the unconsented taking of others’ property as theft (Aquinas, Summa Theologica, IIa IIae, Ques. 66, Art. 7). Although not derived expressly from biblical teachings, this idea of the primordial, divinely ordained common possession of goods has a bearing on tax policy that is similar to the Hebraic idea of God’s possession of the land. Both conceptions undercut the pride that justifies unqualified private ownership, and both warrant the use of social policy to redistribute wealth to prevent the suffering of the least-off. Beginning in the late nineteenth century with the Papal encyclical Rerum Novarum (1891) and accelerating through the twentieth century with further papal and episcopal writings, Catholic social thought emerged as a powerful and distinctive voice in economic matters. Although few of these writings specifically addressed tax policy, 17 Curran reports that deLugo devoted an entire disputation of his Disputationes Scholasticae et Morales, (8 vols. Paris, 1869) to the question of taxation. “DeLugo divided that discussion into eleven different sections which covered sixty-five long pages in his collected eight volumes on moral issues” (Curran 1984, 114). My summary of deLugo’s positions is based on Curran’s discussion (1984, 114). 18 The idea of geometric proportion in matters of distributive justice is prefigured in the writers of the scholastic period, notably Thomas Aquinas in his Summa Theologica IIa IIae, Quest. 61, Art. 2.

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one important exception is “Economic Justice for All,” the 1986 Pastoral Letter of the U.S. National Conference of Catholic Bishops. The bishops begin the letter by identifying themselves as “heirs of the biblical prophets” and of Jesus who proclaimed “Blessed are the poor in spirit.” They quickly add that they write and speak “as pastors not public officials,” “as moral teachers, not economic technicians.” (vi, vii: Sects. 4, 7). They then identify as one of the basic moral principles guiding their thinking that “all members of society have a special obligation to the poor and vulnerable. From the Scriptures and church teaching we learn that the justice of a society is tested by the treatment of the poor” (8: Sect. 16). Applying this principle to considerations of social justice, the letter goes on to state that “distributive justice requires that the allocation of income, wealth, and power in society be evaluated in light of its effects on persons whose basic material needs are unmet” (17: Sect. 70). Underlying this requirement, the bishops observe, is a teaching enunciated by the Second Vatican Council, but, as we have seen, one that is also traceable to the medieval fathers and doctors of the Church: “The right to have a share of earthly goods sufficient for oneself and one’s family belongs to everyone …. [W]e are obliged to come to the relief of the poor and to do so not merely out of our superfluous goods”(17: Sect. 70). “As individuals and as a nation, therefore, we are called to make a fundamental ‘option for the poor’” (21: Sect. 87).19 In a chapter devoted to selected economic policies, the bishops reject debates over “ideological extremes” and efforts “to create or promote a specific new economic system.” They choose instead to focus “on some aspects of the economy where we think reforms are realistically possible” (129: Sects. 129, 132). Among these is an appeal for substantial government funding of programs aimed at improving the conditions of the poor. This includes establishment of “a floor of material well-being on which all can stand” (18: Sect. 74). It extends to the funding of programs of support for education, job creation, and others aimed at ensuring that “all persons also have a right to security in the event of sickness, unemployment, and old age” (18f: Sects. 74, 80). How are the funds for these state expenditures to be gathered? The bishops offer a general appeal for “assessment according to ability to pay” (18; Sect. 76) but then go on to offer a specific preference for graduated or progressive taxation accompanied by the use of taxation as a means of income transfer: The tax system should be continually evaluated in terms of its impact on the poor. This evaluation should be guided by three principles. First, the tax system should raise adequate revenues to pay for the public needs of society, especially to meet the basic needs of the poor. Secondly, the tax system should be structured according to the principle of progressivity, so that those with relatively greater financial resources pay a higher rate of taxation. The inclusion of such a principle in tax policies is an important means of reducing the severe inequalities of income and wealth in the nation. Action should be taken to reduce or offset the fact that most sales taxes and payroll taxes place a disproportionate burden on those with lower incomes. Thirdly, families below the official poverty line should not be required to pay 19 The “option for the poor” or “preferential option for the poor” is a concept that arose in the context of deliberations by the Latin American episcopate. The pastoral letter references some relevant writings (NCCB, 44 fn.).

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income taxes. Such families are, by definition, without sufficient resources to purchase the basic necessities of life. They should not be forced to bear the additional burden of paying income taxes (45: Sect. 202d).

Elsewhere, the bishops entertain the possibility of active income support, stating, “The ‘negative income tax’ is another major policy proposal that deserves continued discussion” (47: Sect. 72). It is important to note that the bishops do not intend these calls for state involvement in support of the poor to render unnecessary the many privately financed institutions that seek to aid the least-off members of society or to replace the traditional Catholic emphasis on voluntary charity. In the pastoral letter, they point to a principle that is a consistent theme in modern Roman Catholic social teaching, the principle of “subsidiarity.” According to this, there is a “need for vital contributions from different human associations—ranging in size from the family to government.” Quoting Pope John Paul II, they add, “it is an injustice and a grave evil and disturbance of right order to assign to a greater and higher association what lesser and subordinate organizations can do” (21: Sect. 99). Economic Justice for All thus stands at the culmination of a long history of Catholic thinking about tax policy. We are at a great distance here from the koinonia fellowship of the Acts community, the unqualified obedience to rulers of Romans 13, or the noblesse oblige of medieval canonical law. But the pastoral letter is an informed attempt to apply many traditional Roman Catholic values to the new circumstances of the modern state, where wage labor has replaced agriculture, large, impersonal economic and governmental institutions have replaced smaller face-to-face communities, and where modern technologies, in communications, education or medicine, have created vital new needs. In this context, the letter brings prophetic and early Christian concerns to bear on social and fiscal policies aimed at protecting the least off.

5.5.3 Protestantism Historically, Protestant treatments of taxation have been shaped by social and theological factors. These include the social location of the great reformers, Martin Luther and John Calvin, and specific ethical concepts that derive from the reformers’ theologies, with their emphasis on sin, faith and grace. As Luther developed his confrontation with the Catholic Church, he had to walk a fine line. On one side were the princes and landed aristocracy, which tended to support the established order, including the Catholic Church, but on whose favor Luther depended for survival. On the other side were the aggrieved peasants who took Luther’s religious reform and its proclamation of the “freedom of the Christian” as a call to social revolution. Indeed, the Peasants War of 1524–25 revealed what could happen if Luther’s purely religious teachings were construed in a social and economic direction.

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Luther bitterly opposed the peasants’ rebellion, calling in his treatise Against the Murderous, Thieving Hordes of Peasants for the rebels to be killed like “mad dogs” (Luther 1525). At the same time, he held some sympathy for the peasants’ grievances. Both themes emerge in his relatively few statements about taxation. As Donald Shriver and E. Richard Knox observe, “An ordered discussion of the government’s right to tax cannot be found in Luther’s writings. Rather one finds scattered in biblical commentary and other writings hints of his position on public revenue questions” (1984, 135). On the one hand Luther sympathized with the heavy tax burdens being placed on the peasants. In his “Admonition to Peace: A Reply to the Twelve Articles of the Peasants in Swabia” (1955: XLVI, 17–43), Luther tells the Princes and Lords that he agrees with the peasants’ protests against “economic injustices” such as high tax rates and the death tax. But in a subsection addressed to the peasants, Luther states that tax and other economic questions “are all matters for the lawyers to discuss. It is not fitting that I, an evangelist, should judge or make decisions in such matters.” As Shriver and Knox observe, “By leaving the issue finally to the experts, Luther side-stepped the issue of justice in a manner imitated by many ecclesiastical organizations and theologians today (1984, 138). Luther also cites New Testament texts such as Romans 13:1–6 and 1 Peter 2:13–14 which assert that rulers are God’s servants to whom Christians owe obedience. Calvin, too, reflects his social location, although it differed from Luther’s. Fleeing France, Calvin found refuge in Geneva, which like many of the emerging European urban centers where Calvinism took root, was populated by a bourgeoisie that had long established their political independence from the feudal princes. From the start, therefore, Calvinism was friendly to commercial life and the accumulation of wealth. Max Weber, a leading scholar of religion and society, is famed for his linking of Protestantism with the emergence of European capitalism. According to Weber, Protestantism’s animus against monasticism moved pious Christians back into the world, including the realm of economic life. Calvinism’s doctrine of predestination, with its stress on the “signs” of salvation and its rejection of the penitential repair for sin of the Catholic tradition, fostered unprecedented individual efforts to evidence one’s salvation, often through worldly economic success. Finally, the spirit of monastic asceticism, now transferred from the cloister to the counting house, led to the accumulation of wealth and to the vast fortunes that characterized European and American capitalism. This social and theological background shapes Calvin’s statements about taxation. As Michael Walzer observes, Calvin’s deep perception of human sinfulness meant that “Calvin accepted politics in any form it took, so long as it fulfilled its general purpose and established an order of repression” (1965, 42). Where taxes are concerned, this returned Calvin and fellow Calvinists like Ulrich Zwingli and John Knox to Romans 13, with its almost unqualified counsel to pay taxes. In a General Confession of Faith intended for common use, Calvin included the statement “I also acknowledge that it is right to obey their [civil authorities’) law and statutes, pay tribute and taxes, and other things of the same nature…” (1849: II, 135). However, it is true that Calvinists like John Knox also expressed concerns about the burdens that taxation imposed on the poor (Curran and Knox 1984, 141).

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Protestantism’s historic association with capitalism, its identification of poverty as result of personal failings, and its lessened outreach to the poor are a heritage that continues in our own era. It lives on in some conservative and evangelical Protestants’ objection to graduated taxation (Hamill 2006). Ironically, this is true of some heirs to the left-wing of the Reformation, the distant descendants of the peasants who rebelled against unjust taxation and whom Luther attacked. This includes the Anabaptist groups who evolved into the various Baptist communities that, seeking relief from persecution, were counted among the many immigrants to the New World. A passionate commitment to freedom of religion is a hallmark of these groups, and in time, this led to the emergence of a pronounced theme on their part, that churches must be exempt from taxation (Curran and Knox 1984). In the American context the disestablishment of religion also meant that churches had to finance themselves, which was usually accomplished by tax deductible donations from the laity. Both themes working together—the churches’ freedom from governmental interference in their finances and the churches’ reliance on members’ affluence and generosity— have led these religious groups to oppose the progressive taxation of wealth. An exception to the opinions of the more conservative churches is a consensus on tax policy mirroring Catholic teachings that has emerged among some of the more socially active “mainstream” or “denominational” churches. One example is the 2009–2012 statement of the “Social Principles of The United Methodist Church.” In addition to advocating “the right of all persons to equal opportunities for employment, access to housing, health care, education, and freedom from social discrimination” (8), the Methodists appear to favor progressive tax policies that aim at redistributing wealth: “We support measures that would reduce the concentration of wealth in the hands of a few. We further support efforts to revise tax structures and to eliminate governmental support programs that now benefit the wealthy at the expense of other persons” (13). Similarly, in 2013, the United Church of Christ issued a “General Synod Resolution on Taxes” calling for “a tax system that is progressive, fair, neutral, adequate, and redistributive” (2013, 5). The Synod also made specific recommendations, calling among other things for “taxes on capital gains … that match those levied on wages and salaries” and “a strong estate tax to reduce the transfer of massive wealth across generations” (2013, 5). Thus, the longstanding internal tension in Christian thinking about taxation lives on in the differences of opinion among American Christian denominations today. On one side stand those who favor Christian’s non-involvement in government fiscal policies, and reliance on voluntary initiatives for social welfare. On the other side are those who see the Christian commitment to the poor as mandating active development on the community’s—and government’s—efforts to use taxes to aid the least off.

5.6 Conclusion I began by observing that while the millennia-old body of Jewish and Christian teachings about tax policies displays some important continuities, there are also

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significant changes of direction and emphasis. We have witnessed these changes as we move from the realm of the Hebrew Bible and its successor tradition of classical Judaism into the much larger world shaped by the New Testament. Some might conclude that we cannot really speak of a single tradition of Jewish and Christian thinking on this issue, and some would argue that even the Hebrew Bible fails to offer a single perspective. Thus, Chodorow, the author of several lengthy treatments of biblical and Jewish teachings, argues against reading modern tax policy straight from biblical texts: The tax systems described in the Bible and Talmud offer a number of different methods of allocating tax burdens and therefore arguably reflect a number of conflicting values. Those who would pick and choose among those values and ascribe to them religious significance must justify their choices. Once one is freed from the letter of the text, the meaning extracted from the Bible clearly reflects human understanding, as opposed to divine fiat, and any conclusions are open to endless argument and myriad opinions (2007a, 127).

This is a useful caution against taking any one type of taxation found in the Bible, such as the seemingly proportionate tithe, and making it normative for today, while ignoring the totality of levies and their interrelationships. Specific teachings should not be made into proof texts. Nevertheless, in looking at the totality of biblical teachings and following them into the life of post-biblical Christian communities, some broad themes can be found that bear on our thinking about tax policy today. One leading theme I would signal is a rejection of the “sanctity” or “deservedness” of private property and, with this, of property’s immunity from community appropriation if needed to serve the needs of all. We see this theme in the Hebrew Bible’s insistence that God is the ultimate owner of the land, which he bestows as a gift on lineages on the condition that they use it to preserve the well-being of the least-advantaged members of the community. We see it again in the medieval Christian teaching that God intends the ownership of the earth’s goods to be in common, and that private property enters only as a remedy for human sinfulness. Both ways of thinking undercut any prideful sense of ownership that fosters resistance to taxation’s community-imposed obligations. Both assert that property is held on the condition of righteous stewardship. Closely related to and building on this first theme is the insistence that every member of the community has the right to a basic economic foundation, and that this foundation must be maintained and renewed in response to the forces that would otherwise relentlessly lead to growing inequality. This theme underlies the Hebrew Bible’s teaching of the Sabbatical and Jubilee years. Both institutions sought to correct for the contingencies, ranging from disparate natural abilities to bad luck that would otherwise sift families into self-perpetuating assemblages of the rich and the poor. In an environment where individuals were utterly determined by the circumstances of their birth, a sense of the “deservedness” of both wealth and poverty, and a resistance to sharing inevitably springs up.20 At the outset, we saw that a Rawlsian approach to justice asks us to put aside the contingencies of birth or fortune to think fairly about how we would like to form 20 Something like this may have happened in the karma-driven, caste-based society of ancient India.

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the institutions of a just society. When acting as impartial rational deliberators, it emphasizes the wisdom of our paying special attention to the long-term needs of the least-off. It leads, finally, to a preference for tax policies that place a floor under the least-advantaged members of society and that work over time to disrupt the formation of persistent economic inequalities. Susan Pace Hamill observes that The ancient causes of poverty that the Old Testament Law was designed to remedy (owning no land and being forced into debt and servitude) are “genuinely comparable” to the contemporary cycle of poverty that prevents many from reaching their potential due to inadequate education, job training, housing, and healthcare (2006, 691, fn 47).

Rawlsian theory encourages us to adopt tax policies that counter the forces leading to this “contemporary cycle of poverty.” This suggests a correspondence between Rawlsian theory and biblical thinking about ownership and taxation. While it may seem anachronistic to impute Rawlsian theory to an ancient religious tradition, it is important to note that Rawls, no less than previous moral philosophers like Kant (1785, 2015, 7, footnote *), sought to elucidate the underlying logic of our most stable intuitive moral judgments (Rawls 1951). Thus, the correspondence between Rawls’s principles and biblical injunctions is not an imposition on those materials but a natural consequence of Rawls’s philosophical project. This moral logic with its consistent willingness to use taxation to support the leastadvantaged runs like a red thread through Jewish and Christian history. True, there are occasional departures. In some New Testament writings and beyond, there is a relative passivity before unjust taxation. There is also a retreat into voluntary charity alone as a way of serving the poor. Both responses reflect the relative powerlessness and oppression of Christian communities. There are some instances, too, when thinking about taxation by Jews, Catholics and Protestants has been influenced by a too close proximity to and dependence on the wealthy. But the red thread emerges again in modern affirmations of the “preferential option for the poor” and in the widespread acceptance of progressive taxation in informed statements by modern religious communities. Thus, we can say that while head and proportional taxes have had their place in Jewish and Christian thinking, the advocacy of progressive taxation as a means of serving the least off and promoting social equality and opportunity is a leitmotif of these traditions.

References Aquinas, Thomas. 1947. Summa Theologica, IIa IIae. The Fathers of the English Dominican Province, tr. http://www.sacred-texts.com/chr/aquinas/summa/. Black’s Law Dictionary. 2004. 8th ed. https://thelawdictionary.org/letter/t/page/10/. Brooks, Roger. 1983. Support for the Poor in the Mishnaic Law of Agriculture: Tractate Peah. Chico, California: Scholars Press. Calvin, Jean. 1849. Tracts Containing Treatises on the Sacraments, Catechism of Geneva, Forms of Prayer, and Confessions of Faith. Edinburgh: Calvin Translation Society, Henry Beveridge, tr.

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Chodorow, Adam S. 2006a. Agricultural Tithing and (flat) Tax Complexity. University of Pittsburgh Law Review 68 (2): 267–305. Chodorow, Adam S. 2006b. God’s Income Tax: What Jewish Tithing Practices Can Teach Us About Tax Reform. SSRN´s eLibrary, March 10. https://papers.ssrn.com/sol3/papers.cfm?abstract_id= 889960. Chodorow, Adam S. 2007a. Biblical Tax Systems and the Case for Progressive Taxation. Journal of Law and Religion 23 (1): 101–145. Chodorow, Adam S. 2007b. Maaser kesafim and the Development of Tax Law. Florida Tax Review 8 (1): 153–208. Clements, R.E. 1979. Old Testament Theology: A Fresh Approach. Louisville, KY: Westminster John Knox Press. Crowe, Martin T. 1944. The Moral Obligation of Paying Just Taxes. Washington, DC: The Catholic University of America Press. Curran, Charles. 1984. Just Taxation in the Roman Catholic Tradition. Journal of Religious Ethics 12 (2): 113–133. Dorff, Elliot N. 2002. To do the Right and the Good: A Jewish Approach to Modern Social Ethics. Philadelphia, PA: The Jewish Publication Society. Elon, Menachem. 2007. Taxation, Legal Aspects. In Encyclopaedia Judaica, 2nd ed, ed. Michael Berenbaum and Fred Skolnik, 19: 532–58. Detroit: Macmillan Reference USA. Elmslie, W.A.L. 1938. Ethics. In Record and Revelation, ed. H. Wheeler Robinson, 275–302. Oxford: Clarendon. Fried, Barbara H. 1999. The Puzzling Case for Proportionate Taxation. Chapman Law Review 2: 157–195. Green, Ronald M. 1993. Centesimus Annus: A Critical Jewish Perspective. Journal of Business Ethics 12 (12): 945–954. Groves, Harold M. 1948. Trouble Spots in Taxation. Princeton: Princeton University Press. Hamill, Susan Pace. 2006. An Evaluation of Federal Tax Policy Based on Judeo-Christian Ethics. Virginia Law Review 25 (3): 671–764. Hertzberg, Arthur. 1991. Judaism: The key Spiritual Writings of the Jewish Tradition, rev. ed. New York: Simon & Schuster. Kaldor, Nicholas. 1955. An Expenditure Tax. London: George Allen and Unwin. Kant, Immanuel, 2015. Critique of Practical Reason. Revised Edition. Cambridge: Cambridge University Press. Livingston, Michael A. 2006. Rendering unto Caesar: Religious Approaches to the Progressive Income Tax. https://ssrn.com/abstract=939052 or http://dx.doi.org/10.2139/ssrn.939052. Luther, Martin. 1970. Against the Robbing and Murdering Hordes of Peasants. In Martin Luther, Documents of Modern History, ed. Rupp E.G. and Benjamin Drewery, 121–6. London: Edward Arnold. http://zimmer.csufresno.edu/~mariterel/against_the_robbing_and_murderin.htm. This is also available as Luther 1955, 46: 357–361. Luther, Martin. 1955. Luther’s works. ed. Jaroslav Pelikan (vols. 1–30) and Helmut T. Lehmann (vols. 31–55). St. Louis: Concordia Publishing House and Philadelphia, Fortress Press. Maimonides, Moses. 1979. The code of Maimonides, Book Seven, The Book of Agriculture, tr. Isaac Klein, Treatise II, “Laws Concerning Gifts to the Poor,” Ch. IX, 3. New Haven: Yale University Press. Methodist Church. 2009–2012. Social Principles of the United Methodist Church. https://www. umcsc.org/PDF/SocialPrinciples.pdf. McKeown, Richard (ed.). 1941. The Basic Works of Aristotle. New York: Random House. Mill, John Stuart. 1870. Utilitarianism. Reprinted from Fraser’s Magazine, Seventh Edition. London: Longmans, Green, and Co. http://www.gutenberg.org/ebooks/11224?msg=welcome_ stranger. Musgrave, Richard, and Alan Peacock (eds.). 1958. Classics in the Theory of Public Finance. London: Macmillan.

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NCCB, National Conference of Catholic Bishops. 1986. Economic Justice for all: Pastoral Letter on Catholic Social Teaching and the U.S. Economy. Washington, DC: An Anniversary Edition is Available at http://www.usccb.org/upload/economic_justice_for_all.pdf. Neusner, Jacob. 1990. Jews and Christians: The Myth of a Common Tradition. New York and London: Trinity Press International and SCM Press. Manion, Christopher. 2003. Faith-Based Taxes in Alabama. LewRoxkwell.com, June 18. https:// www.lewrockwell.com/2003/06/christopher-manion/faith-based-taxes-in-alabama/. Nozick, Robert. 1974. Anarchy, State, and Utopia. New York: Basic Books. Oden Jr., Robert A. 1984. Taxation in Biblical Israel. Journal of Religious Ethics 12 (2): 162–181. Pew Research Center. 2013. A portrait of Jewish Americans. Washington, DC: Pew Research Center. http://pewrsr.ch/16IN5U4. Perkins, Pheme. 1984. Taxation in the New Testament. Journal of Religious Ethics 12 (2): 182–200. Rawls, John. 1951. Outline of a Decision Procedure for Ethics. The Philosophical Review 60 (2): 177–197. Rawls, John. 1971. A Theory of Justice. Cambridge, MA: Harvard University Press. Sugin, Linda. 2004. Theories of Distributive Justice and Limitations on Taxation: What Rawls Demands from Tax Systems. Fordham Law Review 72 (5): 1991–2014. Swartley, Willard M. 1980. The Christian and the Payment of Taxes Used for War. Elkhart, Ind.: Mennonite Board of Congregational Ministries. https://web.archive.org/web/20060421195552/; http://peace.mennolink.org/articles/wartaxes.html. Tosefta Online. 2012. Tractate Peah, Chapter 3, Tosefta 13. tr. Eliyahu Gurevich. http://www. toseftaonline.org/tractate-peah-chapter-3-tosefta-13/. Twersky, Isadore. 1963. Some Aspects of the Jewish Attitude Toward the Welfare State. Tradition 5 (1): 137–158. UCC, United Church of Christ. 2013. Advocating for Tax Reform as Christian Stewardship and Public Duty: A Resolution of Witness Approved by General Synod XXIX. 2013). http://www. uccfiles.com/pdf/Tax-Res-background.pdf. Walsh, William J., and John P. Langan. 1977. Patristic Social Consciousness – The Church and the Poor. In The Faith That Does Justice, ed. John C. Haughey. New York: Paulist Press, 113–151. Walzer, Michael. 1965. The Revolution of the Saints. Cambridge, MA: Harvard University Press. Wright, Richard J.H. 1990. God’s People in God’s Land: Family, Land, and Property in the Old Testament. Grand Rapids, MI: William Eerdmans Publishing Co.

Ronald M. Green (BA, Brown, 1964; Ph.D., Harvard 1973) is Professor Emeritus for the Study of Ethics and Human Values at Dartmouth College. He was a member of Dartmouth’s department of religion from 1969 to 2015 and is a member of the Department of Community and Family Medicine at Dartmouth’s Geisel School of Medicine. He is the author of nine books, editor of five, and author of more than 170 articles in theoretical and applied ethics. His most recent books include Babies by Design: The Ethics of Genetic Choice; Kant and Kierkegaard on Time and Eternity; and Religion and Ethics in the Neonatal Intensive Care Unit (co-edited with George A. Little).

Chapter 6

Developing Moral Standards for Taxation Jennifer Bird-Pollan

Abstract Decisions regarding the proper levels and forms of taxation are not merely questions of economics. Instead, taxation should be seen as the manifestation of a nation’s philosophical ideals of distributive justice. As such, legislators must consider the underlying philosophical beliefs of their constituents in determining the tax laws. Those philosophical beliefs should then inform decisions regarding the form those taxes should take, and amount of tax that the government should impose. This Chapter considers a variety of political philosophical positions that are common in contemporary societies, and then evaluates how a legislator might incorporate those views into the creation of a system of tax laws that properly reflect those political perspectives. In order to consider these issues in a variety of circumstances, this Chapter contemplates the philosophical positions of libertarianism, political liberalism, and utilitarianism, and then thinks through how each of these positions would apply to the creation of a variety of tax laws, including sales taxes, property taxes, wealth taxes, and income taxes. Rather than being an exhaustive analysis of the development of moral standards for taxation, this Chapter is meant to be an example of how a legislator could go about developing such standards in her own particular circumstances.

6.1 Introduction As Oliver Wendell Holmes so memorably noted (to the unending joy of tax lawyers 1 everywhere), ‘taxes are the price we pay for civilized society.’ But does civilization deserve our taxes? Are there moral standards we can appeal to in order to justify the existence of a particular form of taxation, or, for that matter, of taxation itself? If members of a society object to the imposition of a tax, or to the use of tax dollars for 1 Oliver

Wendell Holmes, Compania General De Tabacos De Filipinas v. Collector of Internal Revenue, 275 U.S. 87, 100, dissenting; opinion (21 November 1927). J. Bird-Pollan (B) College of Law, University of Kentucky, Lexington, USA e-mail: [email protected] © Springer Nature Singapore Pte Ltd. 2020 R. F. van Brederode (ed.), Ethics and Taxation, https://doi.org/10.1007/978-981-15-0089-3_6

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a particular purpose, do they have recourse for complaint? Should they? This chapter will explore the possibility of creating moral standards for taxation. This project is distinct from an analysis about the economic rationality of one or another form of taxation, or about the levels at which to tax. Instead, this project focuses on the more fundamental questions of whether or not the imposition of taxation can be justified on moral grounds and what forms of tax are morally acceptable. Historically, drafters of tax legislation are attentive to questions of economics and history, and less attentive to moral questions.2 Questions of morality are often pushed to the side in legislative debate, labeled too controversial, too difficult to answer, or, worst of all, irrelevant to the project. But, in fact, the moral questions of taxation are at the very heart of the creation of tax laws. Rather than irrelevant, moral questions are fundamental to the imposition of tax. Tax is the application of a society’s theories of distributive justice.3 Economics can go a long way towards helping a legislature determine whether or not a particular tax law will help achieve a particular goal, but economics cannot, in a vacuum, identify the goal. Creating tax policy requires identifying a moral goal, which is a task that must involves ethics and moral analysis.4 The problem with developing universal moral standards for taxation is that such standards are likely to be specific to the time and location of the application of those standards. Specific standards will depend, in part, on the status of the taxpayers subject to the tax or the nature of the society where the tax will be applied. Given these differences, this chapter will consider a variety of theories of tax, stemming from various moral philosophical theories. In that context, the chapter will look more broadly at the kinds of questions lawmakers should ask in thinking through whether their tax systems are fair and equitable. These considerations will also be relevant for taxpayers in determining whether or not the system that obligates them to pay tax has moral authority, and thereby compels compliance. An immoral or unjust tax system might well justify civil disobedience, or even revolution. But what standards should be used to determine if the tax system is moral or immoral? Are there broad standards, that apply widely, regardless of context? This chapter will suggest some models for what these standards might look like, and apply the standards in the context of a variety of taxes. Since different forms of taxation accomplish different ends, the project divides the analysis into several parts, looking variously at income

2 ‘All of our technical knowledge on the economic side effects of taxation cannot resolve the funda-

mental fiscal issue that dominates contemporary political discourse, which is how much tax revenue our technical expertise should be harnessed to collect in the first place’ (Kleinbard 2014, XXI). 3 ‘In a capitalist economy, taxes are not just a method of paying for government and public services: they are also the most important instrument by which the political system puts into practice a conception of economic or distributive justice’ (Murphy and Nagel 2002, 3). 4 ‘It turns out that all fiscal policy recommendations rest on a foundation of moral philosophy: the only question is whether we are conscious of that fact’ (Kleinbard 2014, XXII).

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tax,5 property tax,6 wealth transfer tax,7 and sales tax.8 While each of these various forms of tax is imposed for different reasons and by different kinds of governmental entities, this project asks whether the particular tax in question can be justified on moral grounds. In addition, moral standards of taxation can help to answer questions about how much tax is too much, and how tax should be assessed across taxpayers. In establishing moral standards for taxation, legislators must consider the moral views of the citizens to whom the tax laws will be applied. Moral standards used in taxation ought to generally comply with the moral sentiments of the nation, rather than using standards that are inconsistent with the views of the majority. Just like in any kind of rule-making, the criteria for creating morally just tax law will depend on the moral standards of the society in question. But this is what is most difficult about governing. Even in societies that share a general moral sentiment, not all members of the society will agree to a certain set of moral standards, although there may be certain baseline agreements. Lawmakers may need to seek out commonalities among the various moral sentiments of their constituencies in order to develop moral standards in taxation. A baseline of morally acceptable standards will create the basis for determining the appropriate form of tax in that society. In an attempt to think through model standards of taxation that are broadly consistent with the political views of most western democracies, in this Chap. 1 will consider moral standards for taxation based on libertarianism,9 utilitarianism,10 and political liberalism.11

6.2 Theories of Tax There exists a myriad of political philosophical approaches a society could embrace in developing moral standards for taxation. Tax systems that have developed through history have often reflected the societies in which they have developed and have varied accordingly. In an attempt to think through what moral standards for taxation ought to look like in the first part of the 21st Century, this chapter focuses on three political philosophical theories to help flesh out a set of moral standards for taxation. This Section identifies each of those three theories, and explains the central elements of those theories. While there are clearly many more political philosophical worldviews available, the three theories explored in this Section reflect some of the most widely shared political perspectives in the world today. Most leading political parties in Europe and the United States take as their starting point a form of one of the three theories identified in this Section. This is not to say that these are the three best 5 See

infra Sect. 6.3.1. infra Sect. 6.3.2. 7 See infra Sect. 6.3.3. 8 See infra Sect. 6.3.4. 9 See infra Sect. 6.2.1. 10 See infra Sect. 6.2.2. 11 See infra Sect. 6.2.3. 6 See

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philosophical theories, nor to say that any of them is correct.12 It is merely to suggest that, in developing moral standards for taxation, one must identify a perspective from which to develop those standards. It seems best that, in most instances, the perspective to use is the one shared by most members of the community that will be taxed. Accordingly, this Section explores the philosophical theories of libertarianism, utilitarianism, and liberalism. The approach I take in this Chapter is not limited to the three theories identified herein. The Chapter is meant to be illustrative of an approach to rule-making that a legislator could take when considering the views of her constituency and the creation of a system of tax laws. The first step any legislator must take is to identify the underlying moral philosophical beliefs of the constituency she represents. While I do not suggest that is an easy task, part of the work of moral philosophy is to provide robust systems of thought that might be referenced in determining the views of a constituency. It might be true that no existing theory fully contemplates the views of the relevant group, but much can be learned by considering the articulation of these theories in their most complete forms.

6.2.1 Libertarianism Commonly embraced in contemporary political dialogue, libertarianism is generally the belief that individual freedom is the primary moral demand. Libertarian arguments have become standard fare in debates about tax policy. However, what exactly the ‘libertarian view’ means is not always clearly articulated. Rather than a careful articulation of a political theory, libertarian arguments often become caricatures of arguments attributable to particular lightening rod figures. Because the central moral concern of libertarians is the freedom of individuals to act in accordance with their own wishes, most libertarians generally oppose taxation, on the grounds that the imposition of tax by the government interferes with individuals’ freedom to act as they choose. The compulsory payment of tax is seen by many libertarians as the government’s removing the freedom of citizens to determine on their own what to do with their money. Libertarians’ general resistance to taxation stems from the claim that property rights are elemental and primary. All civilization arises out of property rights, and any infringement on or restriction of property rights threatens an essential element of a citizen’s individuality. Strong property rights are at the core of most libertarian theories. Libertarians generally believe that individual property rights pre-date the establishment of any government or society, and therefore governmental interference with property rights, including any attempts to curtail those rights, is anathema to most libertarians. The one exception is that property holders can consent to restrictions on their rights. 12 There are clearly other available philosophical perspectives one might choose to base a moral argument for taxation on. The work in this chapter is meant to illustrate how to work through such an argument, using these three common perspectives as a model.

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Because of these strong property rights claims, it should come as no surprise that most taxation, as it has not been affirmatively consented to by the taxpayers, is viewed by most pure libertarians as a prohibited violation of fundamental property rights. Consent here usually means an affirmative consent to the imposition of any tax, requiring citizens to express their ongoing assent to the tax on each collection. However, despite this insistence on the consent model for taxation, there are arguments that even the strongest form of libertarian property rights can be viewed as consistent with some forms of tax, even when the taxpayer has not affirmatively consented to the tax. There is not a unified libertarian view with regard to the level of consent required for legitimate taxation. Some theorists claim that any individual subjected to a tax must individually provide affirmative consent for the imposition of that tax before the tax can be considered legitimate. Other more pragmatic thinkers claim that remaining in a society that imposes compulsory taxation on its citizens is evidence of consent and can make the imposition of tax in that society legitimate.13 While libertarians disagree on the level of consent required for legitimate taxation, most libertarians agree that taxation imposed as the collection of payment for services rendered by the government to the citizenry is a legitimate form of taxation.14 This form of tax identifies the government as provider of services, and the collection of tax as the collection of payment for those services, not much different from any other kind of market transaction.15 Part of the debate for libertarians when confronted with this benefit principle is the question of what kind of services governments should provide. Some libertarians argue that the government should limit its services to those that only the government can provide, or to services which can be most efficiently or least expensively provided by the government. For instance, libertarians endorsing the benefit principle of taxation may think that the collection of taxes for the maintenance of roads and sewers or to provide national security is an acceptable

13 The famous libertarian philosopher Nozick (1974, 287) makes clear his views of implicit consent

when he writes that ‘… everyone realizes that tacit consent isn’t worth the paper it’s not written on…’. Earlier in the book he claims to have demonstrated that the reason a minimal state is not redistributive, when the amounts paid by some are used to pay for the protection of others, stems from the fact that those who are receiving protection without paying are getting that protection for free in compensation for the rights they may have given up (Nozick 1974, 114). However, Barbara Fried demonstrates that Nozick’s lack of a coherent theory of property rights and consent leads to the result that, in certain circumstances (such as the move from a minimal state to a slightly more than minimal state), consent to limit the rights of citizens does not have to be explicitly attained. Fried claims that ‘… in place of actual or implied consent, Nozick does away with consent entirely’ (Fried 1999, 235). 14 In Nozick’s explanation of the shift from anarchy to a minimal state he demonstrates the situation in which an individual could be compelled to pay for protection, since she is benefitting from the provision of that protection (Nozick 1974, 110–118). 15 The benefit principle of taxation, authorizing taxation only to the extent that it compensates the government for services it provides to its taxpaying citizens, is not a view held only by libertarians. For a discussion of the benefit principle of taxation, and an explanation of its ongoing role in tax policy debates, see Bakija and Slemrod (2008, 86).

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government action.16 Some libertarians may endorse the payment of taxes for the provision of schools, healthcare, or the regulation of markets. Again, the focus in the benefit principle theory is on the relationship between the collection of taxes and the provision of particular services, which the taxes are a payment for. The central element of legitimizing those taxes, under a libertarian theory, is that the taxpayer consented to have the government provide the services.17 In many ways the most careful arguments in support of libertarianism are those of its founding figures, Milton Friedman and Robert Nozick. Both Nozick and Friedman were proponents of limited taxation, arguing broadly that the only acceptable form of taxation is as payment for services, the aforementioned benefit principle of taxation.18 Since one of the central tenets of libertarianism is that government coercion of its citizens is impermissible, the only tolerable form of taxation is that which has the active consent of the taxpayer-citizens. While this could mean that the assessment of any tax must include an affirmative consent to be taxed, both Friedman and Nozick have theories of taxation that contemplate consent more broadly than that.19 In both theories there is an argument that continuing to live in a society and accept benefits from that society constitutes acceptance of the imposition of the tax. Nozick explains the justification of this view through a hypothetical historical evolution of society. In Anarchy, State, and Utopia, he famously starts from the view that in the original creation of society people paid others for purposes of protection of their property, which evolved into the creation of the so-called ‘night watchman state’.20 It is from this historical origin that all justification of taxation stems. However, both Nozick and Friedman remain skeptical about the wide-ranging nature of taxation in contemporary society, and caution that most taxation, including notably taxation of income, would violate basic property rights and threaten economic freedom. While Nozick himself came around to a position that include taxation, including estate taxation, by the time he wrote his final book, ‘The Examined Life’, libertarianism as a philosophical approach remains skeptical of most taxation (Nozick 1993). Nonetheless, understanding the central tenets of libertarianism allows a lawmaker intent on creating a tax system that is acceptable to citizens holding libertarian beliefs to craft a system that honors those beliefs. 16 Even

Friedman (1962, 65) himself, in many ways the father of libertarianism, imagined that a government should provide certain services, and could therefore assess tax on its citizens in order to receive payment for those services. 17 There is a tradition known as Left Libertarianism, in which a more expansive state, such as one that might provide the second set of services listed above, is more likely to be endorsed. What Left Libertarianism shares with the tradition of Right Libertarianism is the insistence on the importance of consent in providing moral legitimacy to the government and its curtailing of property rights. For examples of Left Libertarianism, see, e.g., Otsuka (2003), Vallentyne and Steiner (2001). 18 A common theory of tax law, the benefit principle of tax law says that tax should be assessed in proportion to the benefits that taxpayers receive through the tax system. See, Bakija and Slemrod (2008). 19 Friedman (1962, 65) acknowledged that a government should provide certain services and would then be entitled to collect payment from the citizenry in payment for the services provided. 20 The night watchman state is one where all individuals live independently, relying on each other only insofar as some individuals pay others to offer their protective services. See Nozick (1974).

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6.2.2 Utilitarianism The moral theory that dominates contemporary discussions of tax policy is one that stems from the philosophical work of John Stuart Mill known as utilitarianism. Taken up in contemporary economics and tax policy theory as welfare economics, the goal of utilitarianism is to make decisions that maximize utility. Utilitarian theory is often used to justify decisions in tax policy on the grounds that it simplifies the analysis and makes tax policy decisions ‘neutral’. Legislators can point to the bigger number and justify their decisions regarding tax laws. Utility is often, in this model, reduced to money, and the tax policy choice that results in the most money or the biggest pie, is the one the legislature chooses. Of course, that cannot be the entirety of the analysis. After all, some tax legislative choices will prioritize the money transferred from taxpayers to the government, some choices will prioritize redistribution from highincome to low-income taxpayers, and some choices will prioritize keeping money in the same private hands that it is in before the imposition of tax. In each case, the priority that results in the tax policy choice has normative preferences built into the decision-making process. In Mill’s articulation of the theory, the primacy of the concept of ‘utility’ affects the analysis of what particular action is the ethically appropriate action.21 As a theory of ethical judgment, the goal of the utilitarian actor is to maximize total utility, with minimal attention paid to whose specific utility is maximized. Indeed, it is inappropriate for the decision-maker to imbue her own utility with any more value than any other individual’s utility when deciding the most ethically appropriate course of action. All utility must be weighted equally. Importantly, any ethical decision’s creation of disutility must also be incorporated into that decision’s calculation. In its contemporary form as a theory of welfare economics, the utilitarian calculus looks at the social preferences of a particular society, and then evaluates the utility of particular outcomes based on those social preferences. In such a model, there are no fundamentally ethical or unethical actions.22 Instead, every action must be independently evaluated on the basis of its consequences, and those consequences will likely be different in different societies. For this reason, utilitarian analysis depends entirely on the context in which it is applied, and will likely result in different moral demands in different societies. For this reason, utilitarian analysis is also fundamentally an empirical exercise, requiring those doing the analysis to have clear ideas about what the outcomes will be. In the particular case of creating tax policies that are deemed morally acceptable under a utilitarian analysis, the creator of the policy must be certain that the policy, if enacted, will result in an increase in overall 21 While John Stuart Mill is, by most accounts, the most well-known utilitarian philosopher, he was the intellectual heir of Jeremy Bentham, who introduced Mill to the concept of utility. Bentham (2008, 2) wrote of the idea, ‘By the principle of utility is meant that principle which approves or disapproves of every action whatsoever, according to the tendency which it appears to have to augment or diminish the happiness of the party whose interest is in question: or, what is the same thing in other words, to promote or to oppose that happiness.’. 22 Compare this to libertarianism, as described in Sect. 6.2.1, where the fundamental priority of property rights makes any violation of those rights an unethical action.

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utility that exceeds the increase in any disutility. It is in this context that the application of economic theory and empirical research is an essential part of the creation of morally justifiable tax policies. These empirical analyses are often the end of the story in contemporary tax policy, but that leaves out a fundamental part of the analysis, as articulated in classical utilitarianism. Mill and others believed that there were some objective utility values, that did not depend on empirical outcomes and could be evaluated in the abstract, without resorting to empirical research. Mill included in these objective utility values concepts like justice, fairness, and equality. Utility…enjoins first, that laws and social arrangements should place the happiness, or (as speaking practically it may be called) the interest, of every individual, as nearly as possible in harmony with the interest of the whole; and secondly, that education and opinion, which have so vast a power over human character, should so use that power as to establish in the mind of every individual an indissoluble association between his own happiness and the good of the whole…so that not only he may be unable to conceive the possibility of happiness to himself, consistently with conduct opposed to the general good, but also that a direct impulse to promote the general good may be in every individual one of the habitual motives of action, and the sentiments connected therewith may fill a large and prominent place in every human being’s sentient existence (Mill 1863, 64).

Indeed, Mill saw these values as producing so much utility, that an action that would increase justice, fairness, or equality was likely to be held to be ethical on a utilitarian calculus, despite potentially creating disutility for some members of society. It is quite compatible with the principle of utility to recognize the fact, that some kinds of pleasure are more desirable and more valuable than others. It would be absurd that while, in estimating all other things, quality is considered as well as quantity, the estimation of pleasures should be supposed to depend on quantity alone (Mill 1863, 56).

This element of Mill’s calculus is often left out of the utilitarian calculus when it is taken up in its contemporary form as welfare economics. In addition to applying the utilitarian calculus to the inherently valuable ideals he articulates, Mill also makes clear that applying the utilitarian calculus requires objectivity across individuals. While it may be a natural human tendency to treat one’s own preferences and happiness as more valuable than that of others, Mill’s utilitarianism made clear that this theory is not just an ethics of self-interest. Instead, when engaging in the utilitarian calculus, one must put oneself into a truly objective position, resisting the temptation to value any individual’s happiness (even one’s own happiness) over that of any other person. [Impartiality] is involved in the very meaning of Utility, or the Greatest-Happiness Principle. That principles is a mere form of words without rational signification, unless one person’s happiness, supposed equal in degree (with the proper allowance made for kind), is counted for exactly as much as another’s (Mill 1863, 105).

In calculating how much total happiness an action will produce, all human happiness must have the same value. …the happiness which forms the utilitarian standard of what is right in conduct, is not the agent’s own happiness, but that of all concerned. As between his own happiness and that of

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others, utilitarianism requires him to be as strictly impartial as a disinterested and benevolent spectator (Mill 1863, 64).

As a result, utilitarianism may require an individual to choose an action that increases her own individual pain, because the totality of pleasure that the action creates exceeds that pain. The utilitarian morality does recognize in human beings the power of sacrificing their own greatest good for the good of others. It only refuses to admit that the sacrifice is itself a good. A sacrifice which does not increase or tend to increase the sum total of happiness, it considers wasted (Mill 1863, 107, 108).

Along these lines, even though taxation may create pain in those subjected to the tax, the utilitarian calculus can still find that the imposition of the tax is ethically justified, since the utility created through government programs funded by the tax may well exceed that pain.23 In determining what value should be assigned to pleasure and pain in the application of the utilitarian calculus, Mill emphasizes that there are higher and lower pleasures, and that the higher pleasures are more ethically valuable than the lower ones. It is these claims that help bolster the argument that Millian utilitarianism is not just naked self-interest. For Mill, ‘justice’ is a form of a higher pleasure. As an element of the utilitarian calculus, justice is a pleasure with value that must be calculated and compared with the pain created by any action intended to increase justice. Mill argued that claiming that ‘justice’ is an ethical goal is merely making a claim about the role justice plays in the utilitarian calculus. Part of Mill’s claim was that highly moral actors experience pleasure by helping others.24 As a result, Mill believed that a just society would tend towards equality, since the pleasure experienced by sharing with others would outweigh the pain of having less for those with means, and the pleasure of those receiving help would add to the calculus, to make the equal society more desirable, on utilitarian grounds. Laws and social arrangements should place the happiness or (as, speaking practically, it may be called) the interest of every individual as nearly as possible in harmony with the interest of the whole; and, secondly, education and opinion, which have so vast a power over human character, should so use that power as to establish in the mind of every individual an indissoluble association between his own happiness and the good of the whole, especially between his own happiness and the practice of such modes of conduct, negative and positive, as regard for the universal happiness prescribes; so that not only he may be unable to conceive the possibility of happiness to himself, consistently with conduct opposed to the general good, but also that a direct impulse to promote the general good may be in every individual one of the habitual motives of action, and the sentiments connected therewith may fill a large and prominent place in every human being’s sentient existence (Mill 1863, 108). 23 Mill discusses taxation towards the end of utilitarianism, primarily by criticizing nonconsequentialist analyzes of the justice of taxation. Mill claims that the only way out of the debate about the appropriate way to tax is with the application of utilitarian principles. Having pointed out that some theories of justice will demand equal taxation from all, and others will require graduated tax, Mill states ‘from these confusions there is no other mode of extrication than the utilitarian’ (Mill 1863, 102). 24 ‘In a properly constituted world, the individual’s happiness will be found in doing what is morally right’ (Mill 1863, Editor’s Introduction, 5).

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Mill’s ultimate conclusion is that there are meaningful ethical differences between the higher and lower pleasures. Because the higher pleasures, which are more valuable in the utilitarian calculus, tend towards equality and justice, they should be encouraged. Since utilitarianism focuses its ethical analysis on outcomes rather than motivations, the ethical action is the one that encourages more pleasure (more utility), whatever the reason for the production of that pleasure. In other words, if government mandates require citizens to act in ways that produce more utility, then the citizens’ actions are ethical, even if the citizens only acted in that way because the government compelled the action.25 So laws that compel the payment of taxes, even heavy taxes, which result in redistribution that increases justice and equality in a society will contribute to the ethical actions in that society.

6.2.3 Political Liberalism Many lawyers and legal theorists appeal to John Rawls’ theories of law and ethics to help think through what is justifiable in society. Rawls is a thinker in the tradition of political liberalism, which is certainly one of the most prevalent theories in contemporary political theory. At the heart of political liberalism is the primacy of the belief that morally just political systems guarantee equality of opportunity. This is not a requirement that such a society guarantee equality of outcome.26 Instead, equality of opportunity requires the assurance that all members of a society, regardless of the accidents of their birth, have equal access to success in that society. Because many societies have radical disparities among those accidents of birth, Rawlsian liberalism can require heavy redistribution.27 Like libertarianism, but unlike utilitarianism, Rawlsian liberalism starts from a premise that there are central human rights that may not be violated, even if the 25 This is meaningfully different from deontological thinkers like Immanuel Kant, who insist that actions are only moral if they stem from moral motivations. ‘Utilitarianism is often described as a consequentialist theory …. A non-consequentialist theory, such as Kantian ethics, will claim that certain actions are just wrong in themselves, and not wrong because of their consequences for happiness or anything else. But consequentialist theories make the rightness of actions depend on their consequences. Kantian ethics may claim that murder is wrong in itself, while utilitarianism will claim that it is wrong only because of its consequences (the decrease in overall happiness brought about by the absence of the person killed, by the grief, distress, anxiety caused to others, and so on)’ (Mill 1863, Editor’s Introduction, 14). 26 Theorists who insist that morally just societies guarantee equality of outcome, or the idea that all members of society should share in that society’s wealth equally, generally identify as communist. While this is an important theoretical view in the history of political philosophy, it remains only marginally important in contemporary political debates. Despite the recent trend of interest in the possibility of a guaranteed universal basic income, there is not a contemporary government anywhere in the western world that guarantees equality of outcome. For that reason, I do not dedicate a section of this chapter to that political theory. 27 Most, if not all, tax law articles that make reference to Rawls do so in support of the proposition that Rawls endorsed a redistributive liberal position. See, e.g., Alstott (2007), Rakowski (1996), O’Kelley (1981), Ryan (2010).

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violation of that right would create benefits for many others in society.28 This position is further extended in the theory known as ‘luck egalitarianism’. Luck egalitarianism is the view that equality of opportunity is not just an economic concept, so that those born in the worst economic conditions must have full access to possibilities. Rather, equality of opportunity must extend to all the accidents of birth, including beauty, intelligence, family background and connections, and so on.29 While overcoming these inequalities moves beyond a basic economic question, it is still possible that the best way to create a society that complies with Rawlsian ideals is through a robust tax and transfer system. Rawls does not share the libertarian view that property ownership is an inviolable right, so imposing taxes on those with more in order to provide additional opportunities to those with less is wholly compatible with the Rawlsian model.

6.3 Forms of Tax Having laid out three available moral theories from which to develop moral standards for taxation in Sect. 6.2, this Section applies those theories to some of the most commonly used forms of taxation. Again, to clarify, I do not mean to suggest in this Chapter that the three theories identified in the previous Section and applied in this Section are the only available moral theories lawmakers should consider, nor do I even mean to suggest they are the best such available theories. Instead, this project is meant to demonstrate how a lawmaker might apply what she determines to be the generally held moral beliefs of her constituency in the creation of a tax system. Putting the theories into practice in this way demonstrates the implications of using one moral theory rather than another, but also makes clear that some fundamental principles seem consistent across various moral theories. 28 ‘The basic shortcoming of utilitarianism—in whatever form—is that basic rights of individuals can be sacrificed for a collective societal goal such as maximizing social welfare. It allows an unacceptable trade-off among persons: utilitarianism formulates a principle which may require lesser life prospects for some, simply for the sake of a greater sum of advantages enjoyed by others. Utilitarianism does not recognize that everyone has equal moral worth (which, as we will see, for Rawls does not entail that distributive shares have to be equal), and therefore recognizes neither the way persons are equal to each other, nor the way they differ from each other (Lehning 2009, 17–18). 29 ‘Freedom of fair choice, fair equality of opportunity, and relative priority for the position of the least advantaged, are not only core elements of a (political) conception of justice, they are also characteristics of modern welfare states. Pointing to the importance of freedom of choice means that, in actual social economic policies in welfare states, more than has been the case in the past, a distinction is being made between the positions that people are in, and for which they themselves bear responsibility, and the positions that they are in for which they are not to blame, positions that are a consequence of the “Rawlsian” ‘contingencies of social life’, so to speak. Freedom of choice, in this line of reasoning, goes together with stressing personal responsibility, provided that conditions are fulfilled such that people can actually take responsibility for their choices’ (Lehning 2009, 220–21).

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6.3.1 Income Tax Perhaps the most familiar and widely used form of taxation is the income tax. Characterized usually by the calculation of the tax amount as a percentage of the amount of income earned by the taxpayer in the taxable period, the form that a particular income tax takes ranges from a poll tax,30 to a flat tax,31 to a progressive tax.32 Applying a moral analysis to an income tax, such as the United States Federal Income Tax, can be challenging, since the tax is used in a variety of ways by the government, many of which have little to nothing to do with moral goals. The primary goal of the U.S. Federal Income Tax is revenue raising.33 While that goal in and of itself is rife with moral questions, those questions are tied together with the question of how much revenue is needed, which raises the question of what it is appropriate for government to do. The three theories explored in Sect. 6.2 of this chapter will each offer different answers to that question. But thinking about this relationship helps to clarify the interrelatedness of taxing and spending analysis in determining whether a series of decisions meet the moral standards in place. However, beyond the revenue raising piece of the federal income tax, the U.S. government uses the income tax to create incentives for particular taxpayer behavior. For instance, the deduction available for home mortgage interest is meant to encourage the purchasing of owner-occupied homes.34 The deduction available for accelerated depreciation and immediate expensing of business assets is meant to encourage the purchase of those types of assets.35 There are many other examples of 30 In a head tax system, also known as a poll tax, all taxpayers (or all individuals, depending on the system) pay the same amount of tax. In order to be properly characterized as an income tax, this tax should only be collected from individuals earning income, but a head tax could collect a per individual amount, so that larger households pay more than households with fewer members. Margaret Thatcher notoriously imposed a poll tax in the United Kingdom in 1990, with somewhat disastrous consequences. 31 In a flat tax, all tax is assessed at a particular percentage, regardless of the income amount of the individual earning the income. In other words, higher income taxpayers pay more tax than lower income taxpayers, but the amount they pay is in the same proportion to their income as is the tax paid by lower income taxpayer. 32 Most western democracies impose a progressive income tax, meaning that the tax rate assessed on the income earned increases as the amount of income increases. Therefore, higher income taxpayers pay not only a larger total amount of income tax, they also pay proportionately more in tax than do their lower income counterparts. Progressive income tax systems vary in a number of ways. There can be multiple income tax brackets (the United States currently has seven brackets), or only a few (the Hong Kong income tax only has four brackets), and the tax rates can range widely (in Austria the lowest rate is 0% and the highest rate is 55%), or can be relatively close together (in Hong Kong the rates range from 2 to 17%). 33 In 2017 the individual income tax brought in $1.66 trillion in the United States. This represents about 48% of all government revenues for that year (Center on Budget and Policy Priorities 2018). 34 For more about the deduction for home mortgage interest, available through Internal Revenue Code section 163, see Hemel and Rozema (2017). 35 For more about the deductions available for depreciation and the immediate expensing of assets available through Internal Revenue Code sections 168 and 179, see Morrow (2016, 2017).

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Congress using the income tax to incentivize behavior.36 This is not to say that the use of the income tax as a means of incentivizing behavior makes the development of moral standards for the income tax impossible. On the contrary, developing moral standards for the creation of an income tax will allow that tax to be designed in a way that complies with the moral demands of that society. Once that system is designed, a government could then choose to amend the law as needed to create incentives it feels are necessary, but do not interfere with the underlying moral system. In other words, while the incentives analysis often contains an economic component, or thinks about consequences outside of the tax and transfer system, it is possible to make that analysis in the context of the moral standards developed for the tax law. Thinking specifically about the philosophical theories addressed in Sect. 6.2 of this Chapter, applying each theory likely leads to a different conclusion regarding the ethicality of imposing an income tax. Because libertarianism focuses in particular on the affirmative consent of the taxpayer to the imposition of the tax, an income tax is likely only to be considered morally appropriate when considered through a libertarian lens if taxpayers are given the opportunity to refuse participation in the tax system. There is, however, another complication when considering an income tax from a libertarian perspective. Because libertarians start from the premise that individuals have absolute ownership of themselves and of the products of their labor, a libertarian may argue that an income tax threatens the rights of individuals to their fundamental self-ownership rights. This argument appears occasionally in libertarian arguments against the income tax, but scholars have articulated robust responses, as well (see Buchanan 2014). Utilitarian theories have more tolerance for an income tax than libertarianism. Because the measurement of a just action on utilitarian grounds is based on an analysis of which action produces the most utility, an income tax can be held to be morally just, as long as the utility produced through the imposition of the tax exceeds the pain produced by the collection of the tax. It is this analysis that is at the heart of contemporary welfare economics analyses of the income tax (see Kaplow 2008). Finally, political liberalism is likely to endorse an income tax on ethical grounds. Because the tax and transfer system of which an income tax is a part creates a system that increases equality of opportunity, it is likely that an income tax will be held to be ethical under a political liberalism analysis. An income tax, especially one with a progressive rate structure, which collects more from those with the highest incomes, can have the dual effect of leveling down those with access to the most opportunity, and also, if the revenue collected funds benefits for lower income people, leveling up those who are disadvantaged.

36 For instance, the deduction for charitable contributions (Internal Revenue Code section 170) and the exemption for income earned on municipal bonds (Internal Revenue Code section 103) are two examples of Congress creating incentives for particular behaviors through the tax code.

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6.3.2 Property Tax In the contemporary United States property tax is primarily imposed on real estate values by localities, who, in turn, use the tax revenue to fund local initiatives, such as schools, roads, and sewers. Most local property taxes in the United States are flat taxes, imposing tax annually at a fixed, low percentage on the assessed value of the property. Exceptions to this general rule apply, for instance, in localities with a homestead exception, or in California, where a referendum passed in the 1970s limits the value of certain homes for property tax assessment purposes.37 Collected primarily by cities and counties, amounts received through property taxes tend to be used to for the benefit of the residents of those cities and counties. In the United States, these services often include K-12 schools, garbage collection, and libraries, among other things. The property tax model most prevalent in the United States complies well with the moral framework endorsed by the libertarian perspective. Property taxes are typically used to fund local services, and those services are primarily enjoyed by the taxpayers who have been subjected to the tax. This is the classic benefit principle theory of taxation, assessing tax on those who have benefited from the services the tax is used to pay for. Even in cases where the taxpayer does not take advantage of the specific service (think, for instance, of an elderly couple with grown children living in an area where property taxes are used to fund schools), it is often the case that the existence of those services affect (usually positively) the value of the homes in the district. There is usually a positive correlation between the imposition of taxes, the quality of the schools, and the value of the homes in the district.38 Further, one could imply consent to the imposition of property taxes by the choice to move to the district where the taxes are assessed.39 Analyzing property taxes through the lens of political liberalism leads to less obvious consequences. Because the amounts raised through property taxes are generally used in the neighborhoods in which the taxes are raised, property taxes tend not to 37 California Proposition 13, passed in 1978, limits the property tax assessment value of homes in that state to the purchase price of the home. This law disproportionately benefits those who have owned their homes for a long time, allowing the appreciation in the value of the home to go untaxed. For more about the possibilities within the property tax arena broadly, and with regard to Prop 13 specifically, see Shanske (2014). 38 I certainly do not mean to suggest anything here about the nature of the correlation, nor to suggest which way causation flows, or even if there exists a causal relationship. Indeed, some taxpayers argue against the imposition of new taxes, by claiming that imposing taxes or raising them ultimately decreases the value of their homes, by creating new obligations for potential buyers. 39 Using the geographical location argument to claim that all taxpayers who live in a particular country have consented to the taxes imposed by that country by continuing to live there is a more difficult argument to make than the argument about property taxes imposed by a locality. In particular, those who affirmatively decide to purchase a home in a locality, with full knowledge of the property taxes imposed in that district, seem truly to have consented to those taxes. One could make an origin argument about the original homeowners in a district first imposing property taxes, and require the affirmative consent of each of those individuals, but such a claim will be irrelevant for most homeowners today.

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redistribute income. Instead, taxes imposed on relatively high-income individuals are used to benefit those same high-income individuals and their neighbors, who also tend to be high-income. By contrast, lower-income property tax districts tend to have worse schools and fewer public services, because the amounts collected through the property tax system are lower. When the value of property is used as the tax base, then, unless rates in lower value districts are much higher, lower value districts will not be able to raise as much revenue through the property tax. This plays out in school districts throughout the United States, where lower-income and lower property value neighborhoods are left with lower-ranked schools, while richer neighborhoods have schools that consistently perform better on most metrics. In other words, the Rawlsian goal of ensuring equality of opportunity, and ensuring that decisions benefit the least well-off do not seem to be satisfied in the property tax model most common in the United States today. However, it need not necessarily be the case that property tax revenue is used in the way it happens to be used in U.S. localities. If a larger jurisdiction imposed the tax and used the revenue to fund services across a wider swath of people, the Rawlsian goal might well be satisfied through the use of a property tax. This is an example of a tax that fails the moral standards implied by the Rawlsian liberal, but which could be improved through some reforms, if the moral standards applied in that society required it. This comparison of the analysis of property taxes under the libertarian and liberal models makes clear that the determination of the appropriate tax system hinges entirely on which philosophical perspective is used to determine if the system is morally acceptable. This illustrates that the fundamental questions lawmakers must ask are not economic questions, but moral questions. The entirety of the analysis is influenced by the fundamental question of which moral perspective the lawmaker adopts.

6.3.3 Wealth Transfer Tax Unlike other forms of tax discussed in this chapter, where there seems to be a more easily defensible benefit principle underlying the rationale of the imposition of tax, wealth transfer taxes are less clearly tied to the benefits accruing to the taxpayer.40 By wealth transfer taxes I mean the taxes imposed on the transfer of wealth from one individual to another, which typically involves a transfer from one generation to another. The U.S. federal tax system includes an estate tax, a gift tax, and a generation skipping transfer tax, which are all forms of wealth transfer taxes. Other national and subnational tax systems impose an inheritance tax rather than an estate tax. An inheritance is a form of wealth transfer tax where the tax is imposed at the level of the recipient heir, rather than at the level of the estate. Some jurisdictions 40 Of course, it need not necessarily be so. Any form of taxation could be used to implement the benefit principle theory of tax law. However, as a practical matter, it seems most straightforward to assess the value of benefits received over a period of time that is shorter than a lifetime.

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impose direct wealth taxes, which share significant similarities with property taxes, discussed above.41 Indeed, a residential real property tax is a form of wealth tax, even though that is not how it is typically described. Both wealth transfer taxes and wealth taxes can achieve political philosophical policy goals, although the particular goals achieved differ between the two systems. Wealth transfer taxes are usually justified on the basis of an argument that unearned inherited wealth is appropriate to tax, either because its character as ‘unearned’ wealth makes it less protected from taxation, or because principles of equality of opportunity make it undesirable for some members of society to be given additional opportunities on the basis of family relationships alone. Direct wealth transfer taxes are often defended on egalitarian grounds, arguing that the true ethically required standard should be equality of outcome. Therefore, wealth should be taxed in order to increase equality of outcome.42 Much of the analysis in Sect. 6.3.2 addressing property taxes applies to an analysis of wealth taxes.43 Standards of morality for wealth transfer taxes require determining whether or not the society imposing the tax embraces equality of opportunity principles. Of course, even a society that does value equality of opportunity will have to balance that value with other values that will limit the imposition of a wealth transfer tax in a variety of ways. The libertarian ethical priority for the fundamental right to private property might be seen as violated by wealth transfer taxes. I have argued elsewhere that the particular form of wealth transfer tax known as the estate tax is well designed to address the libertarian concern about private property rights.44 By contrast, while political liberalism and Rawlsian equality of opportunity seem clearly to be consistent with some form of wealth transfer taxation, I have argued elsewhere that the particular form this taxation should take would be influenced by the principles of the theory. Specifically, an inheritance model of taxation, which focuses the tax on the heir and encourages wider distribution of wealth among a larger number of heirs would likely be more desirable for a Rawlsian liberal (Bird-Pollan 2014).

6.3.4 Sales Tax Sales taxes are widely employed by subnational governments in the United States, but exist at the national level in the form of Value Added Taxes (“VATs”) in many 41 See,

supra, Sect. 6.3.2. an example of this theory, see the discussion of a global wealth tax by Piketty (2014). 43 While subnational governments in the U.S. could impose wealth taxes, and non-U.S. governments can impose (and occasionally have imposed) wealth taxes, direct wealth taxes are prohibited by the U.S. Constitution, and so cannot be imposed by the U.S. federal government. 44 Because an estate tax is not imposed until after the death of the holder of the property rights, even if one adopts the strongest libertarian form of property rights, an estate tax would not violate those rights, since property rights cannot extend beyond the death of the creator and holder of the right (Bird-Pollan 2013). 42 For

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other countries.45 Sales taxes are generally calculated as a percentage of the sales price, and are generally imposed on the end buyer of a product or service (Shaviro 2017). Because sales taxes are generally imposed at one flat rate, as compared to the progressive rates often associated with income taxes, sales taxes are generally considered to be more regressive than many other forms of taxation. This view is further exacerbated since lower-income taxpayers must consume more of their available income each year than do their higher-income counterparts. As a result, a larger percentage of lower-income taxpayers’ income and assets are subject to sales taxes than are higher-income taxpayers’ income and assets. Like the property tax analysis, there are persuasive arguments that the payment of a sales tax is consented to by the payor when she decides to buy the item subject to the tax, and therefore that this tax is legitimate under a libertarian analysis. However, in many jurisdictions, sales tax is imposed even on items generally agreed to be necessities. In such situations, it is much more difficult to imply consent, since the buyer had little choice but to purchase the item. A Rawlsian liberal, concerned primarily to ensure equality of opportunity, is likely to find most sales taxes unpalatable. Since lower-income taxpayers are those who are generally not afforded equal opportunities, a tax system that imposes tax at higher proportional rates on those taxpayers is likely to be seen as a violation of the ethical requirements of political liberalism. Some of the most objectionable parts of the sales tax might be addressed (and, indeed, are addressed in most European countries with a VAT) by offsetting the disparities created by the imposition of the sales tax with either a positive cash transfer from the taxing government to the low-income members of the society, or by the provision of services paid for by the collection of the tax, and accruing primarily to lower-income citizens. Again, the design of the tax and transfer system as a whole must be contemplated within the philosophical perspective in order to determine whether the ethical standards have been satisfied.

6.4 Conclusions The determination of what moral standards should be used to analyze a tax system are wholly dependent on the philosophical moral views of those responsible for drafting the tax law. Further, the ethical validity of the tax law must be considered not in isolation, but as part of the whole tax and transfer system contemplated. One hopes that, in a democracy, drafters of tax legislation will not substitute their own moral beliefs for those of the constituents that they represent. The tax law should be a manifestation of the distributive justice views of the society that is governed by those laws. As I have attempted to demonstrate in this chapter, that will mean

45 For an explanation of the VAT system, and the recent proposal in the U.S. to create a similar system, as well as an explanation of why that proposal failed, and why a VAT is never likely to succeed in the United States, see Shaviro (2017).

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different things for different societies based on both the philosophical view and the particular tax in question. Given the trend in tax policy discourse to give primacy to economic analysis, it is important to help lawmakers understand the role ethical standards must play in creating a just tax law. Economics should play a subservient role to ethical analysis. Until a goal is identified (e.g., protecting private property rights, maximizing utility, ensuring equality of opportunity), economics has no role to play. Economics must be used to determine how best to achieve a particular end, but the determination of the end itself is a fundamental philosophical question that must be answered by the society in question. This chapter has attempted to help think through what that might look like in the 21st Century. Acknowledgements The author would like to thank Stefan Bird-Pollan, David Gamage, Robert van Brederode, and participants in the SEALS Tax Policy Discussion Group and Ethics and Taxation Workshop for helpful comments on earlier drafts of this piece. Thanks also to the University of Kentucky College of Law for supporting this research with a summer research grant.

References Alstott, Anne L. 2007. Equal Opportunity and Inheritance Taxation. Harvard Law Review 121: 469. Bakija, Jon, and Joel Slemrod. 2008. Taxing Ourselves. Cambridge: MIT Press. Bentham, Jeremy. 2008. An Introduction to the Principles of Morals and Legislation (1789). New York: Barnes & Noble. Bird-Pollan, Jennifer. 2013. Death, Taxes, and Property (Rights): Nozick, Libertarianism, and the Estate Tax. Maine Law Review 66: 1. Bird-Pollan, Jennifer. 2014. Unseating Privilege: Rawls, Equality of Opportunity and Wealth Transfer Taxation. Wayne Law Review 59: 713. Buchanan, Neil. 2014. Freedom, Taxes, and Forced Labor: A Strange Brew of Libertarianism and Marxism, Verdict 28 April 2014. Available at https://verdict.justia.com/2014/04/28/freedomtaxes-forced-labor. Center on Budget and Policy Priorities. 2018. Policy Basics: Where Do Federal Tax Revenues Come From? (December 6, 2018). Available at https://www.cbpp.org/research/federal-tax/policybasics-where-do-federal-tax-revenues-come-from. Fried, Barbara H. 1999. The Puzzling Case for Proportionate Taxation. Chapman Law Review 2: 157. Friedman, Milton. 1962. Capitalism and Freedom. Chicago: University of Chicago Press. Hemel, Daniel J., and Kyle Rozema. 2017. Inequality and the Mortgage Interest Deduction. Tax Law Review 70: 667. Kaplow, Louis. 2008. The Theory of Taxation and Public Economics. Princeton, NJ: Princeton University Press. Kleinbard, Edward D. 2014. We Are Better Than This: How Government Should Spend Our Money. Oxford: Oxford University Press. Lehning, Percy B. 2009. John Rawls: An Introduction. Cambridge University Press. Mill, John Stuart. 1863. Utilitarianism. Oxford University Press 1998. Morrow, Rebecca. 2016. Accelerating Depreciation in Recession. Florida Tax Review 19: 465. Morrow, Rebecca. 2017. Government as Investor: The Case of Immediate Expensing. Kentucky Law Journal 106: 1.

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Murphy, Liam, and Thomas Nagel. 2002. The Myth of Ownership. Oxford: Oxford University Press. Nozick, Robert. 1974. Anarchy, State, and Utopia. New York: Basic Books. Nozick, Robert. 1993. The Examined Life: Philosophical Meditations. Oxford: Oxford University Press. O’Kelley, Charles R.T. 1981. Rawls, Justice, and the Income Tax. Georgia Law Review 16: 1. Otsuka, Michael. 2003. Libertarianism Without Inequality. Oxford: Oxford University Press. Piketty, Thomas. 2014. Capital in the 21st Century (Le Capital au XXI Siècle). Goldhammer, Arthur (Trsl.). Cambridge, MA: The Belknap Press of Harvard University Press. Rakowski, Eric. 1996. Taxing Wealth Liberally. Tax Law Review 51: 419. Ryan Kerry. 2010. Human Capital and Transfer Taxation. Oklahoma Law Review 62: 223. Shanske, Darien. 2014. Revitalizing Local Political Economy Through Modernizing the Property Tax. Tax Law Review 68: 143. Shaviro, Daniel. 2017. The Rise and Fall of the Destination-Based Cash Flow Tax: What Was All That About? (Presentation Slides) (June 1, 2017). NYU Law and Economics Research Paper Nos. 17–20 and 17–23. Available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2979971. Vallentyne, Peter, and Hillel Steiner. 2001. The Origins of Left-libertarianism: An Anthology of Historical Writings. London: MacMillan.

Jennifer Bird-Pollan joined the University of Kentucky College of Law faculty in 2010 and is now the Robert G. Lawson Professor of Law. She teaches Federal Income Tax, Estate & Gift Tax, International Tax, Partnership Tax, Corporate Tax, and a Seminar in Tax Policy. Professor Bird-Pollan’s research lies at the intersection of tax law and philosophy, specifically with regard to the taxation of wealth transfers and issues of sovereignty in international taxation. Professor Bird-Pollan received her JD from Harvard Law School, her Ph.D. in Philosophy from Vanderbilt University, and her BA in Philosophy and French from Penn State University. Before law school she taught undergraduate philosophy courses at Vanderbilt and at Harvard College. Prior to coming to UK, Professor Bird-Pollan practiced law as an attorney in the tax department of the law firm of Ropes & Gray in Boston, focusing primarily on partnership tax and non-profit tax law. Professor Bird-Pollan won the UK College of Law Duncan Teaching Award in 2017, and served as the 2014–2015 Fulbright Visiting Professor at the Vienna University of Business and Economics in Vienna, Austria. She has been a visiting professor at Indiana University Maurer School of Law and the University of Cologne. In 2018, Professor Bird-Pollan was elected Chair of the University Senate Council at the University of Kentucky.

Chapter 7

Global Tax Justice: Who’s Involved? Cees Peters

Abstract This chapter deals with the question why international institutions of global tax governance will fail to produce legitimate decisions when non-state actors, including NGO’s, are not somehow involved in the decision-making processes of these institutions. It researches this question with the help of an analysis of the prescriptive legitimacy of international institutions in two competing models of global tax governance: the intergovernmental model of democratic states and the model of cosmopolitan pluralism. These models differ with regard to the relationship between the international institutions and the states (i.e. instrumental or no pre-eminence for one of both) and with regard to the role of non-state actors in the decision-making processes (whether or not there is such involvement). The normative right to rule of the institutions in both models is tested against their potential to establish truly democratic national taxing systems in the states that implement these decisions. The analysis in this chapter leads to the conclusion that the current institutional framework of the BEPS project of the OECD, but also the position defended by Dietsch and Rixen, and Dagan, cannot be regarded as a sufficiently legitimate form of global tax governance. The chapter subsequently makes clear why the only way to create a more democratic form of global tax governance is therefore to appreciate the ability of non-state actors to put external pressure on states. In this regard it sets out a roadmap for further research about this topic.

7.1 Introduction For a long time, only a small group of people was preoccupied with the particular problems of international taxation. It was treated as a truly technical matter that was of little interest to the general public. The newspapers were not interested in typical issues such as transfer pricing and tax rulings. In this setting, national parliaments would approve the double tax treaties that were concluded by the tax treaty negotiators C. Peters (B) Tilburg School of Economics and Management (TiSEM), Tilburg University, Tilburg, The Netherlands e-mail: [email protected] © Springer Nature Singapore Pte Ltd. 2020 R. F. van Brederode (ed.), Ethics and Taxation, https://doi.org/10.1007/978-981-15-0089-3_7

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without substantial objection. Experts of international taxation were, in other words, situated in a safe ‘bubble’ far away from the big majority of laypersons. These days are gone forever. Saint-Amans aptly says in an interview “we have moved from tax being just a tax geek thing to tax being a political item on the G-20 and many governments’ agendas” (Johnston 2017, 406). The non-experts have come to understand that the problems of international taxation represent fundamental concerns about our contemporary society. A seemingly technical issue such as transfer pricing is eventually about the distribution of the tax burden amongst taxpayers. Aggressive tax planning structures represent no neutral choices of a taxpayer, but a deliberate attempt to minimize the contribution to the common good. At a more fundamental level, it has become clear that the taxation of a multinational company gets to the root of our democracies, since it is eventually a matter of power. The proposed abolition of the dividend withholding tax in the Netherlands evolved into a debate about the readiness of the Dutch society to adhere to, in the words of Foucault, “a state under the supervision of the market rather than a market supervised by the state” (Foucault 2010, 116). The days that the experts of international taxation could work peacefully in their safe bubbles have therefore disappeared for good. International taxation has become a highly political topic that is in the democratic spotlight of society. It may come as no surprise that the development of academic thinking about ‘global tax justice’ and ‘fairness’ flourishes in this climate.1 Such theorizing is, however, a rather hazardous activity. Post-modern claims about the subjectivity (and therefore arbitrariness) and the mere lack of meaning of the concepts are constantly lurking (Lamberts 2017). The starting point of this contribution is that such perspectives on ‘global tax justice’ should be firmly refuted. They make it impossible to think about the issue in a rational way, since concepts such as ‘global tax justice’ and ‘fairness’ are regarded to constitute merely individualistic and subjective utterances of those who are speaking about it. It is therefore indispensable to think about ‘global tax justice’ within the framework of a tradition that refuses to give in to the view that there is an intrinsic relationship between ‘rationality’ and a ‘just society’. Habermas is one of the fiercest contemporary defenders of such a belief in reason and it is therefore actually no surprise that his work served as an inspiration to develop a communicative paradigm of global tax governance in my previous work (Peters 2014). This line of thinking is based on the presumption that there will need to be procedures in place that are considered to be fair by all relevant participants which need to agree upon the meaning of ‘global tax justice’.2 This implies that there is indeed no fixed idea about the definition of this disputed concept, but that it is simply up to us mortals to define the meaning in a never-ending dialogue.3 As such, this is a 1 Compare,

e.g., Pogge and Mehta (2016), Dietsch and Rixen (2016) and Dagan (2018). procedural view of Christians (rooted in social contract theory) is closely related to this perspective. See Christians (2009) and Broekhuijsen (2017), Chap. 4. 3 The Habermasian point of departure underlying this view is that rationality is not to be found in the thinking process of a single individual, but in a dialogue between individuals (i.e., inter-subjective rationality). See Peters (2014), Sect. 6.2 for further references. 2 The

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position that squares with the procedural tradition on the legitimacy of international institutions (Meyer and Sanklecha 2009). The focus of this chapter is basically on the question which ‘mortals’ should be involved in the decision-making processes of the international institutions of global tax governance, including the OECD and the European Union. There should after all be no doubt that such institutions are indispensable to establish ‘global tax justice’. The thesis statement at the outset of this contribution is that such international institutions will fail to produce legitimate decisions when non-state actors, including non-governmental organizations (NGO’s), are not duly involved in their decisionmaking processes. In order to validate this thesis statement, the contribution reflects on the prescriptive legitimacy of international institutions in two competing models of global governance in the influential work of Zürn (2016, 2018, 219–247). In the first model, the “intergovernmental model of democratic states”, it is up to states— as representatives of a fixed demos—to participate in international institutions. On this account, non-state actors are not involved in the decision-making processes of global tax governance ‘beyond the state’. In the alternative model, labelled by Zürn as “cosmopolitan pluralism”, these non-state actors are an intrinsic part of global tax governance ‘beyond the state’. This implies that non-state actors are effectively able to influence the decision-making processes of the relevant international institutions which increasingly exercise authority over states. It is a view that attempts to realize a conception of more democratic global tax governance in the procedural tradition that was mentioned before. The research question of this contribution is therefore whether—and, if so, for what reasons—international institutions will fail to produce legitimate decisions when non-state actors, including NGO’s, are not duly involved in their decisionmaking processes. This chapter researches this question on the basis of a comparative analysis of the prescriptive legitimacy of the international institutions in the two described models of global (tax) governance. The normative yardstick to analyse this legitimacy is the potential of the international institutions to establish truly democratic national taxing systems in the states that are implementing their decisions. This very need to maintain truly democratic national tax systems therefore constitutes the normative foundation to compare the right to rule of international institutions in both models of global tax governance. The comparative analysis of both models against the background of this normative vantage point should contribute to the vivid academic debate about the normative foundations of global tax governance. The contribution expressly engages in a dialogue with scholars such as Dietsch, Rixen and Dagan who have produced influential work on global tax governance. This chapter is structured as follows. Section 7.2 lays the methodological foundations for the research. It explains the choice to study the prescriptive legitimacy of the international institutions of global tax governance and it introduces the two relevant models of Zürn, which will be used to research the necessity to include the views of non-state actors. This section also explains the reason for testing the right to rule of the international institutions in both models against the normative basis found in their ability to guarantee democratic national taxing systems in the states that are implementing their decisions. Section 7.3, subsequently, explains for what

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reasons the explicit consent of states, which serves as a yardstick for the prescriptive legitimacy of the international institutions in the intergovernmental model of democratic states, fails to meet this normative basis. Subsequent to this analysis, Sect. 7.4 makes clear why the involvement of non-state actors in the model of cosmopolitan pluralism has more promising prospectives for the legitimacy of global tax governance in this regard. This section also sets out a roadmap for further research about this topic. Section 7.5 finishes this chapter with a conclusion.

7.2 Global Tax Justice: A Very Brief Introduction 7.2.1 Internationalist and Cosmopolitan Perspectives The distinction between internationalist (or statist) and cosmopolitan views on the moral phenomenon of global justice constitutes a logical starting point in an analysis of global tax justice (Cf, e.g., Valentini 2011). Cosmopolitan perspectives on the subject-matter have in common the “idea that every person has global stature as the ultimate unit of moral concern and is therefore entitled to equal respect and consideration no matter what her citizenship status or other affiliations happen to be” (Brock 2013, 3). This starting point leads (moral) cosmopolitans to the conclusion that obligations of (distributive) justice—as defined in many different ways—have a global scope and, therefore, global inequalities ought to be eliminated (Ronzoni 2014, 45). It goes without saying that there are many different normative foundations for such cosmopolitan points of view. On the other hand, internationalist (or statist) perspectives on global justice regard justice to be of a more restricted nature in scope, content and subjects (Ronzoni 2016, 207). Consequently, as explained by Valentini, internationalists “deny that egalitarian justice has a place beyond the domestic arena, and opt for an account of international morality consisting of principles of mutual assistance and respect between internally well-ordered political communities” (Valentini 2011, 2–3). In other words, such perspectives emphasize the crucial role of political communities, as represented by states, in matters of global justice. These characteristics pose some difficulties when they are applied to depict scholarly views on ‘global tax justice’. A good example is the qualification of the vision of Dietsch and Rixen.4 The normative starting point of their position is that states should have “fiscal self-determination” in order to make sure that they can establish distributive justice for their citizens within their borders. They claim that states have lost a substantial level of de facto control over their taxing systems which implies, in the words of Rixen, that “policy changes (…) are not legitimately chosen by the governments involved but forced upon them by the pressures of tax competition (…)” (Rixen 2016, 329). Consequently, Dietsch and Rixen develop two principles of “global background justice” (i.e., “the membership principle” and the “fiscal policy 4 Cf.

Dietsch (2011), Dietsch and Rixen (2014), Dietsch (2015), Rixen (2016) and Rixen (2018).

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constraint”) which should ensure that the “fiscal self-determination” of each individual state is restored. The establishment of these principles does however require a substantial level of international cooperation including the establishment of an “International Tax Organization” (Dietsch 2015, 104; Rixen 2016), which should consist of an assembly of states, a secretariat and an independent dispute-settlement body (Rixen 2016, 337–338). The assembly of states should serve as a forum for states to create new global tax rules and, whereas the independent dispute-settlement body should force states to refrain from practices of harmful tax competition (Rixen 2016, 326). Despite of such a substantial level of international cooperation between states, it is not straightforward to qualify the view of Rixen and Dietsch as either an internationalist or a cosmopolitan perspective on global tax justice. Rixen underscores such difficulties when he writes how his position requires “ein deutlich höheres Maß an internationaler Kooperation und Institutionalisierung, als es von den meisten nichtkosmopolitischen Gerechtigkeitstheorien antizipiert wird” (Rixen 2018, 114).5 At the same time, both Ronzoni and Van Apeldoorn hold the view that the scholars should move further towards the cosmopolitan part of the spectrum to realize their normative goal of the effective “fiscal self-determination” of states (Ronzoni 2014; Van Apeldoorn 2018). These kinds of criticisms consequently make clear that it is probably not reasonable to maintain a very strict dividing line between internationalist and cosmopolitan positions about ‘global tax justice’ and that it would be better to think about intermediate positions in between both extreme points of view. This implies that, in the words of Valentini, “principles of justice should govern global or near-global practices, without thereby also implying that domestic egalitarian justice should extend to the world at large” (Valentini 2011, 3).

7.2.2 Methodology In the light of these reasons, it is appropriate to approach the subject of global tax justice also from a somewhat different angle. The approach in this contribution therefore concurs with those scholars, including Dietsch and Rixen (2014), that are concerned with global political justice and the related concept of legitimacy.6 In this view, it is not sufficient to think about global distributive justice and the desirable scope and content of redistribution between states only.7 It is equally important to reflect on the political institutions in which decisions about global distributive 5 “A clearly higher standard of international cooperation than anticipated by most non-cosmopolitan

theories of justice.” He does maintain though that his position should be classified as an internationalist conception of global (tax) justice that differs from radical cosmopolitan and purely statist positions. See pp. 113–114. 6 Fraser (2008), Ronzoni (2009), MacDonald and Ronzoni (2012), Ronzoni (2012), Valentini (2012) and Forst (2014, 3–5). 7 Such a focus constitutes an important strand in the current thinking about ‘global tax justice’. Compare, e.g., García Antón (2016) and Stewart (2018).

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justice are being made (Macdonald and Ronzoni 2012). Consequently, as explained by Held and Maffettone (2017, 58), global political justice may be conceptualized as “a set of normative conceptions meant to specify the institutional architecture of global politics.” We should, in other words, also be concerned with the normative underpinnings of the institutions of global tax governance. Such a concern with the institutions of global tax governance makes it possible to reflect upon various models of global (tax) governance. As explained at the outset, this contribution builds on the writings of Zürn who distinguishes four models of global governance “with cosmopolitan intent” (Zürn 2016, 2018, 219–247). These models are the intergovernmental model of democratic states, cosmopolitan pluralism, cosmopolitan democracy and the minimal world state. All of these models therefore provide for a model of global governance beyond the state, but they differ with regard to the role that is allocated to the international institutions in relation to the authority of the state (Zürn 2016, 91). In the intergovernmental model of democratic states, the international institutions serve as the mere instruments of states, whereas there is no such a strict pre-eminence for states in the model of cosmopolitan pluralism (Zürn 2016, 98). This latter model envisions a more multi-level model of global governance where states are sharing authority with international institutions such as the OECD, the European Union and the United Nations. This chapter analyses the normative foundations of the institutions of global tax governance in both models on the basis of their prescriptive legitimacy. Such a comparative analysis should make it possible to give an answer to the research question concerning the need to include non-state actors in the decision-making processes of international institutions. Such an emphasis on international institutions in the emerging system of global tax governance does however in no way mitigate the normative significance of states in this complex. This chapter starts from the position that there are strong normative grounds to justify the existence of states which establish a sense of domestic tax justice within their territory (Cf. Dietsch 2018). As a matter of fact, the position on the prescriptive legitimacy of the international institutions of global tax governance starts from the presumption—based on sociological and philosophical grounds found in the writings of Habermas—that taxpayers need to recognize themselves in their national taxing system and in the legal norms that are at the basis of this taxing system.8 The very need to maintain truly democratic national tax systems, therefore, constitutes the normative yardstick to analyze the prescriptive legitimacy of the institutions of global tax governance in both the intergovernmental model of democratic states and the model of cosmopolitan pluralism.

8 These

foundations are (a) the strain between social integration and system integration in our capitalist societies and (b) the need to guarantee the internal relationship between the rule of law and democracy. These ideas are explained at length in Peters (2014), Chap. 6.

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7.3 The Limits of State Consent 7.3.1 State Consent and the Intergovernmental Model of Democratic States For a long time, the mere consent of states was supposed to be the only relevant normative condition to guarantee the legitimacy of international tax law (Peters 2014, Sect. 6.6.3). This state consent model of legitimacy, as Buchanan coined it, means that “rules are legitimate international laws if and only if they are produced through the institution of state consent, that is, if they are created in accordance with the procedures that states have consented to for the making of international laws, which include the requirement that states must consent to laws”.9 In this view, states would accept voluntarily that the merely procedural rules of international tax law limit their jurisdiction to tax. The formation of these allocation rules (i.e., the OECD Model Tax Convention) was dominated by states and as such there was no room for a diversity of non-state actors to affect this process. It is usually taken for granted that the recent BEPS project of the OECD is also a form of global tax governance based on the explicit consent of the participating states. Duly authorized representatives of states have agreed upon relevant minimum standards (such as country-by-country reporting) aimed at assisting these states in taking back policy autonomy and diminishing the hole of non-authority that had come into existence. Subsequently, it is up to the national parliaments to give democratic consent to the implementation of these minimum standards through, for example, national legislation, bilateral tax treaties or the new multilateral instrument. This BEPS approach towards global tax governance adequately squares with the intergovernmental model of democratic states as it is described by Zürn. In this model, international institutions are supposed to solve the problems that states are not able to solve individually. This means that they are supposed to be instrumental to the needs of states. As explained by Zürn, “(a)utonomous governance beyond the state is limited by the consent principle” (Zürn 2016, 91–92). Consequently, any decision of an international institution would need to be made by the states on the basis of (fair) negotiations. States may also give consent to the transfer of power to an international institution, but—in the ideal model—states are supposed to be completely in charge of the competences of that institution (Zürn, 2016, 92). Even though the proposals of Dietsch and Rixen are far more ambitious than the current scope of the BEPS project, they start from the same premises. They also take for granted the explicit consent of states in their vision of an International Tax Organization which would restore the “fiscal self-determination” of states. Rixen explains in this regard how his view is based on the (normative) theory of rational institutionalism (2016, 332–334). Such a theory predicts that self-interested (opportunistic) states with bounded rationality are willing to cooperate with each other when several strict conditions are being met. As explained before, overcoming the problem of tax 9 Buchanan

(2010, 90). See also Meyer and Sanklecha (2009).

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competition would require the formation of an intergovernmental organization (i.e., the International Tax Organization) that engages all states on an equal basis in order to make sure that free riding activity is excluded (Rixen 2016, 334). There are however several legitimacy issues with this model of global tax governance. The instrumental use of international institutions will not be able to restore the democratic legitimacy of the tax policy choices that are made in the national domains of states. A first set of concerns finds its origin in the nature of regulatory (tax) competition as such, whereas the second list of arguments results from the nature of the international cooperation between states in this model. Sections 7.3.2 and 7.3.3 deal with these issues respectively.

7.3.2 Regulatory (Tax) Competition The BEPS approach to global tax governance as well as the proposals of Dietsch and Rixen are triggered by the erosion of the “fiscal self-determination” of states by regulatory (tax) competition. Starting point is the view that states should repair what Strange (1996, 14) characterized as the “yawning hole of non-authority” in global tax governance in order to restore the balance between ‘sitting ducks’ (i.e., labour) and the more mobile taxpayers (i.e., capital). Building on the powerful analytical distinction of Hirschman, one could claim that this latter group has the possibility of an ‘exit’ as they can follow the imperatives of the tax law market (Peters 2014, Sect. 2.3.5) and escape the hassle of participating in national democratic decisionmaking processes (i.e., ‘voice’) to obtain the desired taxation of capital (Hirschman 1970). Dietsch writes in this regard how “(t)he mobility of capital in an environment of deregulated markets has allowed capital to extricate itself from the implicit social contract with labour that characterized the postwar period” (2015, 20). The purpose of his work is therefore to “promote reforms that would bring all stakeholders of capitalism back under the control of democratic decision making” and to make sure that “the bargaining positions of labour and capital at the negotiating table become once again symmetrical” (2015, 21). These reforms should therefore be capable of “catching capital” in order to eliminate the undesirable effects of exit from a decision-making process of global tax governance. States are however not only struggling with the undesirable effects of ‘exit’ within a decision-making process of global tax governance. Regulatory (tax) competition also aggravates the pressure on ‘voice’ as a proper democratic functioning device of making decisions on national tax policy. Habermas (2006, 77) writes in this regard how ‘globalization’ has the effect that states are “forfeiting their capacity for autonomous action, and with it their democratic substance”. These are inherently related problems that cannot be approached independently (Benvenisti 2013, 303–304). Both the BEPS approach of the OECD and the proposals of Dietsch and Rixen, therefore, somewhat underestimate that the changes in contemporary societies do not only result in a loss of control for states, but also, in the words of Habermas (2006, 78), in “deficits in democratic legitimation”. This is also the point of view of

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Brock (2016, 168–169) and Van Apeldoorn (2016, 225–227) who both stress that Dietsch and Rixen, in their various contributions, somewhat underestimate the need to consider the democratic quality of the national decision-making process where decisions about international taxation are being made.10 Concerns about democratic legitimation are particularly relevant in case international tax policy choices of states are responsive to the forces of regulatory (tax) competition. There is for example reason to be worried about democratic decisionmaking processes that are being captured by special interest groups. Christians (2017) convincingly writes about the lobby activities of some multinational companies that spend considerable amounts of money to influence the design of national taxing systems. This is probably even more troublesome in case it concerns the leverage of those without voting rights. Schön (2003, 5) writes in this regard how “(t)he ‘democratic’ problem posed by tax competition becomes all too clear when rich individuals or foreign investors who do not belong to the constituency of a country gain massive influence over the fiscal politics of a state”.11 These kinds of defects of democratic will-formations are closely related to the contemporary rhetorical acrobatics in national tax policy debates concerning the need to increase the ‘competitiveness of the taxing system’.12 Such discourses muddy the waters between the interests of (multinational) private enterprises and the interests of states and they transform regulatory (tax) competition into a national goal of international tax policy at the expense of other goals of the tax system (Latulippe 2016). It is questionable whether these kind of threats to the democratic legitimacy of the national tax policy choices can be solved through mechanisms of international cooperation that require the explicit consent of states only. There is certainly an influential—but rather heterogenous—line of thinking that takes the view that multilateral cooperation between states makes it possible to correct some democratic failures within the states (Keohane et al. 2009). However, the implementation of such a view in the context of international taxation faces some serious obstacles. The state aid discussion in the EU makes clear that an autonomous watchdog (i.e., the European Commission) should constantly guard its independence against the efforts of the states to make it operate for the sake of their interests (Peters 2019). Consequently, also the enforcement of the “fiscal policy constraint”, as suggested by Dietsch and Rixen, is not necessarily safeguarded from the resistance of states.

10 They both stress that Dietsch and Rixen assume that there is a proper functioning democratic decision- making process in place. See Dietsch (2015, 182). 11 See also Benvenisti (2013, 303––304). 12 It is actually a complex matter to define precisely what such competitiveness actually stands for in the context of international tax policy. See Avi-Yonah and Sartori (2012).

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7.3.3 International Cooperation Between States These considerations bring to the foreground a second set of arguments to substantiate the view that a model of global tax governance, which is based on the explicit consent of (democratic) states, does not satisfy the required legitimacy standard. Brexit and the changing views about multilateralism in the United States are clear indications that international cooperation between states cannot easily be squared with the (democratic) consent of each individual participating state. National politicians have a strong desire to be completely in control of the outcomes of international cooperation without being forced or heavily affected by external forces (Krisch 2010, 18). The reality of such cooperation is however a completely different one. Not only international tax competition, as Dietsch and Rixen maintain, but also international cooperation may actually pose a threat to the democratic “fiscal self-determination” of (some) states. It is actually a very thorny matter to count on the mechanisms of ‘delegation’ and ‘control’ to preserve democratic control over what is happening in the governance mechanisms ‘beyond the state’ (Krisch 2010, 18). States lose control over the governance processes beyond the state once they have given consent to the establishment of an international institution (Krisch 2010, 17–21). Such a consent usually concerns a rather thin delegation of power to an institution with somewhat vague and not precisely defined objectives laid down in a treaty (Krisch 2010, 18). The example of the European Union is probably the most telling one. When the Member States set up this institution, they could not have imagined that they were actually signing for a treaty that would gradually remove their control over matters of direct taxation. The increasingly extensive interpretation by the Court of Justice of the EU of the provisions concerning the fundamental freedoms and state aid control demonstrates that this initial delegation of power is forcing the Member States to make a never-ending array of changes to their taxing systems. A related concern is the issue of ‘control’ such as the strain on national democratic processes to choose not to comply with the norms that were established by the international institutions of global tax governance (Krisch 2010, 20). One could think in this regard of the efficacy of the peer-review systems on which the OECD BEPS framework and the proposals of Dietsch and Rixen rely. These kinds of systems are definitely crucial for the maintenance of both models of global tax governance, but they do make clear that it is incorrect to claim that any democratically legitimized tax policy decision of a state can always resist the pressure of international institutions. Another concern is the dominant role of experts in the international institutions that are set up by states. In the context of global tax governance, the role of the OECD obviously comes to mind (e.g., Hearson 2018). The OECD may not (yet) be a supranational organization like the EU, but it is undoubtedly a powerful ‘authority’ that generates norms of international taxation with a very strong ‘compliance pull’ (Christians 2010; Eccleston 2011). This institution has been very successful in producing soft law instruments that constitute the minimum level of consensus about

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issues such as the resolution of juridical double taxation and transfer pricing (Christians 2007). The expertise of the policymakers of the OECD serves as the driving force of the authority of the organization. Another reason for concern is that the deliberations of the experts may be rather insulated from domestic political processes. To what extent are the soft law instruments sufficiently subjected to domestic democratic control? And if this is not the case: what should we think about the legitimacy of this organization? Can it always be taken for granted that the decisions made within the realms of the OECD are instrumental to the needs of all the individual states? ‘Old’—merely procedural— problems of juridical double taxation could be resolved in a rather a-political way on the basis of a “broad epistemic consensus” about the ‘best’ way to resolve problems of double taxation (Genschel and Rixen 2015, 163). Such consensus is missing for contemporary—more substantive—problems and therefore the OECD needs much more political savviness to sustain its authority (Büttner and Thiemann 2017). The considerations about the OECD provide for a fluent transition to a final major concern for the view that the explicit consent of states constitutes a sufficient normative condition for the legitimacy of global tax governance. The most salient criticism of the current system of global tax governance is the exclusion of a considerable group of (developing) countries from the decision-making process (See, e.g., Magalhães 2017, 2018). The claim is, in other words, that there is a ‘club’ of powerful, western, capital-exporting countries that illegitimately exercises authority over the generation of norms of international taxation (Broekhuijsen 2017, 59–60).13 Such a dominance has undoubtedly made it impossible for the non-participating states to be in control of the outcomes of the international cooperation about international taxation. These states are effectively forced to comply with the standards that are developed by the participating states (Krisch 2010, 18–19). There have certainly been several attempts by the OECD to improve the engagement of developing countries. The inclusive framework for the implementation of BEPS and the process to establish the multilateral instrument make clear that the OECD is not oblivious to the changes in the international society of states. This is definitely a welcome, but also still an insufficient step forward (Burgers and Mosquera Valderrama 2017; Christians and Van Apeldoorn 2018). The norms of the international tax system are still effectuated by the consent of a limited group of countries only. It is effectively not possible for the ‘other’ countries to ward off the impact of the OECD norms on their national taxing systems (Fung 2017). Christians (2016, 1604) therefore rightly concludes that “the norm diffusion mechanisms of BEPS seem to entrench the OECD’s monopoly over tax policy making: the bad old days of exclusivity and insularity may not yet be excised after all.”

13 Compare

Van Brederode, Chap. 14 of this volume, who entertains the position that the OECD acts like a cartel.

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7.3.4 Conclusion The conclusion of this section is that a model of global tax governance, based on the explicit consent of democratic states only, is not able to restore the democratic legitimacy of the tax policy choices made in the national domains of all states. One concern is that international institutions, which are merely instrumental to the needs of states, are unlikely to resolve the frictions that regulatory (tax) competition causes to the democratic decision-making processes of states. With reference to Dietsch, one could claim that such a vision may be successful in ‘catching capital’ as such, but that such a capture does not necessarily have the effect that the tax policy decisions of states will qualify as truly democratic. In this regard one should think of the lobby activities of powerful taxpayers and a continuous ‘obsession’ in public debates with the competitiveness of the tax system. One may take the view that such concerns should simply be accepted as long as an international institution, like the OECD or the EU, grosso modo functions for the benefit of the community of states. Such a view would somewhat gloss the described concerns about the role of experts in these international institutions of global tax governance and the issues related to the delegation and control to international institutions. This point of view actually implies that the normative right of international institutions to ‘overrule’ democratically designed taxing systems of states is not only based on the explicit consent of states, but also on some functional imperative. Scholars from the functional (or instrumental) tradition on the legitimacy of international institutions accept that state consent should give way when this is required by the ‘general interest’ of all participating states (Meyer and Sanklecha 2009). Such scholars consider, amongst others, the “comparative benefit” of the international institution to “provide benefits that cannot otherwise be obtained” (Buchanan and Keohane 2006, 422). Rixen also takes a similar stance on the legitimacy of global tax governance. He is well-aware of the potential criticism concerning the democratic legitimacy of the proposed International Tax Organization (Rixen 2016, 343; 2018, 119–120). In his view, this argument definitely has a certain merit, but he attaches more value to the potential of an international organization to enable states to effectuate tax policy choices that are not driven by the global forces of tax competition (Rixen 2016, 343). This view therefore represents a cautious shift from ‘input legitimacy’ towards ‘output legitimacy’ (Scharpf 1999). This line of reasoning illustrates a further disadvantage of the intergovernmental model of democratic states that should not be accepted. International cooperation between states on the basis of the explicit consent of states only is inevitably linked to the maintenance of the status quo of the current rules of the game of international taxation. This concerns the current practice of a system that is dominated by a limited number of powerful states which take decisions about ‘global tax justice’ on behalf of the entire world. How will the states that are in power give consent to a new model of global tax governance with substantially less power for themselves? Models of global tax governance that are based on state consent only, are—even when there is also some functional imperative—too much stuck in the world as it

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currently is. Such views, including the BEPS project of the OECD, represent an excessively internationalist (or statist) perspective on global tax justice and as such they do not represent a desirable—more cosmopolitan—roadmap for a change of the system of global tax governance (Valentini 2011, 72). For this very reason, the eventual solution of Dagan should be refuted too. Dagan also asserts that the legitimacy of international institutions of global tax governance cannot be based on the mere consent of states only (Dagan 2018, 203–212). In her view, there is a need for an additional, independent normative justification for such cooperation between states (188). Her normative yardstick is that such cooperation can only be just, “if and only if it improves (or at least does not worsen) the welfare of the least-well-off of the constituents in all the cooperating states” (204). She subsequently argues that this condition of justice is not met, since there is no “collective coauthorship” at the basis of the (current) multilateral tax cooperation (205). She is, in other words, and for good reasons, skeptic about the sense of reality of current initiatives for more inclusive and representative multilateral tax cooperation (205). In her view, the existing power asymmetries between states and the dominance of insufficiently accountable contemporary international institutions “make the (clearly desirable) advancing of distributive justice on the domestic level without curtailing justice on the inter-nation level unlikely” (226). This leads her eventually to conclude that multilateral cooperation is not a desirable venue and that properly controlled tax competition is eventually more desirable. How this solution should break the current status quo of global tax governance remains unclear though. The proposals to perfect the international tax law market eventually seem to be a capitulation for the criticized instrumental imperatives of the intergovernmental model of states (212).

7.4 Democratic Ordering Beyond the State 7.4.1 Introduction The somewhat gloomy closure of the analysis about the legitimacy of the institutions of global tax governance can be avoided when it is accepted that states are not the only relevant actors that play a role in this environment. It is the purpose of this section to explain why the involvement of non-state actors in the model of cosmopolitan pluralism has promising prospectives for the legitimacy of global tax governance. This analysis should result in a proposal for an alternative standard of prescriptive legitimacy that takes into consideration the increasing relevance of non-state actors. Such an alternative standard will need to have a strong critical appeal, but it should not qualify as a merely utopian dream that is completely at odds with the world as it is (Zürn 2016, 89). For this very reason, this chapter does not consider the possibility of a more federal model with supranational political institutions that derive their authority from truly global democratic decision-making processes (Peters 2014,

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235–239). The focus is on a less ambitious alternative that can be properly squared with the actual developments concerning global tax governance in our society. After all, as explained by MacDonald (2017, 42), “we must work with what we’ve got, institutionally speaking, and regard the project of global democratization as a longterm work-in-progress.” The way forward is therefore to explore the possibilities of a model of global tax governance that resembles Zürn’s model of cosmopolitan pluralism (2016, 92–94). This model is constituted on the shared view of a broad school of thinkers that a multi-level model of global governance is emerging where states are increasingly sharing authority with international institutions. These international institutions are not regarded to be mere instruments of states (like in the intergovernmental model of democratic states), but they are increasingly “on par” with the authority of states. In this view, “(…) international institutions increasingly exercise authority that undermines the intergovernmental consensus principle” (Zürn 2016, 99). This model of cosmopolitan pluralism does not envision a fixed and idealized view on the institutions of global governance under the umbrella of some “institutional anchor” (Zürn 2016, 92–93). Scholars with such pluralist ideas are concerned with the development of political and legal mechanisms that make it possible to coordinate conflicting claims of authority between states, between states and international institutions and between competing international institutions. It is obviously not the purpose of this chapter to expound elaborately on the complete theoretical foundations of such a pluralist model for global tax governance. The emphasis is on one element of the political premises of such a model. As such it is an effort to further my earlier work of developing such a pluralist model of global tax governance (including the proposal for deliberative international tax law) (Peters 2014, Chap. 8). The additional element to the model, proposed here, is that non-state actors have the possibility to influence the decisions of these international institutions.14 Zürn (2016, 100) writes in this regard how scholars within this tradition “point to a growing willingness among societal groups to develop independent expectations and strategies towards international institutions, and also to the growing importance of international affairs in public debate.” It is this very involvement that paves the way for the much-needed spaces for political action ‘beyond the state’. Such a political space, to which both Dagan (2018, 228–229) and Magalhães (2018, Sect. 4.2) allude in their work, should serve as the thin end of the wedge to more democratic global tax governance in accordance with the procedural tradition on the legitimacy of international institutions. This view should therefore illustrate that propositions concerning the expansion of the “democratic tent”, as Dietsch (2015, 21) expressively describes ideas about global democracy, are not necessarily, contrary to his assessment, “utopian and hence unhelpful”.

14 Rixen

(2016, 337) points at such a role for societal interest-groups when he is laying down his vision on the institutional design of the International Tax Organization.

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My presumption is that the dominant group of states in the system of global tax governance is unlikely to create fundamental changes to the system without the external pressure of non-state actors.15 Only the involvement of non-state actors will be able to set change of the existing system in motion. Such nascent forms of “social integration”, to use the social- theoretic toolkit of Habermas, are indispensable to break the continuous domination of instrumentally acting states (and multinational companies) in the dominant mode of “system integration” that characterises contemporary global tax governance (Peters 2014, Sect. 6.3.2). Eventually, only involvement of non-state actors will be able to generate spaces for political action ‘beyond the state’ which have the power to evolve into more democratic forms of global tax governance. At this point, it is appropriate to quote Habermas (2001, 88) who wrote that “(w)e will only be able to meet the challenges of globalization in a reasonable manner if the postnational constellation can successfully develop new forms for the democratic self-steering of society.” Consequently, in this view, the ability to maintain truly democratic national taxing systems should necessarily go hand in hand with the construction of democratic political areas beyond the state (similarly, Joerges 2018, 157).

7.4.2 The Politicization of Global Tax Governance The thesis that the involvement of non-state actors will eventually result in a more democratic global tax governance requires both an empirical and a normative substantiation. The empirical basis of this thesis will obviously require more research in the future. It starts from the view, though, that a variety of non-governmental organizations (such as Tax Justice Network, Oxfam and Christian Aid) has successfully put transparency and corporate income taxation on the political agenda (Christians 2012; Elbra 2018). Such involvement is notably changing the attitude of the international and supra-national institutions of global tax governance. There is little doubt that nonstate actors have successfully enforced some changes to the traditional expert-driven international tax governance of the OECD (Büttner and Thiemann 2017). Moreover, the bold international tax policy choices of the EU can be related to the access of nongovernmental organizations to the decision-making processes of institutions such as the European Parliament and the European Commission (Christensen 2019). The various initiatives of the EU concerning country-by-country reporting are an excellent example of such influence (Seabrooke and Wigan 2016). Political scientists would characterize this kind of involvement of non-state actors as the ‘politicization’ of the international and supra-national institutions of global tax governance (Rixen and Zangl 2013).

15 Rixen (2016, 334) is more optimistic that states themselves will jump over their own shadows. In

his view, this requires a proper institutional design of the proposed International Tax Organization. Such cooperation should be multilateral and inclusive.

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Zürn (2018, 139) defines politicization as “the demand for, or the act of, transporting an issue or an institution into the field or sphere of politics—making previously unpolitical matters political”. It is being applied to characterize the phenomenon that actions (or inactions!) of international organizations are increasingly subject to “societal contestation” by civil society, since their exercise of authority over states and society is more and more in need of legitimation (Zürn 2018, 98). In this way, politicization may be regarded as an appropriate term to characterize the transformation of global tax governance that is currently taking place.

7.4.3 The Promises of the ‘All-Affected Principle’ The subsequent question is whether—and under what conditions—this increasing involvement of non-state actors would contribute to a more democratic form of global tax governance. An influential line of normative thinking in political theory, which could be labelled as “democratic polycentrism” recognizes the democratic potential of such involvement (Archibugi et al. 2012; Tallberg and Uhlin 2012). This includes the view that the involvement of non-state actors contributes to the advent of a ‘transnational’ public sphere which—in line with the influential thinking of Habermas—is a basic condition for a deliberative understanding of democracy beyond the state (Nanz and Steffek 2004). Consequently, civil society serves as a “transmission belt” in the sense that it ‘transfers’ the preferences and opinions from the ‘transnational’ public sphere to the international institutions that take ‘global’ decisions (Steffek and Nanz 2008). One related view, which is called ‘stakeholder democracy’, evaluates positively the growing direct representation of non-state actors in the decision-making processes of international organizations (MacDonald 2008, 2012). In this view, “individuals should be entitled to participate in any political decision-making that impacts in problematic ways upon their autonomous capacities” (2008, 40). When the number of affected people is too numerous, as will most often be the case with regional or global international institutions, the model of stakeholder democracy recognizes the need for more indirect forms of stakeholder involvement which explains the central role of NGO’s as relevant stakeholders (2008, 145). These different ideas about the role of non-state actors in global tax governance share a common normative starting point, namely the so-called ‘all-affected principle’ which is regarded to constitute a solution for the so-called ‘boundary problem’ of democratic theory (Song 2012, 39–40). It is this very principle that makes it intuitively plain to understand why the explicit consent of (some) states does in no way ensure that all states will be able to maintain truly democratic national tax systems. Benvenisti (2013, 304) writes in this regard about the democratic problem that “stems from the lack of fit between the group that has the right to vote and the group that is affected by the decisions made by, or on behalf of, the first group.” Held (1995, 16) succinctly illustrates this issue when he writes that the premise of “a ‘symmetrical’ and ‘congruent’ relationship between political decision-makers and

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recipients of political decisions” is being challenged by the complex network of connections between states and societies. Habermas (2006, 78) writes in a similar vein how “(d)eficits in democratic legitimation arise whenever the set of those involved in making democratic decisions fails to coincide with the set of those affected by them.” One should only think of the example of regulatory competition to illustrate that the assumption that the democratic choices of one particular demos have an impact only on the lives of these specific people simply not holds in our modern societies. The development of an alternative standard of prescriptive legitimacy for global tax governance which fits in the ‘procedural’ tradition should therefore start from the normative vantage point of the ‘all-affected principle’. Obviously, the very elucidation and specification of this principle constitute a challenge for future research that should take into consideration the conceptual discussion in the literature of political theory about the mere scope of the ‘all affected principle’ and the need to think of somewhat related alternatives (Näsström 2011; Song 2012). The crucial point is that this principle should serve as a supplement to the existing democratic decisionmaking processes within states. As such, it has the capacity to ‘regulate’ the political part of the interaction between states and the institutions of global tax governance ‘beyond the state’ like in the model of cosmopolitan pluralism. In this way, it could serve as an indicator to determine who should have access to the “democratic tent” of a particular international institution of global tax governance. Moreover, it would be a helpful yardstick to correct decisions made in national democratic decisionmaking procedures that do not sufficiently consider the interests of those outsiders that are affected by those decisions. As such, it would also fit in the current state aid analyses of the European Commission. It is however outside the scope of this chapter to pursue these matters further. The involvement of non-state actors, in any of these theories, obviously poses some serious challenges to an idealized picture of ‘procedural legitimacy’. In a perfect world, parameters like equal access to deliberation, transparency and access to information, responsiveness to stakeholder concerns and the inclusion of voices would be relevant (Steffek and Nanz 2008, 10–12). The fact that such conditions are clearly not met, could obviously be a reason to write off this position as a viable road for global tax governance. Erman (2014), for example, stresses that it is difficult to translate a conception of moral equality—i.e., one of the variations of the ‘allaffected principle’—into political equality, since there are no guarantees for an equal participation in decision-making processes. Another point of disquiet is that the nonstate actors also will need to adhere to the rules of a fair political game (Peters 2014, Sect. 6.6.2.2). This concerns for example the rather Macchiavellian tactics to influence the views of ordinary citizens about the taxation of multinational companies (Essers 2014). Their persistent reliance on arguments of morality in combination with a mere disregard of the technicalities of international tax law as it is written in the books is another case in point (Christians 2014). For these reasons it is undesirable to characterize the development described in Sect. 7.4.2 as an outright positive one (Eccleston and Elbra 2018, 303). Such an evaluation fails to articulate the described problems with the increasing involvement

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of non-state actors. Nevertheless, and despite of these concerns, the overall evaluation of this gradual evolution of global tax governance is a positive one. The main reason for this is that the advancement of democratic institutions is always work in progress. A process of Habermasian social integration is undoubtedly transforming global tax governance in response to the persistent traditional forces of system integration (Peters 2014, Sect. 6.6.2.1). Moreover, in line with Rosanvallon’s ideas about ‘counter-democracy’, the increasing involvement of civil society may be characterized as an evolution of various powers of oversight in society (i.e., vigilance, denunciation and evaluation) which ‘oversee’ the exercise of authority by the powerful players of global tax governance (Peters 2017). Consequently, as explained by Edwards (2009, 99), “civil society organizations supplement formal democracy by contributing their voice to global debates rather than their vote.” The current developments in global tax governance therefore represent an imperfect, but notable transformation towards the application of the ‘all-affected principle’ and it sets in motion a series of changes that lead to a more democratic ordering beyond the state.16 As such, a model of global tax governance along the lines of cosmopolitan pluralism provides a promising venue for further research. It is a useful perspective to reflect upon the enlargement of the “democratic tent” without moving towards a ‘true’ global democracy.

7.5 Conclusion The analysis in this chapter confirms the validity of the thesis statement at the outset of this contribution. International institutions of global tax governance will fail to produce legitimate decisions when non-state actors, including NGO’s, are not somehow involved in the decision-making processes of these institutions. This conclusion is based on an analysis of the prescriptive legitimacy of international institutions in two competing models of global tax governance: the intergovernmental model of democratic states and the model of cosmopolitan pluralism. These models differ with regard to the relationship between the international institutions and the states (i.e., instrumental or no pre-eminence for one of both) and with regard to the role of non-state actors in the decision-making processes (whether or not there is such involvement). The normative right to rule of the institutions in both models was tested against their potential to establish truly democratic national taxing systems in the states that implement these decisions. In case the decision-making processes of such international institutions rely on the explicit consent of states only, they will fail to maintain the democratic legitimacy of the tax policy choices that are made in all states that are affected by these decisions. 16 Compare

my conclusion in Peters (2014, 387): “The voices in civil society and the articles in the international media are an increasingly important factor to come somewhat closer to the ideal of a never-ending deliberation to resolve the continuing tension between the facts and the norms of international tax law.”

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Consequently, those models of global tax governance that consider the relevant international institutions as mere instruments of states, will generate decisions that stay below the desirable threshold of prescriptive legitimacy. The reason for this is that they are unlikely to resolve the frictions that regulatory (tax) competition causes to the democratic decision-making processes of states. In this regard, one should think of the lobby activities of powerful taxpayers and a continuous ‘obsession’ in public debates with the competitiveness of the tax system. More importantly, those models lack the critical ‘bite’ to provide for an alternative to the current practice of a system that is dominated by a limited number of powerful states which take decisions about ‘global tax justice’ on behalf of the entire world. These considerations lead to the conclusion that the current institutional framework of the BEPS project of the OECD, but also the position defended by Dietsch, Rixen and Dagan, cannot be regarded as a sufficiently legitimate form of global tax governance. The only way to create a more democratic form of global tax governance is, therefore, to appreciate the ability of non-state actors to put external pressure on states. Only such non-state actors will be able to break the hegemony of the dominant group of states in the current system. Their involvement with the decisions of international institutions will pave the way for the much- needed spaces for political action ‘beyond the state’. The current process of the politicization of global tax governance should therefore be applauded. This process contributes to the further development of democratic forms of global tax governance. Such an evolution is badly needed, since it is not possible to maintain truly democratic national taxing systems without the construction of democratic political areas beyond the state. More research will be needed to square this politicization of international tax governance with adequate standards of prescriptive legitimacy in the procedural so-called tradition. The socalled ‘all-affected principle’ seems to be a suitable candidate in this regard.

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Magalhães, Tarcísio. 2017. International Taxation Without International Representation? Legality and Legitimacy in Global Tax Governance. In Building Trust in Taxation, ed. Bruno Peeters, Hans Gribnau, and Jo Badisco, 267–284. Cambridge: Intersentia. Magalhães, Tarcísio. 2018. What Is Really Wrong with Global Tax Governance and How to Properly Fix It. World Tax Journal 10 (4): 499–536. Meyer, Lukas H., and Pranay Sanklecha. 2009. Introduction: Legitimacy, Justice and Public International Law. Three Perspectives on the Debate. In Legitimacy, Justice and Public International Law, Lucas H. Meyer (ed.), 1–28. Cambridge: Cambridge University Press. Nanz, Patrizia, and Jens Steffek. 2004. Global Governance, Participation and the Public Sphere. Government and Opposition 39 (2): 314–335. Näsström, Sofia. 2011. The Challenge of the All-Affected Principle. Political Studies 59 (1): 116–134. Peters, Cees. 2014. On the Legitimacy of International Tax Law. Amsterdam: IBFD. Peters, Cees. 2017. Improving Democratic International Tax Governance: On the Power of Citizens, Transparency and Independent Watchdogs. In Building Trust in Taxation, ed. Bruno Peeters, Hans Gribnau, and Jo Badisco, 205–234. Cambridge: Intersentia. Peters, Cees. 2019. Tax Policy Convergence and EU Fiscal State Aid Control: In Search of Rationality. EC Tax Review 28 (1): 6–17. Pogge, Thomas, and Krishen Mehta. 2016. Global Tax Fairness. Oxford: Oxford University Press. Rixen, Thomas. 2016. Institutional Reform of Global Tax Governance: A Proposal. In Global Tax Governance: What Is Wrong With It and How to Fix It, Peter Dietsch and Thomas Rixen (eds.), 325–349. Colchester: ECPR Press, Colchester. Rixen, Thomas. 2018. Globalisierung und fiskalische Demokratie. Politische Vierteljahresschrift 59 (1): 103–124. Rixen, Thomas, and Berhard Zangl. 2013. The Politicization of International Economic Institutions in US Public Debates. The Review of International Organizations 8 (3): 363–387. Ronzoni, Miriam. 2009. The Global Order: A Case of Background Injustice? A Practice-dependent Account. Philosophy & Public Affairs 37 (3): 29–256. Ronzoni, Miriam. 2012. Two Conceptions of State Sovereignty and Their Implications for Global Institutional Design. Critical Review of International Social and Political Philosophy 15 (5): 573–591. Ronzoni, Miriam. 2014. Global Tax Governance: The Bullets Internationalists Must Bite—And Those They Must Not. Moral Philosophy and Politics 1 (1): 37–59. Ronzoni, Miriam. 2016. Tax Competition: A Problem of Global or Domestic Justice? In Global Tax Governance: What Is Wrong With It and How to Fix It, Peter Dietsch and Thomas. Rixen (eds.), 201–214. Colchester: ECPR Press. Scharpf, Fritz W. 1999. Governing in Europe: Effective and Democratic. Oxford: Oxford University Press. Schön, Wolfgang. 2003. Tax Competition in Europe—General Report. In Tax Competition in Europe, ed. Wolfgang Schön, 1–42. Amsterdam: IBFD. Seabrooke, Leonard, and Duncan Wigan. 2016. Powering Ideas through Expertise: Professionals in Global Tax Battles. Journal of European Public Policy 23 (3): 357–374. Stewart, Miranda. 2018. Redistribution between Rich and Poor Countries. Bulletin for International Taxation 72 (4/5): 297–309. Strange, Susan. 1996. The Retreat of the State: The Diffusion of Power in the World Economy. Cambridge: Cambridge University Press. Song, Sarah. 2012. The Boundary Problem in Democratic Theory: Why the Demos Should Be Bounded by the State. International Theory 4 (1): 39–68. Steffek, Jens, and Patrizia Nanz. 2008. Emergent Patterns of Civil Society Participation in Global and European Governance. In Civil Society Participation in European and Global Governance: A Cure for the Democratic Deficit?, ed. Jens Steffek, Claudia Kissling, and Patrizia Nanz, 1–29. Basingstoke: Palgrave Macmillan.

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Cees Peters serves as an assistant professor at the Fiscal Institute Tilburg of Tilburg University. His research focuses on topics that are at the intersection of the political economy of international taxation and international tax law. This implies that he is dealing with global tax governance in the broadest sense, including issues such as the international tax policy of states, multinational companies and international institutions. In this context, Cees Peters is also dealing with the current and desirable ways of taxing capital. This implies that he has a broad knowledge of international and EU tax law, including topics such as transfer pricing, EU state aid law and the various initiatives of the OECD and the EU. Cees Peters wrote numerous national and international publications. His work received the ‘Jaap van den Berge Literatuurprijs’ in 2019 for its contribution to the development of tax law in the Netherlands. His work includes a book called ‘On the legitimacy of international tax law’. This book assesses the legitimacy of current international tax law and makes recommendations to improve its legitimacy. It includes an analysis of the Base Erosion and Profit Shifting project and a proposal for more democratic international tax governance. The book was shortlisted for the IBFD Frans Vanistendael Award for International Tax Law in 2015. Before Cees Peters joined Tilburg University he worked at the international and EU tax practice of PwC for 9 years.

Part II

Ethical Standards and Obligations for Tax Advisors and Taxpayers

Chapter 8

Taxpayers’ Subjective Concepts of Taxes, Tax Evasion, and Tax Avoidance Christoph Kogler and Erich Kirchler

Abstract The motivation to comply or not to comply is considerably influenced by beliefs, attitudes, and social representations of taxpayers. These subjective conceptualizations and evaluations are often not objective or true, but they determine how citizens construct their subjective reality. Attitudes, judgments, and behavior intentions eventually shape people’s behavior which is often more affected by what they think than by what actually is. We first explain what social representations are, how they are related to individual attitudes, and to what extent both social representations and attitudes shape behavior according to the existing psychological literature. In the following section we present three of our own studies on taxpayers’ social representations of taxes and their attitudes towards tax evasion and tax avoidance. These empirical studies identify relevant differences in attitudes between different occupation groups: Self-employed entrepreneurs express less favorable views on taxes and the tax authorities and as a result feel more restricted and hindered in their work, while employed workers focus stronger on the exchange function between tax payments and the resulting provision of public goods. Despite the differences, in all occupation groups tax evasion is not perceived as a severe crime and tax evaders are even judged quite positively and as more intelligent than the typical tax payer. The most recent study suggests that tax evasion might not be evaluated as positive anymore as in earlier studies, but instead tax avoidance seems to be morally accepted and taxpayers engaging in tax avoidance are judged more positive than the typical taxpayer.

C. Kogler (B) Department of Social Psychology, School of Social and Behavioral Sciences, Tilburg University, Tilburg, The Netherlands e-mail: [email protected] E. Kirchler Faculty of Psychology, Department of Applied Psychology: Work, Education, and Economy, University of Vienna, Vienna, Austria © Springer Nature Singapore Pte Ltd. 2020 R. F. van Brederode (ed.), Ethics and Taxation, https://doi.org/10.1007/978-981-15-0089-3_8

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8.1 Introduction Already at the beginning of the past century, Veit (1927) reflected on citizens’ attitudes towards taxes and tax morale. He defined tax morale as an “absolute, inherent ingredient of the complex of obligations demanded of citizens” (323). In the middle of the century, Günther Schmölders emphasized the significance of citizens’ attitudes towards the state and its authorities for understanding tax behavior. In his opinion, any investigation on tax compliance has to start with the question of how the state is represented in the minds of citizens (Schmölders 1960). People make (subjective) sense of paying taxes, the tax system, government spending, and the provision of public goods. The motivation to comply or not to comply is considerably influenced by beliefs, attitudes and social representations of taxpayers (Kirchler 2007). None of these subjective conceptualizations and evaluations need to be true or objectively grounded, but they determine how citizens construct their subjective reality. The subjective reality is the “world” in which an individual moves and acts. Thus, subjective conceptualizations eventually shape people’s behavior (Cullis and Lewis 1997). People’s attitudes, judgments, and their behavior intentions are said to be more affected by what they think than what actually is (Lewis 1978). Importantly, there is a multitude of studies within the field of tax behavior that identify determinants of actual behavior (i.e., predictors of tax compliance and evasion; see for instance Allingham and Sandmo 1972; Alm et al. 1995; Andreoni et al. 1998; Kirchler 2007), but few studies focus specifically on citizens’ representations of taxes and taxation. Accordingly, the aim of this book chapter is to present and discuss research on attitudes and social representations towards taxes, tax evasion, and tax avoidance. We will first explain what social representations are, how they are related to individual attitudes, and to what extent both social representations and attitudes shape behavior according to the existing psychological literature. In the second part of this chapter, we present in detail three of our own studies on taxpayers’ social representations of taxes and their attitudes towards tax evasion and tax avoidance.

8.2 Social Representations Unfamiliar and complex phenomena that are of high social relevance as, for instance, unexpected changes in the political arena, in economics (e.g., the introduction of the Euro) or in society in general (i.e., migration), stimulate interpersonal discussion and public discourse. Public discourse serves mutual information about the unfamiliar developments and sense-making. Since the majority of citizens are most likely not experts with regard to these topics, they usually exchange their lay views in order to understand and evaluate these issues (Kirchler 2007). This serves the purpose of gaining information about the unfamiliar in order to understand and make sense of it (Wagner et al. 1999). While experts are claimed to discuss phenomena of interest on an abstract level, follow the rules of

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logic, and aim at systematically evaluating arguments, the discourse of laypeople is more concrete and symbolic (Duveen and Lloyd 1990). Accordingly, knowledge is confounded with personal opinions, beliefs and attitudes, and subjective views of reality shaped by ideological convictions and new content is categorized and integrated in existing concepts (Stark et al. 2017). These concepts emerging from social discourse are referred to as social representations (Moscovici 1961, 2001). In short, a social representation can be considered as collective knowledge and feelings toward a social object or topic including shared attitudes on a societal or group level, which is influenced by individual attitudes. However, social representations and attitudes are not equivalent concepts. Social representation theory describes and explains the processes that transform an unfamiliar phenomenon into a familiar, socially shared concept (Moscovici 1973, 1976). It provides a conceptual framework to explore, describe, and explain complex phenomena within their historical, cultural, and macro-social context (Farr 1996; Wagner 1994; Wagner et al. 1999) and offers potential explanations for several psychological constructs such as attributions, attitudes, stereotypes, and social identity (Flick 1995). Generally speaking, social representations can be described as systems of values, notions, ideas, knowledge, and practices shared by a group in respect to a social object and they fulfil two functions: First, to enable individuals to understand relevant phenomena and to provide orientation within the social environment. Second, to facilitate communication between the members of a group by providing a code for social exchange that allows unambiguous denotation and classification of diverse aspects of the environment (Moscovici 1973, 1976). Social representations manifest in language and behavior (Stark et al. 2017) as well as in legends, paintings, photos, books, and other media (Voelklein and Howarth 2005). The formation of social representations involves two cognitive processes: anchoring and objectification. Anchoring is an ordering process to categorize and classify information (Stark et al. 2017). Novel information concerning a social object is linked to and integrated in already existing knowledge structures and representations. This process affects both new and existing knowledge (Wagner et al. 1999). Objectification transforms an abstract phenomenon into a concrete and specific form (Stark et al. 2017) and allows to visualize a social object for instance by terms, metaphors, symbols or images (Wagner et al. 1999). Even though social representations consist of complex psychological content such as attitudes, beliefs, feelings, values, ideals, traditions or attributions, they are clearly structured. Their structure is organized by two distinguishable elements, namely the nucleus and the periphery (Abric 1984). The nucleus is the heart of the representation. It comprises the terms, names, metaphors and emotions that are immediately and frequently associated with a social object (Abric 1993), thereby defining its meaning, relevance, and particularity. These terms and emotions are normative and form a stable unit resistant to situational changes. Furthermore, they organize all other elements and thereby determine the meaning of the elements in the periphery (Wagner et al. 1996). While core elements illustrate the shared knowledge of a group, peripheral elements reflect the individual content of a social representation. Based on individual experience, these elements protect the nucleus and function as links to

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other concepts (Kirchler 2007). In different social contexts, their meaning and the relationship to other peripheral elements as well as to the nucleus is dynamic. This flexibility serves to specify and corroborate the core in a given context and to adjust to temporal developments (Wagner et al. 1996). Social representations can be investigated with a multitude of methods (Stark et al. 2017; Wagner et al. 1999). One popular approach to analyze social representations are free association tasks, since the associations elicited when people are presented with a social object as, for instance, taxation or tax evasion, yield information about the beliefs, thoughts, and feelings of individuals concerning this respective social object (De Rosa and Annamaria 1995; Nelson et al. 2000; Vergès 1992). Additionally, participants are not led into a predetermined direction since there are no structured questions used (Gangl et al. 2012). In free association tasks, participants are presented with one or more stimuli and then requested to spontaneously generate associations to these stimuli. Subsequently, these associations are evaluated as positive, neutral, or negative. The following analysis of the associations provides insight into the content and the structure of the social representation, and allows for identifying core and peripheral elements (Vergès 1992). This offers a possibility to assess common (i.e., shared) as well as individual attitudes—positive or negative—towards a given social object (De Rosa and Annamaria 1995).

8.3 Attitudes Eagly and Chaiken (1993) define “attitude” as a psychological evaluation of a particular object or situation with some degree of favor or disfavor that potentially influences behavior. Attitudes constitute an individual’s disposition to respond favorably or unfavorably to an object, a person, an institution, an event, or to any discernible aspect of the individual environment (Ajzen 1993; Fishbein and Ajzen 1975). In contrast to social representations which address a socially built and shared concept, attitudes address individual opinions. Existing definitions of attitudes relate to cognitive, affective, and conative characteristics. While cognitive responses are expressions of beliefs about characteristics or attributes of an event or situation (e.g., the belief that taxes are important for the provision of public goods or in contrast a theft by the state), affective responses are feelings toward the respective object (e.g., feelings related to taxes as expression of citizens’ cooperation with the state or feelings toward the spending of tax money by the government). Conative responses are intentions and actions in relation to the attitude object (e.g., intentions to comply with the tax laws or to evade taxes). Accordingly, individuals’ positive or negative evaluation of a person, an object, an event or a situation is a dominant characteristic of their attitude (Ajzen 1993; Fishbein and Ajzen 1975). The psychological literature on tax behavior comprises studies on the relation between attitudes and tax compliance. However, it is important to emphasize that theoretical concepts, operationalizations, and measurement of attitudes vary considerably (Kirchler 2007). While some authors understand attitudes as subjective

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evaluations of tax evasion (e.g., Porcano 1988; Wärneryd and Walerud 1982), others consider evaluations of crime in general (e.g., Wahlund 1992) and general judgments of the government and state (e.g., Schmölders 1960), or intolerance of tax evasion (e.g., Wilson and Sheffrin 2005). Furthermore, some researchers refer to attitudes and moral beliefs about the propriety of evasion (e.g., Elffers et al. 1987), moral attitudes towards tax evasion (e.g., Orviska and Hudson 2002), or tax mentality including beliefs and evaluations of evasion and awareness of tax non-compliance in socially relevant groups (e.g., Lewis 1978; Schmölders 1960). As a consequence, sometimes evaluations of taxpayers’ behaviors are confounded with evaluations of tax authorities, the government or fiscal policy. In some studies, the measured variable is referred to as attitudes, whereas in other studies authors use the term tax mentality or tax morale. Sometimes attitude measures also include fairness perceptions and subjective norms. The lack of clearly distinct measures makes it often difficult to aggregate or compare results from different studies and to draw clear conclusions. For instance, many empirical studies on tax morale rely on a single-item measure which is obviously advantageous in terms of practicability and convenience but might not be suitable to identify prevalent representations and attitudes regarding taxation in detail (cf. Alm and Torgler 2006; Torgler 2012; Torgler and Schneider 2009). In line with the approach of the theory of planned behavior (Fishbein and Ajzen 1975) and the theory of reasoned action (Ajzen 1991), attitudes are often measured by presenting individuals with the attitude object (e.g., associations to the term “taxes”). In tax compliance studies, often Likert-type scales are applied in order to measure participants’ evaluation of tax related issues. Accordingly, respondents specify their level of agreement or disagreement on a symmetric agree—disagree scale for a series of statements. Hence, the range captures the intensity of their feelings for a given item. Besides that, Peabody’s (1967, 1985) semantic differential represents another popular method to explore social objects. It consists of 32 bipolar pairs of adjectives structured in tandems of two adjective pairs which allow to disentangle evaluative and descriptive components toward a certain stimulus. To differentiate the evaluative and the descriptive information the pairs of items for a certain trait contrast opposite evaluative and descriptive aspects with a second contrast that reverses the evaluative aspect, but is similar with regard to the descriptive aspect. For instance, the item extravagant (negative) v. thrifty (positive) is combined with the item generous (positive) v. stingy (negative) and participants have to indicate their agreement on a scale from −3 to +3. Accordingly, an evaluative and a descriptive judgment can be assessed and provide insight into how a social object is described and evaluated (Kasper et al. 2018). Both methods—association tasks and semantic differentials— were used in the empirical studies we will present in detail below. According to the theory of planned behavior (Ajzen 1991), actual behavior is only partly predicted by attitudes. Subjective norms and perceived control of behavior are further determinants of behavior intentions and actual behavior that need to be considered. Nevertheless, the relevance of attitudes towards the government, fiscal policy, and tax non-compliance for explaining tax behavior has been emphasized in a multitude of empirical studies in different contexts, countries and time periods (e.g., Chan et al. 2000; Dornstein 1976; Fetchenhauer 2004; Groenland and van Veldhoven

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1983; Niemirowski et al. 2002; Orviska and Hudson 2002; Porcano 1988; Trivedi et al. 2005; Vogel 1974; Wahlund 1992; Wallschutzky 1984; Webley et al. 2001). Overall, these studies reveal a statistically significant, but moderate influence of attitudes towards taxation on intended behavior (i.e., self-reported behavior). Therefore, the relation between attitudes and actual behavior might be even weaker. As a consequence, Braithwaite (2003) suggests that attitudes and behavior need to be treated as separate dimensions that interact with each other. Lewis (1982) points out that the evidence concerning the attitude—behavior relationship allows for confidence in the general prediction that in case tax attitudes become worse, tax evasion will increase. After discussing the importance of social representations in making sense of economic phenomena as taxes, explaining how social representations are related to shared and individual attitudes, and presenting evidence on the influence of attitudes on tax behavior, the following sections revisit three of our previous studies. These three studies investigated social representations of taxpayers and their attitudes towards tax compliance and evasion in Austria at different points in time, and thus, offer a possibility for interpretation with regard to development over time.

8.4 Attitudes Towards Honest and Dishonest Taxpayers In the late 1990s, Kirchler (1998) explored social representations of taxes among five occupational groups in Austria to identify potential differences between these employment groups: blue- and white-collar workers, civil servants, entrepreneurs, and students. Overall, 171 participants completed both a free association task and Peabody’s semantic differential. In the free association task, spontaneous thoughts on taxes had to be listed, numbered according to the order of occurrence, and then evaluated as either positive, negative or neutral. In the semantic differential, 32 adjective pairs were presented, and participants were asked to judge typical taxpayers, honest taxpayers, and tax evaders on all 32 pairs. In total, 1003 associations were counted, with 547 different words mentioned. The different associations were categorized by two independent raters, resulting in 25 categories (inter-rater agreements of 92%). Frequencies varied significantly within 20 of the categories across all five employment groups. The analysis revealed differences between the respective employment groups: Entrepreneurs associated primarily punishment and disincentive to work, public constraint, lack of clarity in the tax law, lack of transparency concerning public spending of tax revenues, and complex bureaucratic rules with the stimulus “taxes”. They experienced taxes as a form of pressure and a handicap in their work. Blue-collar workers raised criticism regarding the government and politicians in general, who they believed to spend tax revenues selfishly. Nevertheless, they were also aware of public goods financed by taxes. The principal associations of white-collar workers were social security and social welfare financed by tax contributions. This group described taxation as a “necessary evil” that affects income as it constitutes a financial loss. Civil servants emphasized the importance of taxes for redistributing wealth in order to increase

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social justice. On the other hand, this group also perceived tax evasion and freeriding by not contributing to public goods as an element of the social phenomenon of taxation. Students, the only group in the study that were predominantly not paying income tax, mentioned various theories and technical concepts, names of politicians, and even the names of fictitious and cartoon characters (e.g., Donald Duck). These results of the correspondence analysis based on the free association task are in line with reactance theory (Brehm 1966) and exchange theories (Adams 1965; Blau 1964; Thibaut and Kelley 1959). The perception of taxes as a loss and a restriction of freedom are more prevalent in the group of entrepreneurs, while blue-collar workers, white-collar workers, and civil servants associate taxes with an exchange relationship as they reflect the financial loss as well as the provision of public goods. These diverging representations might be at least partly attributed to a fundamental difference concerning tax payments: while entrepreneurs in Austria pay taxes outof-pocket, the other groups receive net income where the tax due is already deducted. The semantic differential (Peabody 1985) revealed considerable differences between descriptive and evaluative aspects of judgments regarding typical taxpayers, honest taxpayers, and tax evaders. As Fig. 8.1 indicates, typical taxpayers were

Fig. 8.1 Description and evaluation of typical taxpayers, honest taxpayers and tax evaders (adopted from Kirchler 1998, 52). Judgments range from −2 (negative overall evaluation, lazy, stupid) to + 2 (positive overall evaluation, hard-working, intelligent)

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evaluated as less hard-working and rather stupid, and surprisingly more negative than tax evaders, who were judged as rather positive overall, highly intelligent, and hard working. Finally, honest taxpayers were evaluated most positively, and also perceived as intelligent, and hard working. These results could be interpreted as evidence that tax evasion is often not perceived as a (severe) crime, but rather as some kind of minor offense. Interestingly, although all five employment groups differed in terms of their social representation of taxes, they all had an equally negative attitude towards taxes and seem to perceive tax evasion not as a crime, which is in line with other studies (e.g., Burton et al. 2005).

8.5 Attitudes Towards Tax Avoidance, Tax Evasion, and Tax Flight In addition to investigating social representations of different tax saving strategies this study evaluated fairness perceptions of tax avoidance, tax evasion, and tax flight within a sample including fiscal officers, business students, business lawyers, and small business owners (Kirchler et al. 2003). Tax avoidance referred to legal actions to reduce tax payments (e.g., exploitation of tax-loopholes). Tax evasion, was associated with illegal reduction of tax payments (e.g., underreporting of income). Tax flight described the legal relocation of businesses in order to save taxes (e.g., making use of offshore tax havens). The underlying motivation for comparing social representations of these different strategies to reduce the tax burden was the following: From a macro-economic perspective—ignoring legal considerations—tax avoidance, tax evasion, and tax flight might yield similar outcomes regarding tax revenues. However, from a psychological perspective, legal and moral considerations might result in different perception of these strategies. Therefore, social representations of tax avoidance, tax evasion, and tax flight were analyzed to contrast these two positions and to investigate whether there are considerable differences, despite the identical economic consequences. Overall, 252 Austrian fiscal officers, students of economics and business administration (with a specialization in auditing and accounting), business lawyers, and small business owners participated in the study. Participants were randomly assigned to one of three scenarios (tax avoidance, tax flight or tax evasion) and subsequently had to produce spontaneous associations. In a next step, they evaluated these associations as either positive, negative or neutral. Independently, they had to indicate fairness perceptions with regard to tax avoidance, tax evasion, and tax flight in a later stage of the study. After reading the scenario describing a person engaging in either tax avoidance, tax evasion or tax flight, subjects were instructed to produce spontaneous associations to the activities described in the text and to evaluate them as positive, negative or neutral. To identify differences in the social representations of tax avoidance, tax flight, and tax evasion the immediate associations (i.e., the core of the social representations) after having read the respective scenario were compared. While the core elements

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of tax avoidance were often associated with the terms “legal”, “intentions to save taxes”, “cleverness”, and “good idea”, tax evasion was importantly related to terms as “illegal”, “fraud”, “criminal offense”, “risk”, and “dirty money”. In contrast, tax flight was linked to intentions to save taxes, lower tax burden abroad, and the costs of relocation. In a next step, all associations were categorized by a group of experts. A correspondence analysis revealed that tax avoidance was considered as legal and moral, tax flight as legal and immoral, and tax evasion as illegal and immoral. An additional analysis indicated that the strongest negative associations were produced in case of the tax evasion scenario and the most positive associations as a reaction to the tax avoidance scenario. Finally, the fairness perceptions showed that all employment groups considered tax evasion as least fair and tax avoidance was evaluated as the fairest of the three strategies to save on taxes. As can be seen in Fig. 8.2, fiscal officers evaluated all three strategies to reduce tax payments as significantly less fair than the other participant groups. Business owners perceived tax flight as fairer than the other employment groups. These findings suggest that tax avoidance, tax flight and tax evasion are perceived differently, and that perceptions also vary considerably between employment groups. The discrimination between different activities to reduce ones’ tax liability were based on legal as well as moral considerations and depended on personal affectedness, experience, occupational status, and knowledge about taxes. In general, legal forms to save on taxes were deemed more acceptable than illegal forms.

Fig. 8.2 Perceived fairness of tax avoidance, tax evasion and tax flight among fiscal officers, business students, business lawyers and small business owners (adopted from Kirchler et al. 2003, 548)

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8.6 Attitudes and Social Representations of Taxation, Tax Avoidance and Tax Evasion In a recent study, Kasper et al. (2018) aimed at identifying potential changes in the evaluations of different types of taxpayers in comparison to the previously discussed study of the late 1990s (Kirchler 1998). In addition to the three types of taxpayers considered in the original study (typical taxpayers, honest taxpayers, and tax evaders), tax avoiders were included as a further type. Similar to the original study, participants had to fill in a questionnaire measuring attitudes towards these four types of taxpayers. The study was based on a within-subject repeated measures design controlling for order effects. The study included 235 Austrian participants, mainly employed, but also selfemployed taxpayers. Attitudes towards the different types of taxpayers were measured applying Peabody’s semantic differentials consisting of 32 adjective pairs, in order to differentiate evaluative and descriptive aspects of judgment. Therefore, for each domain of interest two pairs of adjectives (tandems) were combined applying a semantic differential. As shown in Fig. 8.3, on the aggregated level all types of taxpayers were evaluated as rather positive. The scores of tax evaders were only slightly higher than zero, which means that they were evaluated quite neutral. In relative terms, there were substantial

Fig. 8.3 Mean overall judgements of tax evaders, tax avoiders, honest taxpayers, and typical taxpayers. Plotted points represent participants’ aggregated evaluative scores and vertical lines indicate the mean evaluation for each type of taxpayer (adopted from Kasper et al. 2018, 297)

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differences between the different types of taxpayers. Honest taxpayers were judged as equally positive as tax avoiders while the typical taxpayers were evaluated more positive than tax evaders, but not as positive as honest taxpayers and tax avoiders. In comparison to the reference study conducted two decades earlier (Kirchler 1998), it is noticeable that tax evaders were not evaluated better than the typical taxpayer anymore, but in the current study the tax avoiders are evaluated clearly positive and very similar to honest taxpayers. The evaluation on the single dimension stupid v. intelligent revealed an interesting result. While typical and honest taxpayers were judged as being moderately intelligent, tax evaders were perceived as significantly more intelligent, even surpassed by the tax avoiders, who were evaluated as most intelligent.

8.7 Synopsis People’s behavior is often more affected by what they think than what actually is. Therefore, in this chapter we elaborate on the importance of taxpayers’ social representations and attitudes toward taxation. In the psychological literature on tax behavior a number of studies can be found suggesting that social representations and attitudes have a significant, but moderate influence on tax behavior. However, due to varying concepts, operationalizations, and measurement it is difficult to compare and aggregate these findings. The presented empirical studies on taxpayers’ attitudes identify relevant differences between different occupation groups. Self-employed entrepreneurs express less favorable views on taxes and the tax authorities and as a result feel more restricted and hindered in their work, while employed workers focus stronger on the exchange function between tax payments and the resulting provision of public goods. Despite these differences, in all occupation groups tax evasion is not perceived as a severe crime and tax evaders are even judged quite positively and as more intelligent than the typical tax payer. A recent study suggests that tax evasion might not be evaluated as positive anymore as in earlier studies, but instead tax avoidance seems to be morally accepted and taxpayers engaging in tax avoidance are clearly judged as more positive than the typical taxpayer. An apparent limitation regarding the conclusion is that the three selected studies were all conducted in Austria. The literature on tax attitudes and tax compliance clearly indicates quite substantial differences between different cultures and countries (see for instance Alm and Torgler 2006; McGee 2012; Richardson 2008), so the presented results cannot be generalized and simply transferred to other countries. Nevertheless, what is striking as well as informative is that even in a Western democratic country like Austria, with a comparably low shadow economy (cf. Alm et al. 2004; Schneider and Enste 2013) and a functioning tax system, the general perception of taxes seems to be quite negative and tax evaders are evaluated surprisingly positive. This suggests that attitudes towards taxation might be negative in general and even more negative in countries where trust in the state and the respective authorities is even lower.

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Christoph Kogler is Assistant Professor at the Department of Social Psychology at Tilburg University, The Netherlands. He received a master’s degree in psychology in 2002 and completed his postgraduate studies with his Ph.D. in 2006, both at the University of Salzburg, Austria. After that he worked for six years as a Postdoc at the University of Vienna, Austria where he obtained his Habilitation. He studies economic decision making, applying different research methods such as lab experiments, surveys, and methods to investigate cognitive information processing (MouselabWeb, eyetracking, fMRI). His main research interests are economic and socio-psychological determinants of tax compliance with an emphasis on the influence of trust, fairness perceptions, social norms, and delayed audit feedback on tax compliance. Other research domains include the endowment effect, dual process theories in decision making, nudging, moral evaluations of big data technologies, and the impact of emotions on economic decisions. His research was published in acknowledged scientific journals such as Current Directions in Psychological Science, PLoS ONE, Journal of Economic Behavior & Organization, Journal of Economic Psychology and Journal of Risk and Uncertainty among others.

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Erich Kirchler is Professor of Economic Psychology at the University of Vienna, Austria. He was Editor-in-Chief of the Journal of Economic Psychology and President of Division 9 (Economic Psychology) of IAAP (International Association of Applied Psychology). He obtained his Ph.D. (1973) from the University of Vienna and his Habilitation (1989) from the University of Linz, Austria. His major research interest is in household financial decision making and tax behavior. Publications include Economic Psychology: An Introduction (with Erik Hoelzl, Cambridge University Press, 2018), The Economic Psychology of Tax Behaviour (Cambridge University Press, 2007), Conflict and Decision Making in the Private Household (together with Christa Rodler, Erik Hoelzl, Katja Meier-Pesti; Psychology Press, 2001), Wirtschaftspsychologie (“Economic Psychology”; Hogrefe, 4th edition 2011) and articles in Journal of Personality and Social Psychology, Journal of Applied Psychology, Current Directions in Psychological Science, Applied Psychology: An International Review, Journal of Economic Psychology, and numerous articles in international journals on economic and applied psychology. He was an advisor at the Austrian Science Fund (FWF), was president of the International Associations for Research in Economic Psychology (IAREP), and the Austrian Psychological Society (ÖGP).

Chapter 9

Ethical Standards for Tax Planning by Corporations Ave-Geidi Jallai

Abstract This chapter focuses on corporate tax planning in the context of business ethics and corporate social responsibility (CSR). Should corporations integrate tax planning into their CSR policy? If so, how? Tax planning in the context of CSR is conceptualized in this chapter as good tax governance. Good tax governance goes further than pure compliance with the (letter of the) law because taxation has a moral dimension. Derived from that, good tax governance is presented as a counterpart for aggressive tax planning or tax avoidance. The increased public attention to corporate tax planning practices and the moral dimension of taxation are indicative of the need for corporations to engage in good tax governance if they claim to behave socially responsible. Ethical decision-making in the context of tax planning requires corporations to develop a tax code of conduct and adhere to standards of transparency. This chapter aims to show why and how tax planning can be integrated into CSR.

9.1 Introduction International corporate tax planning has become a heavily debated topic in media, politics, and academia. On the one hand, multinational corporations are accused of not paying (enough) tax. The media have published reports on tax planning, generally shining a negative light on the practice, and alleging corporations avoid 1 paying their ‘fair share’ of taxes. These reports on so-called aggressive tax planning practices have triggered public outcry with politicians sharing this public sentiment 2 and accusing multinational corporations of immoral behaviour. On the other hand, 1 See

e.g., Birrell (2014), Tax Justice Network (2017), Conway (2015), Setzler (2014). e.g., The UK House of Commons, Committee of Public Accounts (2012). Wintour (2015), The European Commission (2018).

2 See

The author wishes to thank Robert van Brederode and Hans Gribnau for their valuable comments and feedback. A.-G. Jallai (B) School of Law, Tilburg University, Tilburg, The Netherlands e-mail: [email protected] © Springer Nature Singapore Pte Ltd. 2020 R. F. van Brederode (ed.), Ethics and Taxation, https://doi.org/10.1007/978-981-15-0089-3_9

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it can be argued that since multinationals act according to the law (except in case of tax evasion) and follow their business interest there is no basis for such accusations based on morality. Indeed, in general, tax planning stays within the boundaries of existing legal rules and is common and acceptable economic behaviour. The aim of this chapter is to understand the ethical dimension of tax planning in the context of corporate decision-making and show why multinationals might want to re-think their tax planning strategies, i.e., include an ethical dimension into the decision whether and, if so, what type of tax planning to engage in. Tax planning is legal, and in principle, there is nothing wrong with trying to lower one’s tax burden. From a business economics viewpoint, tax is seen as a cost; and costs should be kept low. Nevertheless, heightened political and public attention suggests that some kind of corporate tax behaviour—though legal—is at some point unacceptable. It goes without saying that it is a state’s responsibility to develop a legal system that facilitates justice and fairness, including tax laws. However, the law is imperfect because it is always subject to interpretation and lawmakers, when writing law, cannot predict and, thus, not take the future behaviour of people into account (Gribnau 2017, 14). Consequently, some powerful taxpayers, such as multinationals, can circumvent the rules if they wish. For instance, by using legal interpretation to broaden the scope of the wording of the law in an effort to legitimize their tax planning practices. However, where these same practices, although legal, may arguably conflict with the purpose or the spirit of the law, they may be considered as socially unacceptable. As a result, tax planning has become part of a wider societal debate that touches upon moral responsibility. In the corporate context, such moral responsibility can be exercised within the framework of corporate social responsibility (CSR). CSR is a corporate commitment to go beyond the strict compliance with the law and consider how corporate behaviour affects various important social matters. This chapter analyses whether and, if so, how corporations should integrate tax planning into their CSR policy. Such tax planning is conceptualized as good tax governance. Corporations that wish to pursue good tax governance, pay their fair share3 by not abusing the shortcomings in the legal systems and are transparent about their tax planning strategies. In a substantive approach to good tax governance, a corporation makes an assessment as to whether its decision-making in the area of tax is in line with ethical business-making and aligns this assessment to the amount of tax paid. This procedural element of good tax governance translates foremost to transparency. A corporation should develop tax values and a strategy that conforms with the substantive element, and clearly communicate these values and strategy both internally and externally. As a result, a corporation demonstrates to its stakeholders that its tax governance is value-based and ethically under control. The substantive part of good tax governance can be seen as ethical behaviour, which functions as a goal in itself. Transparency is means to anchor good tax governance, because corporate behaviour in the area cannot be evaluated without information and openness. In order to implement good tax 3 Indeed,

the concept of fair share is up to a debate. It is not the aim of this study to provide a comprehensive definition of this concept.

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governance that combines substantive and procedural elements, corporations could develop a tax code of conduct.

9.2 Tax Planning and Business Ethics The primary function of taxation is to fund government services and to redistribute wealth between citizens (Murphy and Nagel 2002, 40–42; Avi-Yonah 2006, 229–230). The obligation to pay taxes and taxpayers’ rights and obligations are laid down in a system of legal rules. Apart from the legal system, morality, generally, also guides individual behaviour (Gribnau 2017, 13). The legal system should codify public morality; however, it will never be able to exhaustively do so (Carroll 1991, 41; Gribnau 2017, 14). Therefore, legal rules in a complex society inevitably leave room for different choices and interpretations, which is also the case with tax law and regulations. This suggests that in case legal rules fall short, morality should fill the gap. Indeed, in general, it is a task of the lawmaker to strive for the best legal system with no gaps between the spirit and the letter of the law. However, such a perfect system is impossible to achieve. In case of international corporate tax planning, multinationals have choices to make when interpreting tax law (whether the planning deviates from the spirit of the law or not4 ) and in determining how much they contribute to the societies in which they operate. Morality requires the members of society to make certain value judgements and behave just or fair when making choices (Peczenik 1989, 21; Gribnau 2015, 240). However, there exists no fixed standard of what is just and fair and it is often easier to point out what is unfair. For instance, tax planning that does not meet established moral and societal norms5 is considered unfair and may lead to public outrage, because it reduces or minimalizes the contribution—the fair share—the corporation is due to society. Having that said, it is not entirely clear how to measure the fair share of tax that each individual corporation should contribute. While corporations should pay their fair share, they are not expected to pay more than the law requires. This leaves multinationals with the right to plan their taxes. Tax planning is a legal way to consider the tax effects of various laws and adapt ones’ actions accordingly (Gribnau 2015, 226; Gribnau and Jallai 2018, 338). Every 4 Of

course, it can be argued that it is not always clear what the spirit of the law precisely is, but taxpayers engaging in dodgy structures normally do realize that they do not operate in a completely legitimate, morally or socially acceptable, manner. To test this, taxpayers could ask themselves whether they would feel comfortable if the legality of their tax practices would be publicly discussed (for instance in the news). Of course, this does not define the complex concept of the spirit of the law but it does provide a wider perspective to a simplistic argument for defending strictly legal but still dodgy tax practices. 5 The distinction between moral and social norms is an interesting discussion but falls out of the scope of this contribution. The underlying starting point in this paper is that moral norms and morality are personal reasoning to make the distinction between good and bad, right and wrong. Social norms, on the other hand, are the informal (and usually unwritten) rules that govern behavior in groups and societies. Both moral and social norms influence each other.

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taxpayer is to a certain extent involved in tax planning, whether intentional or not. The forms of corporate tax planning practices vary from legal and ethical to legal and unethical to illegal. For instance, tax mitigation constitutes ethical tax planning where it follows both the letter and the spirit of the law. Often, it makes a legitimate and ethical use of tax incentives created by the states. Tax mitigation can, however, easily turn from legal and ethical tax planning into legal tax planning that is ethically questionable—tax avoidance. Tax avoidance could be strictly legal (according to the letter of the law) but may conflict with the spirit of the law, in which case such corporate tax practices come under question (see e.g., Freedman 2007, 385). Some multinationals even go a step further and artificially create opportunities to lower their tax obligation by engaging in aggressive tax planning (Piantavigna 2017, 54; Gribnau 2015, 227). Both, tax avoidance and aggressive tax planning are terms that contain moral judgement. Aggressive tax planning is not a legal term but it suggests that certain corporate behaviour in tax planning matters raises a serious degree of public concern. It is a strictly legal yet unethical form of tax planning, reducing or mitigating a corporation’s moral responsibilities towards society. While states have the responsibility to create law that meets reasonable standards of clarity to ensure minimum degrees of legal certainty, multinationals on the other hand should not abuse flaws in the law and regulations. This is especially true for corporations that present themselves as ethical and socially responsible corporations (CSR), as will be argued in the following sections. Multinationals are responsible for determining their own moral boundaries. Indeed, at a minimum, tax planning should comply with the law; however, in today’s environment, more is expected from multinationals. Notwithstanding that concepts such as ‘fair share’ or ‘the spirit of the law’, which are often used in tax planning debates, do not offer much practical guidance, businesses are under pressure to react. International corporate tax practice is in desperate need of moral reflection because the existing tax system does not seem to prevent aggressive tax planning. In addition to the minimum requirement that tax planning remains legal, a moral standard of ‘legitimacy’ is expected to be upheld (Pfeifer and Jin Yoon 2016, 165). Requiring corporations to act socially responsible when engaging in tax planning does not suggest that they have to act as ideal corporate citizens, or altruistically. Multinationals that voluntarily apply CSR, have accepted a moral responsibility towards society, i.e., abiding by commonly accepted moral and social norms. However, multinationals engaging in aggressive tax planning seem not to respect these norms, which makes tax avoidance problematic. Companies cannot deny having moral obligations to the countries in which they operate. Multinationals that manipulate the legal system for the purpose of mitigating their tax liabilities, benefit from public goods and services without contributing to the societal cost of their production and, therewith, act as free-riders. Corporate free-riding has a number of negative consequences: it compromises the national tax systems, distorts competition, and either leads to a decrease in public goods and services or a price increase of these public goods and services for other taxpayers (Hemels 2014, 419). Corporate tax planning becomes, thus, unacceptable where core values of society are violated. Tax planning that results in the mitigation or significant reduction of the tax liability of a

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large body of a country’s corporations may have a negative impact both on economic development and the sustenance of a fair society. Multinationals are economic entities whose interests are naturally bend towards reducing costs and increasing profit. Nevertheless, when corporate tax practices start threatening to undermine moral and social criteria, it is time for change. Companies should stay away from behaviour that could possibly conflict with generally accepted social and moral norms. Corporations that have accepted responsibility towards society, should apply that responsibility also to their tax matters, which could be realized by integrating tax planning into CSR. Taxation is a crucial for the funding of the costs of society and, therefore, corporations are called to be accountable for contributing their share. In the words of the European Commission, “[B]y paying taxes businesses can have an important positive impact on the rest of society” (European Commission 2012, 6). Reversely, by not paying taxes, businesses can have a negative impact on society. Consequently, paying taxes is, apart from a legal, also a moral obligation of corporations.

9.3 Corporate Social Responsibility Social responsibility or sustainability are concepts that have become integral parts of the value system of many a corporation as expressed in their mission statements. Having that said, it is not always entirely self-evident what exactly corporate responsibility entails and whether companies actually engage in CSR driven by internal motivation (as a social duty), or incentivized by external motivation (the perception of the company by others). In order to analyse how tax planning can be included into CSR, this concept needs some clarification. CSR can be understood in terms of responsible and moral behaviour towards society, where corporations are socially conscious and operate their business according to high ethical standards (McBarnet 2007, 48–50). CSR identifies corporate moral responsibilities that reach beyond the strict compliance with the letter of the law, focusing on the role of corporations in and their relationship with society. CSR, which falls within the domain of business ethics, generally means that companies take responsibility for the effect their actions have or may have on society; and these anticipated effects are then included in the decision-making process. The idea of modern CSR was born after certain corporate actions undermined moral values that led to a debate of the responsibilities that could reasonably be expected from the business entities (Friedman and Miles 2006, 21; Carroll 2008, 25). Today it is widely accepted that corporations have specific responsibilities beyond the mere obligation to follow the laws. It is, for instance, not acceptable that multinationals use their corporate power to avoid unfavourable regulations without regard to other societal interests.6 Excessive corporate power that focuses only on its selfinterest at the cost of moral values and social norms is not in line with the principles 6 On

corporate power, see, e.g., Tapscott and Ticoll (2004, 184) and Christians (2017).

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of CSR. CSR, as an internal moral code, should prevent the (ab)use of excessive corporate power where laws fall short. CSR can be seen as a tool to build and maintain ‘corporate legitimacy’, which should be understood as the social acceptance of a corporation by the wider community as a responsible participant in society, and, as such, the acceptance provides a social license to operate. CSR should be built on intrinsic values such as honesty, fairness, and integrity.7 The substance of CSR is often conceptualized as Triple Bottom Line: People, Planet, Profit (Elkington 2004, 2018; Eijsbouts 2011). The aim of this approach is to protect long-term sustainability by focusing on the environmental, economic, and social effects of corporate operations. The key social issue of triple bottom line is to ensure social justice, which can be linked to tax planning because taxes provide the financial funding of society, as explained in the previous section. Carroll’s CSR Pyramid, developed in 1991, is a helpful tool in understanding the substance of corporate responsibilities and the expectation imposed on corporations. According to Archie B. Carroll, who is often considered to be one of the most important academics amongst the CSR scholars, corporate social responsibilities can be divided into four categories: economic, legal, ethical, and philanthropic. Based on that, Carroll developed a corporate social responsibility pyramid that describes these four building blocks of CSR (Carroll 1991) (Fig. 9.1). Taking a Hobbesian approach, Carroll takes the position that corporations are parties to the social contract (Rayman-Bacchus and Crowther 2004, 3–5), which enforces the expectation to pursue corporate economic missions within the framework of the law. Carroll places the ethical and philanthropic blocks above the economic and legal blocks. Ethical responsibilities of a company go beyond the law and profit making, and embody those standards, norms or expectations that reflect a concern for what consumers, employees, shareholders and the community regard as fair, just, or moral. Carroll adds that ethical responsibilities are seen as the obligation to do what is right, just and fair. Ethical responsibilities in the context of Carroll’s work respond to “the kinds of behaviors and ethical norms that society expects business to follow” (Melé 2008, 54). The philanthropic block of Carroll encompasses those corporate actions that are in response to society’s expectation of a good corporate citizen, for example actively engaging in activities or programs to promote human welfare or goodwill (Carroll 1991, 40–43). The philanthropic responsibilities are merely desired and not required of a corporation from a CSR perspective (Crane and Matten 2016, 52). Based on Carroll’s CSR Pyramid, it is evident that corporations have, indeed, first and foremost economic and legal responsibilities. But this is not all. CSR begins where the law ends, where the company goes beyond pure compliance with the letter of the law. Law is not perfect and it cannot regulate every aspect of human or corporate behaviour. Therefore, CSR concerns moral responsibilities that corporations have when legal shortages occur. CSR expects corporations to make a positive contribution to society beyond legal expectations. Law sets only the minimum requirements 7 Indeed,

there can also be other rationales behind CSR, such as corporate responsibility to create wealth, to use wealth for social ends, or CSR as a vehicle for wealth creation (business case for CSR). See Moon et al. (2017), 34–38.

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Fig. 9.1 The Pyramid of corporate social responsibility

for corporate behaviour. Thus, society expects from corporations a behaviour that is beneficial, or at least not harmful for societies. In addition to economic and regulatory considerations, corporations have to deal with moral choices when planning taxes. Society has “certain expectations for appropriate business behavior and outcomes” (Wood 1991, 695). Such expectations can be categorized under social norms, which according to Ruggie (2013, 91) “exist over and above compliance with laws and regulations.” Therefore, businesses are not free to do as they please for the purpose of increasing their income, market share or alike. Corporations behave socially irresponsible when minimizing their tax liability through various tax avoidance structures (Jallai 2017). They do not meet the societal expectations for appropriate business behaviour and outcomes. Corporate commitment to CSR should be consistently applied to all of the company’s dealings and activities. For companies that present themselves as socially sustainable, there are ethical considerations to be made, in addition to legal and economic ones, when defining and implementing a business strategy and making decisions. Corporations that claim to be CSR compliant should

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not engage in fiscal engineering in order to pay (almost) no corporate income taxes to the societies in which they operate. There is, nevertheless, no agreement as to the scope of corporate responsibilities. On the one hand, we have the view that corporations have an obligation to society above the legally required minimum as discussed above. An opposite view holds that the only responsibility of a company is to operate within the framework of the law and that minimal ethical constraints apply. According to Friedman’s doctrine (Friedman 2002, 133; see also: Berle and Means 1968; Stout 2012, 29), corporations are only responsible for increasing their profits and for maximizing shareholder value. Indeed, there are many shareholders primarily interested in realizing high and short-term returns, regardless of moral or social values. However, there is also a growing number of investors that expect corporations to operate responsibly (SRI) (Tschopp 2005, 57). Therefore, corporations need to take a position in balance with and satisfying different and often conflicting stakeholders’ interests and expectations. CSR is concerned with the stakeholder view and prevents corporations from exclusively focusing on raising profits, growing market share, etc. at any cost (for example, at the cost of welfare of a wider group of stakeholders). As corporations need to balance different interests, engaging in CSR can be driven by (mutually not exclusive) intrinsic and extrinsic motives. Intrinsic motives are a characteristic of an integrity-based approach, where corporations are driven by morality in addition to economic performance (profits) goals and compliance with the law. Such motives are related to values and social norms. The extrinsic motivation, on the other hand, indicates that a corporation’s behaviour has external causes, such as reward, coercion or a desire to avoid penalties or reputational damage. Extrinsic motivation is, therefore, a feature of an instrumentalist morality. In case CRS is endorsed for extrinsic reasons, the firm’s responsible behaviour is not driven by an internal wish to do what is right, just and fair (see e.g., Benn and Bolton 2014, 57; Gribnau and Jallai 2017). Absent an intrinsic motivation, a CSR approach is seen as an instrument to, for example, enhance the firm’s reputation, and not as a byproduct of responsible behaviour. In practice, CSR actions can, in many instances, be attributed to both intrinsic and extrinsic motives for CSR is a dynamic concept (Gribnau and Jallai 2017).

9.4 Good Tax Governance Under CSR Corporations presenting themselves as adhering to socially responsible values, should also apply these values to their tax planning practices. In other words, socially responsible corporations should engage in good tax governance. Appropriate tax governance helps corporations to “comply with tax laws, as well as have processes in place to adhere to the principles and commitments in their own tax strategy” (Ravishankar 2018, 13). Thus, good tax governance can be seen as a tool to assist corporations in being compliant with corporate values imbedded in its mission statement

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when implementing tax planning strategies, and in communicating the appropriateness of their actions. Governance is a broad concept that applies to the purpose, management and functions of nations, governments, communities, and organizations such as corporations (Du Plessis et al. 2015, XXV). Corporate governance, for instance, determine the rules and principles according to which power is distributed within a corporation and to the decision-making process with regard to the use of this power (Du Plessis et al. 2015, XXV). Derived from this, tax governance can be seen as rules and principles for managing corporate tax practises; and good tax governance refers to the ethical dimension of tax governance under the concept of CSR. Companies engaged in minimizing their tax obligations cannot claim that they behave responsibly just because they have made a general commitment to CSR (Gribnau and Jallai 2017, 74). Lavermicocca and Buchan (2015, 12) argue in the same vein that corporations that commit to act responsibly not only in economic or financial but also in social terms, are expected to “place a higher level of importance on tax compliance and tax contributions to government.” Corporations can comply with tax rules with the help of professional tax advisers, but also by “making full disclosure of all facts material and relevant to the tax plan, and making sure that the tax avoidance plan as actually implemented is in conformity with the transaction as planned” (Pfeifer and Jin Yoon 2016, 165). This indicates that, when it comes to tax planning, the notion of “going beyond the compliance” (Buchholtz et al. 2008, 335) consists of two layers, one substantive and the other procedural. Good, socially responsible and sustainable tax governance entails both. With regard to the substantive layer, based on Carroll’s CSR Pyramid, socially responsible companies need to consider ethical considerations in addition to legal and economic ones when defining and implementing a business strategy and taking taxrelated decisions. The procedural layer involves the principle of transparency which exceeds compliance with legal reporting obligations. Accountability concerns both process and outcome (Buchholtz et al. 2008, 335). Socially responsible, sustainable companies should pay their fair share of tax (or at least not unfair), and they should be open and willing to discuss their tax planning strategy and practice. Good tax governance goes beyond (but does not exclude) a mere cost-benefit analysis and mere concern for reputation and market value. ActionAid (2011) suggests the following steps for responsible tax governance: 1. create a company tax policy setting out the principles that apply and the practices that are ruled out; 2. disseminate this policy to internal and external stakeholders; 3. ensure board level oversight of internal tax policymaking; 4. disclose a range of qualitative and quantitative information on tax practices and their impacts; 5. work with peers and stakeholders to formulate a mutually agreed code of conduct.” In other words, good tax governance requires from corporations that they develop a tax strategy that is in accordance with the overall corporate values, such as codes of

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conduct. This strategy should be communicated to internal and external stakeholders (transparency). Furthermore, such strategy should be monitored, evaluated and where necessary adjusted over time. Even though the exact meaning of ‘fair share’ is up to debate (see Chap. 1, this volume), the link between taxation and moral behaviour is clear—how (corporate) persons live together as a society and “as individuals in relation to one another” (Paine 1996, 478). Ethics provides a tool for corporations to balance conflicting interests. For instance, it helps corporations to balance short-term shareholder value creation and long-term sustainable development. In terms of good tax governance such conflicting interests do not always have to exclude each other. A precondition of good tax governance is an internal drive, which requires self-reflection. In case this motivation exists, corporations should commit to both, substantive and procedural parts of good tax governance (Gribnau and Jallai 2017). Corporations should not strive to pay as less tax as possible (of course, also as much as possible is not expected) (Gribnau 2015, 238). Instead, corporations that wish to engage in good tax governance should make an effort to consider the spirit of the law, or at least they should not stretch the letter of the law for the purpose of avoiding or strongly reducing their income tax liabilities in countries where they operate. In tax debates, fairness is given an important position because of the publics’ perception of fairness. The free-riding behaviour of other taxpayers is not perceived as fair and this can be seen as the starting point for the fair share debates. In order to adjust or change its tax planning behaviour (whether intrinsically or extrinsically motivated, Gribnau and Jallai 2017), corporations that wish to apply good tax governance need to accept that taxation has a moral dimension. Acting fairly does not concern the question whether corporations are breaking the rules (acting illegally) but it is about not taking advantage of loopholes or ambiguities in the system. Hemels (2014, 426) argues that the general anti-abuse rules constrain corporate self-serving short-term aggressive behaviour and “could therefore be regarded as a reflection of the principle of fairness.” Nevertheless, this is not enough. As explained earlier, no system is perfect and consequently corporations can always find ways to play around the rules if they wish. Multinationals often have a choice between different legal rules, which, as Gribnau argues, “can be manipulated in unethical ways” (2015, 240). Moreover, he adds, “interpreting and using the law inevitably imply making value judgements.” Thus, in tax planning, multinationals have a choice between interpreting the letter of the law for the benefit of their selfinterest or according to the intention of the legislator. Therefore, the corporate mindset on the decision-making level needs to change and this is the starting point of good tax governance. For instance, 25 years after developing the triple bottom line (see Sect. 9.3), Elkington himself argues that simply implementing sustainability policies is not enough; it is the mind-set that needs to be changed: “none of these sustainability frameworks will be enough, as long as they lack the suitable pace and scale—the necessary radical intent—needed to stop us all overshooting our planetary boundaries” (Elkington 2018). The necessary change in mind-set with regard to tax planning lies in the process rather than in the outcome. Good tax governance namely concerns the corporate

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tax structures and tax planning or creative compliance with the law rather than the amount of tax paid. Indeed, the effective corporate tax rate is usually an outcome of these corporate practices, which suggests that the effective tax rate of responsible companies is probably higher than of corporations applying more aggressive tax planning. This, however, could be seen as a trade-off for good tax governance. Indeed, lower effective tax rates are sometimes a result of the legitimate use of tax incentives (for instance regulation to foster R&D) and this is not in conflict with good tax governance. The key question with regard to good tax governance is “whether the payment of tax should occur in the country where value is created or the profit is actually earned, or the jurisdiction that has the lowest tax rate” (Dowling 2014). According to Dowling “[S]ocial responsibility suggests the former while financial responsibility suggests the latter” (Dowling 2014). Having said that, social responsibility often is in line with long-term financial responsibility (Jallai and Gribnau 2018). Good tax governance should be seen as a business strategy that does not accept artificial structures, such as base erosion or profit shifting. In the words of the OECD (2011, 60), corporations should “comply with both the letter and spirit of the tax laws and regulations of the countries in which they operate” and for that purpose corporations should take “reasonable steps to determine the intention of the legislature and interprets those tax rules consistent with that intention in light of the statutory language and relevant, contemporaneous legislative history.” In other words, corporations that engage in good tax governance are expected to go beyond the strict compliance with the letter of the law. This requires ethical decision-making.

9.5 Ethical Decision-Making Corporate ethical decision-making is crucial in situations where “values are in conflict” (Treviño and Nelson 2014, 39). Ethical reflection is necessary in case the decision, which provides corporate managers with “alternative courses of action”, is “likely to have significant effects on others” or “the decision is perceived as ethically relevant by one or more parties” (Crane and Matten 2016, 136–137). One of such ‘grey areas’ of business that requires moral reflection that is not covered by the law (Crane and Matten 2016, 6) is corporate tax planning. For CSR companies, moral decision-making in the context of tax planning entails going beyond minimalist compliance, beyond the letter of the tax law. This kind of ethical conduct beyond compliance fits well within a CSR-framework (see e.g., Melé 2008, 54–55; Carroll 1979, 500; Carroll 1999, 283). Therefore, companies that seek to prove moral leadership can implement CSR policies and companies that already have a CSR strategy must meet the expectations associated with good tax governance, because taxes are contributions to society.

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All forms of tax planning (even tax evasion) stay initially within the economic block of Carroll’s Pyramid.8 Assuming that corporations—often with assistance from tax advisors—comply at least with the letter of the law, tax planning fulfils the requirement of the legal block of Carroll’s theory. Thus, any form of tax paying that is legal would in principle comply with both, the economic and legal layers of CSR Pyramid. However, in my view, the legal block does not distinguish between the letter and the spirit of the law, a distinction which is very relevant in the area of taxation. Consequently, the line between Carroll’s legal and ethical blocks is unclear with regard to taxation. From the legal-positivist perspective, the law could be seen separate from ethics, as the Pyramid seems to suggest. I would, however, argue that ethics is part of the law; but sometimes legal rules fall short in codifying ethics adequately (Carroll 1991, 41; Gribnau 2017, 14). Dealing with such short-comings of the law would move corporate behaviour to the ethical block of the CSR Pyramid where the notions of the spirit of the law and fair share reside. Incorporating ethical decision-making into tax planning practice requires of corporations to adapt a tax code of conduct. Gribnau et al. (2018, 407) argue that corporate codes of conduct “are important instruments to enhance moral corporate behaviour.” Moreover, tax codes of conduct could present an opportunity for corporations to “meet stakeholder needs with regard to tax in the current highly politicized and mediatized environment” (Gribnau et al. 2018, 391). Consequently, as good tax governance is not a commonly agreed upon concept, developing a code of ethical tax conduct provides an opportunity for CSR corporations to prove their intrinsic motivation. Important, however, is that such ethical “commitment to principled thinking should be consistent and not opportunistic” (Gribnau et al. 2018, 398). Thus, ideally, it should be a result of morally responsible business-making, which according to Carroll “aspires to succeed, but only within the confines of sound ethical precepts—that is, standards predicated upon such ideals as fairness, justice, and due process” (Carroll 1987, 7). Based on these standards, management pursues, according to Carroll, “its objectives while simultaneously requiring and desiring profitability, legality, and morality” (1987, 10). Moral management can thus be seen as “a matter of balancing competing interests, principles, values and ideals” (Gribnau et al. 2018, 398). Corporations can no longer separate tax and other corporate values (see e.g., Bowers 2018). A code of conduct can be conceptualized as a set of corporate self-regulatory9 set of rules “that guides and orients behaviour within an organisation or sector in order to promote social, environmental, and/or ethical behaviour” (Leipziger 2010, 71). It is a tool for internal and external communication of CSR commitments (Bondy et al. 2008, 432–448), to clarify corporations’ understanding of moral behaviour. In 8 It is, nevertheless, questionable whether short-termism is in the best long-term economic interests

of the company. This discussion, however, is out of the scope of this contribution. stands for regulation that is “exclusively set by business” for business. Such set of rules and norms are considered to work “as a direct counterpart to governmental regulation”. Examples of such self-regulatory standards are “collective agreements or commitments by industry”, which are “intended to avoid, forestall or soften potential laws”, or corporate codes of conduct. Crane and Matten (2016, 520).

9 Self-regulation

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other words, such codes set ethical behavioural standards for corporate decisions and operations. Codes of conduct help “to achieve moral consistency throughout the company” if they are “implemented strongly and embedded in the organizational culture” (Gribnau et al. 2018, 398; Buchholtz and Carroll 2008, 331). Moreover, a code of conduct can be “a truly helpful resource that employees use for ethical decision-making” (Harris 2017). Indeed, since stakeholders’ expectations as well as the regulatory environment, business strategy, or ethical norms may change over time, corporations should adjust such code if necessary. Harris suggests to “periodically review the code—every three years is common—and update it to remain aligned with changes in the business or in the regulatory environment” (Harris 2017). Additionally, corporate employees on different levels should be trained on a continuous basis “about their responsibilities functioning as ethical role models, recognizing and preventing retaliation, and responding to” arising concerns (Harris 2017). Managing corporate strategy and values, as well as reputation and trust amongst stakeholders suggests that tax governance is a responsibility of the corporate board.10 It is part of corporate risk management (Gribnau et al. 2018, 400). According to Mitchell, “running a successful and sustainable business” requires that corporate managers do “not risk undermining its own legitimacy” by ignoring CSR concerns (Mitchell 2007, 281). Thus, it is the role of the board “to set general guidelines for the company’s global tax philosophy and the framework for the governance of tax issues and processes” (Bronzewska and Van der Enden 2014, 636). For developing a tax code of conduct, management should have certain tax values that are respected in their decision-making process. Good tax governance, as a selfregulatory approach, should be attractive for multinationals because it is fairly flexible and a corporation can give its own niche-related content to it. Moreover, companies have a choice in deciding how far-reaching their social responsibility strategy is. Multinationals aspiring to engage in good tax governance should, in other words, have certain ethical tax values in place. For example, PwC (2017) suggests that sustainable tax is a concept that is based on four key elements: (a) conscious choices, that are made based on (b) corporate values (which are developed in dialogue with various stakeholders), and that are (c) implemented through the corporation (e.g., in a form of a Tax Control Framework), and that is (d) digitalized. Developing certain tax values is at the core of good tax governance because these values will lead corporate boards as well as the employees in decision-making processes. Therefore, corporate management should “set general guidelines for the company’s global tax philosophy and the framework for the governance of tax issues and processes” (Bronzewska and Van der Enden 2014, 636). Such a tax philosophy should be integrated in “the overall business mission and vision” (635–636). Corporations that wish to develop tax values and the related risk management framework (such as, a Tax Control Framework, or TCF) can use various sources to begin with. In recent years many organizations, such as VBDO,11 PRI,12 Fair Tax 10 See

more on reputation and trust in Ferrell et al. (2017, 37), Eccles et al. (2007), Jallai (2017). et al. (2018), Verstappen et al. (2017). 12 Ravishankar (2018). 11 Urbach

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Mark,13 The B Team14 and B Corp15 have published various principles for responsible tax conduct.16 For instance, VBDO guiding principles are an appropriate illustration for companies that wish to develop a code of conduct for good tax governance: (1) define and communicate a clear strategy regarding tax governance; (2) align taxation with the business and tax is not to be regarded as a profit centre in itself; (3) respect the spirit of the law, i.e. tax compliant behaviour is the norm; (4) have insight into the management of tax risks; (5) monitor and test tax controls and adhere to tax policies and strategy; and (6) be able to provide tax assurance (VBDO 2014). In a nutshell, all such principles concern integer and sustainable decision-making, transparency, compliance with the laws, and cooperation with tax authorities. There are several multinationals that already have developed good tax governance, such as Unilever and DSM (Urbach et al. 2018). Many are yet to follow. It is suggested that usually financial institutions are first adaptors of good tax governance, including institutional investors for “they are and have been subject to increased scrutiny by regulators and the general public” (PwC 2017). Consequently, it is only a matter of time before multinationals and other corporations will implement more responsible tax practices as they are likely to face pressure from said institutional investors. Individual corporations that develop a good tax governance model ahead of time, may gain a competitive advantage. PwC suggests that “from a fiduciary perspective, developing a robust tax governance model is valuable to demonstrate that you are in control of your tax position and that potential tax risks around investments are being monitored” (PwC 2017). There is also evidence suggesting that some multinationals that were in the centre of various aggressive tax planning scandals are changing their tax strategies. For instance, sources claim that social-media giant Facebook is changing its legal structure in order to ensure that “ad revenues would be booked in the local markets rather than at its international headquarters in Ireland” (Kuchler 2017). Google, following public pressure, has become more transparent in New Zealand (Smyth 2018). Furthermore, Starbucks reportedly changed its corporate structure in Europe in order to pay more tax in the UK after 2012 (BBC 2012).17 These are

13 Fair

Tax Mark: https://fairtaxmark.net. B Team (2018). 15 Alexander (2018). 16 In practice, corporations use key performance indicators (KPIs) to measure whether and how business objectives are achieved. Also with regard to taxation KPIs are important for business practice for they enable to measure corporations’ tax performance against its overall business objectives and goals. It is, however, out of the scope of this chapter to propose possible examples for good tax governance KPIs. See more on KPIs and tax: https://www.pwc.com/gx/en/tax/publications/ assets/pwc_tax_function_of_the_future_tax_function_KPI_sept17.pdf; How to develop KPIs, see e.g. https://assets.kpmg.com/content/dam/kpmg/pdf/2016/07/indirect-tax-article-series-kpidriving-indirect-tax-value.pdf. 17 Note, however, that they do not admit any wrongdoing with regard to practices that were in the centre of criticism. Therefore, such actions should be assessed critically as they may only constitute window-dressing. 14 The

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clear examples of corporate reactions to changing societal expectations with regard to corporate tax planning.

9.6 Transparency: A Procedural Element of Good Tax Governance There is growing public interest in corporate tax practices. Therefore, developing tax values for internal use only is not sufficient from the public perspective. In order to accept corporate behaviour, stakeholders need to know and understand it. Increased public interest in corporate tax practices has triggered increased demand for corporate accountability (Lewis 2003; Porter 2003, 7–8; Wan-Jan 2006). Accountability can be considered as “social corporate control” because “corporations are accountable for the creation of organizational wealth for its multiple constituents” (Valor 2005, 196–197). Such social corporate control expects corporations to account for their “activities, accept responsibility for them, and to disclose the results in a transparent manner” (Business Dictionary). Accountability can, thus, be achieved through transparency, “through the provision of information to stakeholders and society” (Swift 2001, 16). In this relation of transparency, “the one who is accountable, explains or justifies actions to the one to whom the account is owed” (Swift 2001, 17). In other words, transparency is a primary requirement for keeping multinationals accountable towards the societies in which they operate. Without information it is hardly possible to acquire the knowledge needed to hold those who wield power over others accountable. Accountability enables people to check the exercise of power (Tapscott and Ticoll 2004, 13, 225; Bianchi 2013, 2). This explains why the demand for transparency in tax affairs has become urgent (Gribnau and Jallai 2018). Transparency is an important element of good tax governance. Generally, transparency enables citizens to hold to account those who exercise some kind of power over them, such as politicians or corporations (Innerarity 2016, 89). The Internet era facilitates unprecedented access to information, which allows stakeholders to increasingly demand for accountability in a far-reaching way. Stakeholders want information in order to assess a corporation’s conduct and applied values, and whether these are in line with a stakeholder’s own values. In addition to financial information, corporations are expected to publish even more. In addition to commercial objectives, the OECD, for instance, encourages companies to “disclose policies and performance relating to business ethics, the environment and, where material to the company, social issues, human rights and other public policy commitments” (OECD 2015, 34). Also, good tax governance could be considered as a matter related to business ethics, which is material to all OECD’s listed commitments. In general, transparency requirements expect multinationals to publish information that can be considered material, i.e., information about the company that “is

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likely to change the perceived value of a security when it is disclosed to the public” (Business Dictionary).18 The materiality of information depends on the decision context for “information may have little or no bearing on one type of decision, but be extremely important for another.” Lo explains that, in case “materiality is determined by reference to the potential to affect decisions, then it is the potential change in expectations that determines whether an item is relevant” (Lo 2010). Moreover, information that is material in one context might become immaterial in another context (Corporate Reporting Dialogue 2016, 3). Despite the challenge to distinguish between material and immaterial information “this does not mean that an ‘immaterial’ item has zero effect on users—the effect is simply expected to be smaller than the threshold for materiality, so there are still costs and benefits to disclosing such immaterial information.” Therefore, as “materiality in concept is continuous and a matter of degree,” (Lo 2010) it is a responsibility of the corporate decision-making organ to determine which information is material “from the perspective of stakeholders” (Corporate Reporting Dialogue 2016, 4). Corporate decision-making “should reflect management’s best interpretation of stakeholder expectations as of the reporting date” (Corporate Reporting Dialogue 2016, 4). Deciding upon the materiality of the information to be disclosed is, however, a challenging task for “there is no international consensus on standards of business conduct” (Donaldson 1996, 52). Moreover, different stakeholders value different kinds of information and they need to be able to “separate signal from noise” (Tapscott and Ticoll 2004, 22). For the purposes of good tax governance, multinationals should thus communicate their tax values and strategies even though not required by the law. Transparency with regard to corporate tax planning starts, like any other clear-cut regulatory obligation, with the law. In the fight against certain types of tax planning, transparency is often considered a key principle (Peters 2017, 218–231). The urgency of transparency was clearly visible already in the 2013 OECD-report to the G20: “Leaders, civil society and everyday taxpayers are renewing demands for greater transparency and (…) changes to the international tax rules to restore fairness and integrity of their tax systems and the global financial systems more generally” (OECD 2013a, 2). The European Commission, for instance, states that “transparency is a crucial element in securing fairer taxation,” adding that the Commission has “given high priority to improving tax transparency in the Single Market” (European Commission 2015) Transparency is according to the Commission one of the “three principles of good tax governance” (European Commission 2011, 7). One of the reasons why various international regulatory approaches aim to create more transparency in tax planning is to minimize the information gap between corporations and other interested parties, such as tax authorities, states or society at large. Various disclosure rules also help to evaluate the information corporations provide. Measures, such as the OECD BEPS Action Plan (OECD 2013b) and the EU Action Plan (European Commission 2016; see also Hilling and Ostas 2017, 46–54), 18 The U.S. Supreme Court interprets material information as the information which would likely be “viewed by the reasonable investor as having significantly altered the total mix of information made available.” Grewal et al. (2017, 10). See also: OECD (2011, 27).

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require for good tax governance. According to Hey (2018, 5), the “recent international push for transparency” reflects the tax legislators’ interest in “understanding complex economic structures and upcoming business models which might lead to new policy considerations and new legislative actions.” However, because transparency requirements are accompanied by rather vague policy intentions, it is unclear what such legal tools aim to achieve. Some argue that increased disclosure requirements are intended to reduce corporate tax aggressiveness (Lavermicocca and Buchan 2015, 18). However, as long as the concept of tax aggressiveness itself remains insufficiently defined by the regulators, the concrete aim of such requirements remains disputable as well. Therefore, the OECD BEPS (country-by-country reporting, OECD 2013b) and the EU ATAP (also country-by-country reporting, European Commission 2016), which set very similar requirements, should provide at least a brief indication on what is considered to constitute aggressive tax planning. International transparency requirements and tax disclosure rules are a first step not only towards understanding the anatomy of tax planning but also in directing corporations towards behaviour they can publicly endorse and defend, such as good tax governance. Good tax governance, as a notion of going beyond the minimum the law requires, implies that multinationals need to do more than meeting such mandatory requirements. For good tax governance, intrinsic motivation is necessary but extrinsic motivation remains relevant as well; in fact, these two complement each other. Apart from regulatory rules, various market actors have recently joined the call for corporate transparency, adding another layer of extrinsic motivation for tax transparency. States can impose tax transparency by establishing various mandatory disclosure rules. However, these rules do not always bring sufficient results as the information may not reach all interested parties, or the information that is provided may not cover all that is of interest to such parties. This explains the various additional calls for tax transparency by private parties. For instance, many NGOs pressure corporations towards disclosing their tax strategies in the hope for increased corporate accountability.19 The most effective are perhaps calls for tax transparency by market parties. Blowfield and Murray (2008, 35–36) claim that “the degree of transparency depends on legal and stock market requirements.” These legal and market requirements force or pressure corporations to be more transparent and can, therefore, be categorized as extrinsically motivated transparency, able to serve as a platform for intrinsic considerations. They are important as an instrument to put more pressure on corporations to fulfil their moral obligation to pay their fair share. Consequently, corporations can no longer ignore their tax practices for any dubious strategy may negatively affect, for example, corporate reputation. An example of external pressure for more transparency are the private reporting initiatives, such as ESG reporting that is very important for many investors.20 19 See e.g., Tax Justice Network: https://www.taxjustice.net; Oxfam Novib: https://www.oxfam.org/ en/tags/tax (accessed 21.12.2018). 20 Many existing corporate reporting standards provide companies with guidance concerning the expected context of CSR. CSR is often measured as Triple Bottom Line that focuses on People, Planet, Profit (3Ps) [Developed by John Elkington; Elkington 2004). The Triple Bottom Line

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Tax transparency is important for investors because the amount of tax corporation has to pay “is material to its profitability” (Ravishankar 2018, 5). Aggressive tax planning practices might be a signal for investors of “underlying legal, operational, reputational, financial and/or governance risks.” Moreover, aggressive tax planning practices inform investors about the risk tolerance or averseness of the management, which is important for investors. High risk appetite can potentially lead to “a variety of damaging outcomes for the business” (Ravishankar 2018, 5). Good tax governance and transparency are thus tools to ensure investors’ confidence. Investors, namely, are also aware of the fact that taxation is a precondition for “a solid foundation for competition, growth and other factors that enable long-term business sustainability at investee companies” (Ravishankar 2018, 5). The UN Principles of Responsible Investment (UN PRI), for example, encourage companies to “disclose information related to policy, governance and performance” through “multiple channels” such as a separate corporate tax policy statement or “the annual report or sustainability report and/or the company website.”21 Comprehensive disclosure would, according to UN PRI, include a tax policy signed by a board-level representative outlining the company’s approach to taxation and how this approach is aligned with its business and sustainability strategy (Ravishankar 2018). Additionally, it should provide sufficient evidence of tax governance, policy and related risks, and give an overview of tax strategies, material tax incentives, country-bycountry activities and disputes with tax authorities (Ravishankar 2018). The afore suggests that also for (certain groups of) investors transparency in tax matters is very important.22 approach “aims to measure the financial, social and environmental performance of the corporation over a period of time” [The Economist (2009, November 17). Triple Bottom Line. Retrieved from: http://www.economist.com/node/14301663 (accessed 10 October 2017)]. This is also the heart of ESG reporting, which is one of the most widely used corporate responsibility reporting standards. ESG metrics help investors to calculate long-term returns for they indicate healthy corporate performance. This is important for corporations as there is evidence of increase in socially responsible investments (SRI), which “has incentivized companies to implement more comprehensive ESG reporting measures” (Skroupa 2017). A myriad of institutions provides guidance for corporations and information for investors with regard to ESG reporting and performance. For example, FTSE Russell ESG Ratings [Retrieved from: http://www.ftserussell.com/financial-data/ sustainability-and-esg-data/esg-ratings (accessed 15.05.2018)] include also tax transparency as part of the (ES)Governance. One of the main motives behind voluntary CSR reporting (such as ESG reporting) is, however, the business case. Corporations use CSR reporting as a tool to “look after its powerful (i.e., often financially oriented) stakeholders and report to the extent that it benefits the company’s profits” (Herzig and Kühn 2017). However, this tool has received some criticism, for instance, with regard to the fact that CSR is too complex in order to evaluate in one number (See, e.g., Van Gils 2018). Having that said, it would be worthwhile for future researches to establish how tax would fit into ESG or other CSR reporting and evaluation calculations. For instance, benchmarks or key performance indicators (KPIs) should be developed for this purpose. See also: London Stock Exchange (2018). 21 https://www.unpri.org/news/new-guidance-helps-investors-engage-on-tax. 22 Additionally, many shareholders are concerned about corporations lobbying to influence laws and regulations that affect all aspects of the economy (McRitchie 2018), which is also important from the corporate tax planning perspective. As a matter of fact, corporate lobbying disclosure would

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In addition to the UN, several other institutions focus on tax transparency. For instance, in the Netherlands, VBDO, a responsible investors’ organization,23 has developed the Good Tax Governance Benchmark (VBDO 2014, 2018), providing recognition to corporations that have adopted good tax governance and consequent transparency measures. Such transparency initiatives create an additional dimension of external motivation for good tax governance. Positive recognition not only adds to good corporate reputation, it also creates a competitive environment amongst corporations to prove their positive impact, leading to a race to the top. An example of a corporation driven transparency initiative is a statement issued in 2015 by ten large UK multinationals, each accredited by the Fair Tax Mark, calling for recognition of that “progressive business practice” and challenging other companies to become “as transparent as possible.”24 The statement claimed that “enhanced transparency is vital, whether from country-by-country reporting or from public statements on tax policies and governance.” Furthermore, businesses were encouraged to “demonstrate that they are open and transparent about their tax affairs, and pay the right amount of corporation tax at the right time and in the right place.” It further recognized tax as a corporate responsibility issue to which corporations must respond. All such statements and publications put extra pressure on multinationals to be more transparent regarding their values and tax planning. Corporations that wish to take transparency to a higher level in the context of good tax governance should search for an intrinsic motivation.

9.7 Conclusions Various examples, provided through this chapter, illustrate the urgency for corporations to pay close attention to their tax planning strategies. Good corporate governance presumes adequate risk-management and the tax-dimension has become an important part of it. Regulatory developments, such as OECD BEPS and EU ATAD, are clear signs that responsible tax governance is not the fashion of the day but a requirement designed to stay. This chapter argues that tax planning has a moral dimension. Morality in business practice comes down to ethical corporate decision-making and CSR, which expects corporations to go beyond strict minimum compliance with the letter of the law. Derived from that, corporations that claim to operate according to socially responsible standards, should also commit to good tax governance. be an important dimension of transparency for keeping both, corporations as well as politicians accountable for the sustainable system. This discussion is, nevertheless, out of the scope of this contribution. 23 Webpage: http://www.vbdo.nl. 24 ‘MEPs should support a Fair Tax Payer label’ Open letter to The Guardian 15 December 2015. Retrieved from: https://www.theguardian.com/politics/2015/dec/15/meps-should-support-afair-tax-payer-label (accessed 12.12.2018).

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Good tax governance relies on paying one’s fair share of tax. Despite its vagueness, fairness has inevitably become an important concept with regard to taxation. The freeriding behaviour of some taxpayers is perceived as unfair. In order to adjust or change their tax planning behaviour, and engage in good tax governance, corporations need to accept that taxation has a moral dimension. Acting fairly implies that corporations do not take advantage of loopholes or ambiguities in the tax system. This requires ethical decision-making, which is crucial in cases of conflicting values, which need to be balanced. When a corporation is convinced that its tax planning practices are legal, socially responsible, and in accordance with its CSR commitments, it should be able to report this openly to the public. If a corporation is hesitant to disclose certain information, it could be seen as a red flag. Indeed, companies are economic entities and will not actively search for the possibilities to pay more tax. Therefore, they need to communicate their tax strategy in a balanced and integer way. An informed debate is indispensable for developing standards for substantive good tax governance. Several practical tips and sources for ethical decision-making, presented in this chapter, should help corporations to understand taxation in the context of CSR and switch to good tax governance.

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Kuchler, Hannah. 2017, December 12. Facebook to stop booking ad sales through Irish HQ. Financial Times (online). Retrieved from https://www.ft.com/content/62a68f3c-deb8-11e7-a8a40a1e63a52f9c. Accessed 12 Dec 2018. Lavermicocca, Catriona, and Jenny Buchan. 2015. Role of Reputational Risk in Tax Decision Making by Large Companies. eJournal of Tax Research 13(1): 1–46. Leipziger, Deborah. 2010. Codes of Conduct. In The A to Z of Corporate Social Responsibility, ed. Wayne Visser et al. West Sussex: Wiley. Lewis, Stewart. 2003. Reputation and Corporate Responsibility. Journal of Communication Management 7 (4): 356–366. Lo, Kin. 2010. Materiality and Voluntary Disclosures. Journal of Accounting and Economics 49 (1): 133–135. London Stock Exchange. 2018. Revealing the Full Picture: Your Guide to ESG Reporting. Guidance for Issuers on the Integration of ESG Into Investor Reporting and Communication. Retrieved from https://www.lseg.com/sites/default/files/content/images/Green_Finance/ ESG/2018/February/LSEG_ESG_report_January_2018.pdf. Accessed 21 Dec 2018. McBarnet, Doreen. 2007. Corporate Social Responsibility Beyond Law, Through Law, For Law; The New Corporate Accountability. In The New Corporate Accountability: Corporate Social Responsibility and the Law, ed. Doreen McBarnet et al., 9–58. Cambridge: Cambridge University Press. McRitchie, J. 2018, March 14. Lobbying Disclosure Sought @ 50 Companies. CorpGov.net blog. Retrieved from https://www.corpgov.net/2018/03/lobbying-disclosure-sought-50-companies/? utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+corpgov%2FesYs+ %28CorpGov.net%29. Accessed 20 Mar 2018. Melé, Domènec. 2008. Corporate Social Responsibility Theories. In The Oxford Handbook of Corporate Social Responsibility, ed. Andrew Crane et al., 47–82. Oxford: Oxford University Press. Mitchell, Lawrence E. 2007. The Board as a Path Toward Corporate Social Responsibility. In The New Corporate Accountability: Corporate Social Responsibility and the Law, ed. Doreen McBarnet et al., 279–307. Cambridge: Cambridge University Press. Moon, Jeremy, et al. 2017. Historical Perspectives in Corporate Social Responsibility. In Corporate Social Responsibility: Strategy, Communication, Governance, ed. Andreas Rasche et al., 31–62. Cambridge: Cambridge University Press. Murphy, Liam B., and Thomas Nagel. 2002. The Myth of Ownership: Taxes and Justice. New York: Oxford University Press. OECD. 2011. MNE Guidelines. Paris: OECD Publishing. OECD. 2013a. OECD Secretary-General Report to the G20 Leaders. Paris: OECD. OECD. 2013b. Addressing Base Erosion and Profit Shifting (BEPS). Paris: OECD Publishing. OECD. 2015. G20/OECD Principles of Corporate Governance. Paris: OECD Publishing. Paine, Lynn Sharp. 1996. Moral Thinking in Management: An Essential Capability. Business Ethics Quarterly 6 (4): 477–492. Peczenik, Aleksander. 1989. On Law and Reason. Dordrecht: Kluwer Academic Publishers. Peters, Cees. 2017. Improving Democratic International Tax Governance: On the Power of Citizens, Transparency and Independent Watchdogs. In Building Trust in Taxation, ed. Bruno Peeters et al., 205–234. Antwerpen: Intersentia. Pfeifer, Michael G., and Sae Jin Yoon. 2016. The Ethical Limits of Tax Planning. Trusts & Trustees 22 (1): 159–165. Piantavigna, Paolo. 2017. Tax Abuse and Aggressive Tax Planning in the BEPS Era: How EU Law and the OECD Are Establishing a Unifying Conceptual Framework in International Tax Law, Despite Linguistic. World Tax Journal 9 (1): 37–98. Porter, Michael. 2003. CSR—A Religion with Too Many Priests? European Business Forum 16. (Interviewed by Morsing, Mette).

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PwC. 2017. Sustainable Tax for Institutional Investors & Asset Managers. Retrieved from https:// www.pwc.nl/nl/dienstverlening/tax/documents/sustainable-tax-brochure.pdf. Accessed 21 Dec 2018. Ravishankar, Vaishnavi. 2018. Evaluating and Engaging on Corporate Tax Transparency: An Investor Guide. UN Principles of Responsible Investment. Retrieved from https://www.unpri. org/Uploads/t/r/l/PRI_Evaluating-and-engaging-on-corporate-tax-transparency_Investor-guide. pdf. Accessed 21 Dec 2018. Rayman-Bacchus, Lez, and David Crowther (eds.). 2004. Perspectives on Corporate Social Responsibility. Abington: Taylor and Francis. Ruggie, John Gerard. 2013. Just Business: Multinational Corporations and Human Rights. New York: W. W. Norton & Company. Setzler, B. 2014, January 17. The Real Tax Threat to American Businesses. US News. Retrieved from http://www.usnews.com/opinion/blogs/economic-intelligence/2014/01/17/americas-corporatetax-problem-is-that-big-corporations-dont-pay-enough. Accessed 21 Nov 2017. Skroupa, Cristopher P. 2017, April 24. ESG Reporting Reshapes Global Markets. Forbes (online). Retrieved from https://www.forbes.com/sites/christopherskroupa/2017/04/24/esgreporting-reshapes-global-markets/#4a6711d55d5e. Accessed 21 Dec 2018. Smyth, Jamie. 2018, February 22. NZ Strikes Blow for Global Tax Clampdown as Google Shifts Policy. Financial Times (online). Retrieved from https://amp-ft-com.cdn.ampproject.org/c/s/amp. ft.com/content/7aa6ec34-179e-11e8-9e9c-25c814761640. Accessed 20 Dec 2018. Stout, Lynn A. 2012. New Thinking on ‘Shareholder Primacy’. In Corporate Governance after the Financial Crisis, ed. P.M. Vasudev and Susan Watson, 25–41. Cheltenham/Northampton, MA: Edward Elgar Publishing. Swift, Taylor. 2001. Trust, Reputation and Corporate Accountability to Stakeholders. Business Ethics: A European Review 10 (1): 16–26. Tapscott, Don, and David Ticoll. 2004. The Naked Corporation: How the Age of Transparency Will Revolutionize Business. Toronto: Penguin. Tax Justice Network. 2017. The Guardian article. Retrieved from http://taxjustice.blogspot.nl/2014/ 01/bill-gates-is-he-just-hypocrite.html. Accessed 15 Dec 2017. The B Team. 2018. A New Bar for Responsible Tax: The B Team Responsible Tax Principles. Retrieved from http://bteam.org/wp-content/uploads/2018/02/A-New-Bar-For-Responsible-Tax. pdf. Accessed 2 Jan 2019. Treviño, Linda K., and Katherine A. Nelson. 2014. Managing Business Ethics: Straight Talk About How to Do it Right, 6th ed. Hoboken: John Wiley. Tschopp, Daniel J. 2005. Corporate Social Responsibility: A Comparison Between the United States and the European Union. Corporate Social Responsibility and Environmental Management 12 (1): 55–59. UK House of Commons, Committee of Public Accounts. 2012. HM Revenue & Customs: Annual Report and Accounts 2011–12. Nineteenth Report of Session 2012–13 Report, together with formal minutes, oral and written evidence. London, The Stationery Office Limited. Retrieved from http://www.publications.parliament.uk/pa/cm201213/cmselect/cmpubacc/716/ 716.pdf. Accessed 12 Dec 2017. Urbach, Xander, et al. 2018. Tax Transparency Benchmark 2018: A comparative study of 76 Dutch listed companies. VBDO. Retrieved from https://www.vbdo.nl/wp-content/uploads/2018/ 11/TTB18-1.pdf. Accessed 3 Jan 2018. Valor, Carmen. 2005. Corporate Social Responsibility and Corporate Citizenship: Towards Corporate Accountability. Business and Society Review 110 (2): 191–212. Van Gils, Stijn. 2018, January 9. Duurzaam beleggen past niet in één getal. Financieel Dagblad. Retrieved from https://fd.nl/beurs/1234145/duurzaam-beleggen-past-niet-in-een-getal#!. Accessed 21 Dec 2018. VBDO. 2014. Good Tax Governance in Transition, Transcending the Tax Debate to CSR. Utrecht: VBDO (Vereniging van Beleggers voor Duurzame Ontwikkeling) Publication.

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VBDO. 2018. Tax Transparency Benchmark 2018. Utrecht: VBDO (Vereniging van Beleggers voor Duurzame Ontwikkeling) Publication. Verstappen, Rudy, et al. 2017. VBDO Investor Guide: Integration of Tax in Responsible Investment: Practical Steps to Design and Implement a Responsible Tax Strategy for Investors. VBDO & PwC. Retrieved from https://www.vbdo.nl/wp-content/uploads/2017/09/ VBDOInvestorGuideIntegrationoftaxinresponsibleinvestment.pdf. Accessed 3 Jan 2018. Wan-Jan, Wan Saiful. 2006. Defining Corporate Social Responsibility. Journal of Public Affairs 6 (3–4): 176–184. Wintour, P. 2015, February 6. Ed Miliband: I Won’t Back Down on Tax Avoidance. The Guardian (online edition). Retrieved from http://www.theguardian.com/politics/2015/feb/06/ed-milibandtax-avoidance-business-labour. Accessed 11 June 2018. Wood, Donna J. 1991. Corporate Social Performance Revisited. The Academy Management Review 16 (4): 691–718.

Ave-Geidi Jallai is a Ph.D. researcher in the Tax Law department at Tilburg University, Law School, The Netherlands. Her research focus is on the theory and practice of international corporate tax planning, tax avoidance, corporate governance and corporate social responsibility. She has published a number of articles in this area of research. Her latest work is a book chapter (with Hans Gribnau), Sustainable Tax Governance and Transparency, in Susanne Arvidsson (ed.) Challenges in Managing Sustainable Business: Reporting, Taxation, Ethics and Governance (Palgrave Macmillan 2019), 337–369.

Chapter 10

Ethical Standards for Tax Advisers Michael Walpole

Abstract In this chapter the author reviews the renewed emphasis on tax adviser ethics that is evident in the early 21st Century. The chapter identifies some of the reasons for this emphasis and some of the administrative responses to the involvement of advisers in less acceptable forms of tax planning. The chapter notes signs of a divergence (without concluding that there has been complete separation) of ethics between tax advisers in the legal profession and others. In the course of doing so the chapter identifies the key responsibilities borne by tax advisers to their clients and to society. Keywords Ethics · Tax evasion · Tax avoidance · Tax minimisation · Tax planning · Tax compliance · POTAS (UK) · PCRT · Tax Practitioners Board (Australia) · Starbucks · Vodafone · Tax schemes · Tax advisers · Tax law

10.1 Introduction and Context The early 21st Century would appear to be a unique period of scrutiny of the ethics of the professionals who give tax advice. This has been manifested particularly in Australia and the United Kingdom (UK) but this scrutiny is not unique to those 1 jurisdictions. Several events have come together to account for this closer scrutiny of tax advisers in the context of tax avoidance. In the UK, the world financial crisis of mid-2007 to early 2009 accounts for some of this scrutiny. During this period a severe downturn in the United States (US) housing market became a catalyst for a wider economic downturn spread via overly risky financial positions that had been taken by US and other banks which effectively contaminated the global financial system. Banks around the world faced bankruptcy and governments stepped in to prop them up and

1 For a commentary on the tax advising profession in the United States of America see Rose (2011).

M. Walpole (B) UNSW School of Tax and Business Law, Sydney, Australia e-mail: [email protected] © Springer Nature Singapore Pte Ltd. 2020 R. F. van Brederode (ed.), Ethics and Taxation, https://doi.org/10.1007/978-981-15-0089-3_10

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reduce the spread of the downturn. Many workers lost their jobs and governments were placed under stress to contain the consequences of a worldwide recession. It is this phenomenon that turned the minds of citizens and the press and other media to scrutiny of the behaviours of professionals (particularly banking sector professionals) and of governments in protecting some from the consequences of their actions. It was certainly a catalyst for heightened interest in the tax and social security benefits system in the UK and this is discussed further below. The ultimate effect was to take the simmering interest in the role of ethics in the tax profession to a rapid boil, certainly in the UK.

10.2 Tax Avoidance in the 21st Century As is explained above, the prospect of increased taxes and cuts in social benefits that might be a consequence of government attempts to cope with the effects of the worldwide recession encouraged activists and various media outlets in the UK to turn their attention to tax avoidance. The Guardian newspaper had long been running articles intended to expose the excesses of tax avoidance practices. It was joined in its criticism of tax minimisation and poor administrative controls on this through the efforts of the interest groups UK Uncut, and the Tax Justice Network. Over the years, individual multinational companies and private individuals were criticised for their tax minimisation. A popular UK comedian, Jimmy Carr, was revealed to be a participant in the so-called “K2” tax avoidance scheme which evidently involved the use of payments of income to trusts sited in tax havens (such as Jersey) which then lent the monies back to the economic owner of the income. As it was a loan it was not liable to tax in the hands of the economic owner and as the original funds were paid to a non-resident trust it was not subject to tax in the UK (Furness and Hope 2012). There was no suggestion of illegality on the part of Carr or others involved but the morality of their actions was questioned.2 Administrative inertia (and worse) was also alleged in the media. A particularly fierce attack was made on the personal integrity of the Second Permanent Secretary of HMRC under such headlines as “How Vodafone made tax dodging respectable” in The Guardian (Cohen 2010) relying apparently on a report in Private Eye.3 The criticism of officials spread to a criticism of tax advisers (Brooks 2019). There were also calls to boycott Vodafone itself.4 The adverse media concerning Vodafone was extremely effective and in 2010 it had to close its London, Oxford Street, store for hours during a protest (Monk 2010). 2 See Furness (2012) “…treasury minister MP David Gauke told the BBC’s World at One he agreed

such tax avoidance schemes were ‘morally repugnant’”. 1275 12 November 2010, http://www.private-eye.co.uk/sections.php?section_link=in_the_ back&issue=1275. 4 See Facebook “Boycott Vodafone until they repay their 6bn tax bill” 29 October 2010, https:// www.facebook.com/Boycott-Vodafone-until-they-repay-their-6bn-tax-bill-153153704726686/. 3 Issue

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Other protests affected other companies like TopShop5 and Marks and Spencer. The Tax Justice Network and the UK Uncut tax advocacy groups maintained pressure on the authorities and taxpayers (and continue to do so). This public concern about tax avoidance also spread to the formal organs of the UK democratic process and Parliament’s Public Accounts Committee began an investigation of Her Majesty’s Revenue and Customs (HMRC) and its responses to alleged tax avoidance, and of the role of advisers in the advice they provide which results in tax minimisation on behalf of their clients.6 The resultant Report of the Committee of Public Accounts entitled Tax avoidance: the role of large accountancy firms concluded, amongst other things, that HM Revenue & Customs (HMRC) appears to be fighting a battle it cannot win in tackling tax avoidance. Companies can devote considerable resource[s] to ensure that they minimise their tax liability. There is a large market for advising companies on how to take advantage of international tax law, and on the tax implications of different global structures. The four firms employ nearly 9000 people and earn £2 billion from their tax work in the UK and earn around $25 billion from this work globally. HMRC has far fewer resources. In the area of transfer pricing alone there are four times as many staff working for the four firms than for HMRC (House of Commons 2013).

Tax minimisation had become so publicly unpalatable that on occasion the mere hint of it could cause extreme reactions. For this writer the high-water mark of this was seen in the reactions of the public to allegations in 2012 that the US multinational coffee chain, Starbucks had used tax minimisation techniques to pay no corporate tax in the UK for many years, and in the response by Starbucks which was to pay tax it apparently did not owe. …in its 15 years of operations in the UK, the company had paid UK corporate income taxes only once. Using a combination of legal tax avoidance practices (e.g., transfer prices, royalty payments, interest expense), Starbucks UK had effectively shifted taxable income to other Starbucks subsidiaries where it would be taxed at lower rates. In 2012, Starbucks in the UK faced a public relations furor[e] over its failure to pay British corporate income taxes (Campbell and Helleloid 2016, 38).

At risk of itself facing a boycott, the managing director of Starbucks UK stated, in an open letter on the website and in a speech, that Starbucks would voluntarily abandon certain UK tax deductions associated with transfer pricing and thus pay an extra £20 million in corporate tax in 2013 and 2014 “above what is required by law”. This demonstration of the power of social (and thus consumer) sanctions is hard to ignore. It seems that community perceptions are very much part of the context in 5 “UK

Uncut targets Topshop and Vodafone over tax arrangements: Movement invades stores in push for government to tax the rich and big companies more instead of making budget cuts”, The Guardian 4 December 2010, https://www.theguardian.com/politics/2010/dec/04/uk-uncut-protesttopshop-vodafone; Ben Leach and Alastair Jamieson, “Marks and Spencer targeted as tax protests widen” The Telegraph, 19 December 2019, https://www.telegraph.co.uk/finance/newsbysector/ retailandconsumer/8212040/Marks-and-Spencer-targeted-as-tax-protests-widen.html. 6 See Tom Bergin, Reuters, 1 February 2013, https://uk.reuters.com/article/uk-britian-taxaccountants/mps-press-accountants-on-tax-avoidance-idUKBRE90U0SG20130131.

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which taxpayers and tax advisers must operate. These perceptions must affect ethical decision making. Other events have also drawn tax minimisation and those who facilitate it into the spotlight. Leaks and revelations have maintained the profile of tax in the public eye. In Australia a leak of incriminating information prompted a large scale investigation by several Federal agencies including the Australian Taxation Office (ATO) in the form of the “Project Wickenby”.7 The contents of a laptop computer seized from a Switzerland based accountant, Phillip Egglishaw, apparently revealed details of Australian clients of the accounting firm Strachans and it was alleged that these clients were engaging in tax evasion using offshore financial arrangements to divert income beyond the reach of the Australian tax authorities. The relevant agencies such as the ATO and the Commonwealth Director of Public Prosecutions8 have announced the successful conclusion of the multi-agency task force’s activities. Although this task force was concerned with evasion, not avoidance, the associated publicity kept tax and the actions of those determined to escape payment of tax in the public eye and mind. International revelations had a similar effect in Australia and the UK and elsewhere. A source, who apparently worked for the Panamanian law firm Mossack Fonseca, in 2015 released millions of documents to a journalist at the German newspaper Süddeutsche Zeitung. These revealed the names and volumes of confidential information concerning the financial arrangements and activities of thousands of clients of the law firm. The documents and conclusions drawn from them were published by the International Consortium of Investigative Journalists (ICIJ)9 and led to widespread media reports and associated coverage. This leak of documents which suggested financial impropriety especially tax evasion through secrecy was variously called “The Panama Papers” or “The Mossack Fonseca Papers” and received widespread publicity throughout the world. It was followed by another leak to the same German newspaper in the form of “The Paradise Papers”. The documents in this second leak were confidential documents and communications of the law firm, Appleby, headquartered in Bermuda, and of the corporate service firms, Estera (based with Appleby in Bermuda) and Asiaciti Trust. The revelation of the identities behind many entities based in tax havens and of the relationships between such entities also led to many media stories about hidden wealth and hitherto secret economic connections between various parties. The 21st Century has thus seen heightened and consistent interest in tax avoidance and in the actions of professionals in advising clients on tax matters. Both the UK and the Australian Parliament called tax professionals to hearings to investigate and critique their role in advising on structures and transactions associated with tax minimisation. The UK House of Commons Committee of Public Accounts reported on hearings in January 2013 involving representatives from four large professional 7 See

https://www.ato.gov.au/General/The-fight-against-tax-crime/Our-focus/Project-Wickenbytask-force/. 8 See https://www.cdpp.gov.au/crimes-we-prosecute/fraud/project-wickenby. 9 https://www.icij.org/investigations/panama-papers/.

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services firms (PWC, Deloitte, EY, and KPMG) about whose role the Committee said it had concerns. The Report indicated that there seemed to have been a change in culture in such firms but that this might not be enough. The four firms insisted that they no longer sell the type of very aggressive avoidance schemes that they sold ten years ago. While this may be the case, we believe they have simply moved to advising on other forms of tax avoidance which are profitable for their clients; such as the complex operating models they offer to major corporate clients to minimise tax by exploiting the lowest international tax rates. The four firms have developed internal guidelines on where the line between tax planning and aggressive avoidance lies, but these principles do not stop them selling schemes with as little as a 50% chance of succeeding if challenged in court. Clearly HMRC has to consider the risk to the taxpayer of a protracted legal battle. It would appear that firms and tax avoiders are taking advantage of the constraints under which HMRC is obliged to operate. Furthermore, HMRC is always constrained by resources (House of Commons 2013, 3–4).

The Report expressed reservations about the relationships that these firms had with HMRC. The close relationship that the four firms enjoy with government creates a perception that they wield undue influence on the tax system which they use to their advantage. They told us that they second staff to government to provide technical advice on changes to tax laws and that this has improved the quality of legislation. The witnesses conceded that this may give the perception that they are able to influence legislation to help their larger clients to the disadvantage of smaller UK businesses (House of Commons 2013, 4).

These activities sparked concerns for the Committee which said: More worryingly, we have seen what look like cases of poacher, turned gamekeeper, turned poacher again, whereby individuals who advise government go back to their firms and advise their clients on how they can use those laws to reduce the amount of tax they pay (House of Commons 2013, 4).

In Australia the Senate Economics References Committee (2018, 37) expressed similar concerns about the role of accounting firms (especially big accounting firms) in producing financial statements that were transparent enough for scrutiny of tax positions. In a dissenting comment one of the political parties expressed concerns about lack of resources in the ATO and the role of accounting firms in helping to run the tax system. Over the period that this inquiry has been conducted, staffing levels at the ATO have been massively reduced. … 1.5 At the same time that these mass-scale public sector redundancies have occurred, public money going to the big-four accounting firms for consulting services has grown to $1.7 billion over the past five years.2 Ernst & Young, PwC, KPMG and Deloitte cannot substitute the ATO’s role in pursuing tax avoidance strategies, particularly given that they are also the authors and facilitators of tax avoidance strategies around the world (2018, 87).

Governments have recognised the need to control the actions of professionals that play an intermediary role in the relationship between taxpayers and the revenue authorities. This has resulted in the introduction of laws that heavily discourage tax advisers’ involvement in the more extreme forms of tax minimisation. An example

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from Australia is the response to mass marketed tax avoidance schemes of the late 1990s which was to place the intermediaries involved in marketing such schemes at risk themselves. Introduced in 2006, the “Promoter Penalty” rules aim (and at time of writing apparently successfully) to deter wide promotion of tax exploitation schemes. This is effected by imposing a civil (as distinct from criminal) penalty on advisers where they have promoted tax exploitation schemes, or where they have implemented a scheme that purports to conform to a ruling10 issued by the ATO but in a manner that is in fact different to the ruling in question. The Commissioner of Taxation has powers under the “Promoter penalties” regime to seek the imposition of a penalty by the Federal Court, to stop the promotion or implementation of an offending scheme and to enter voluntary undertakings with the scheme promoters. Noticeably the Explanatory Memorandum accompanying the Bill that introduced Division 290 into the Tax Administration Act 1953 contains this statement: The civil penalty regime is not intended to inhibit the provision of independent and objective tax advice, including advice regarding tax planning. Advisers who advise on tax planning arrangements, even those who advise favourably on a scheme later found to be a tax exploitation scheme, are not at risk of civil penalty to the extent that they have merely provided independent, objective advice to clients.11

This latter qualification suggests that the Parliament was intending to be tolerant of tax advice that may result in reduction of a taxpayer’s liability provided it is not in the nature of a scheme promoted to multiple taxpayers. In the UK there are parallel measures aimed to discourage tax advisers in the promotion of tax avoidance schemes. These are the POTAS12 (Promoters of Tax Avoidance Schemes) regime. The POTAS rules are very deliberately aimed at tax advisers and, it appears, at a subset of them. The objectives of the regime are to change the behaviour of a small and persistent minority of promoters of avoidance schemes who exhibit certain behaviours, and to aim to deter the development and use of avoidance schemes by influencing the behaviour of promoters, their intermediaries and clients (HMRC 2015, 6).

The POTAS rules require promoters that have been identified for monitoring purposes to disclose to HMRC details concerning their products and their clients; and to disclose to clients that they have been identified for monitoring. It is noticeable that the POTAS rules are, like the Australian promoter penalty rules, apparently aimed at extreme types of tax avoidance advice. This suggests that tax avoidance advice that falls outside of these extreme categories does not merit sanctions being imposed by the tax authorities. The sanctions that might be visited upon tax advisers are discussed further below. 10 The

reference is to “Product rulings” which are public indications (binding on the ATO) of how the tax law applicable to a particular tax preferred investment will be applied. The example typical of the period in question is that of agricultural schemes designed to promote investment in particular types of crop such as olive tree plantations; forestry plantations etc. 11 Clause 3.50 Explanatory Memorandum Tax Laws Amendment (2006 Measures No. 1) Bill 2006. 12 POTAS is found in Part 5 of the Finance Act 2014.

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10.3 Morals in Tax and Ethics in Tax Although the moral aspects of tax avoidance and the advice that can lead to tax avoidance have been the subject of public criticism arising from the heightened media attention described above, it is ethics that guide members of the tax profession in what they are expected to do to assist clients. In his article “Tax Avoidance—a View from the Dark Side” David Bloom QC (2016) has made the point, emphatically, that the obligation to pay tax is legal not moral. Unpopular that such a view may be with some people, the proposition does appear to be correct. The situation is somewhat analogous with the duty of a criminal defence lawyer to provide their client with the best defence possible, within the bounds of the law and the facts known to counsel. It may seem morally reprehensible to defend a murderer or thief but the legal (and ethical) obligation is to act in the best interests of a client provided the lawyer observes their overriding duty to a court and is not privy to a defence based on a known untruth. Bloom has cited numerous authorities in support of the point. One he mentions is the former Chief Justice of the High Court of Australia, Sir Anthony Mason who said in a speech There is the never-ending debate on the morality of tax avoidance and, more recently, the morality of lawyers participating in it. To me it has always seemed that the morality of tax avoidance (as distinct from tax evasion) is very much a matter for the individual taxpayer, although he runs the risk of adverse comment…However, the morality of tax avoidance is a matter separate and distinct from the issue of tax liability in particular cases (Mason 1975, 574).

Bloom also cited Freedman (2004, 350) who quoted from an article by Professor Wheatcroft in which he concluded that: …whatever may be the personal sympathies of a judge who tries a Revenue case, his decision has to be based on purely legal and technical grounds, and Parliament can expect no discretion or elasticity from the courts in enforcing taxation law (Wheatcroft 1955, 218, cited by Bloom 2016).

In the case of Leary v FCT 13 Brennan J (as he was at the time) expressed concern about the implications of legal and accounting professionals promoting a tax scheme not because it was a tax scheme but because they had “assumed the mantle of entrepreneurs”. He was evidently concerned that this created a conflict of interests saying: The… [differences in between the functions of adviser and entrepreneur] arise because the field of professional activity is coextensive with a lawyer’s professional duty. That duty is to give advice as to the meaning and operation of the law and to render proper professional assistance in furtherance of a client’s interests within the terms of the client’s retainer. It is a duty which is cast upon a lawyer, as a member of an independent profession, whether his services are sought with respect to the operation of taxing statutes, the provisions of a contract, charges under the criminal law or any other of the varied fields of professional concern. It is a duty which arises out of the relationship of lawyer and client. 13 Leary

v FCT (High Court) 80 ATC 4452–4453.

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But activities of an entrepreneur in the promotion of a scheme in which taxpayers will be encouraged to participate falls outside the field of professional activity; those activities are not pursued in discharge of some antecedent professional duty. Entrepreneurial activity does not attract the same privilege nor the same protection as professional activity; and the promotion of a scheme in which particular clients may be advised to participate is pregnant with the possibility of conflict of entrepreneurial interest with professional duty.

It would seem that the ethical obligations of an adviser (at least a legal adviser) are to provide professional assistance within the bounds of the law, irrespective of the morality of the use to which the advice may be put. In providing the professional assistance the adviser is obliged to avoid conflicts of interest that may make the client’s interests secondary to other considerations—especially the interests of the adviser. There are several cases in the Australian jurisdiction that make it clear that the adviser’s obligation is to give competent advice on the application of the tax law to the circumstances of the client. This will (indeed must) include advice that will result in the client paying less tax than they would otherwise pay. In Walker v Hungerfords14 the accountants, Hungerfords, had erroneously calculated the plaintiff’s tax liability for many years owing to a miscalculation of the amount of depreciation that might legally be claimed for tax purposes. They were liable to their client for damages in the form of overpaid tax as a result. In Bell v Vahexi Pty Ltd 15 an accountant tax agent was retained by a client resident overseas to acquire Vahexi Pty Ltd and to transfer property to that company. The tax agent (who was knowledgeable but not expert in tax) failed to warn the client of the tax implications of this because he was not aware of a recent change to the income tax law in the form of new “thin capitalisation” rules and the client suffered extra tax. The client was successful in a damages claim against the tax agent. In Symond v Gadens Lawyers Sydney Pty Ltd 16 the plaintiff had retained the defendant to advise him on the appropriate means by which to raise funds from his business interests in order to finance extensive property renovations. The advice that was given incurred for the client a very substantial personal and business tax liability and the client was awarded damages. These cases may seem to be concerned solely with professional competence and care but what underlies them, and the liability for incorrect advice, is the fact that an adviser is required to provide a client with the correct legal advice pertaining to the tax laws. This is a professional obligation whatever a moral view of the advice may be. It is suggested that moral considerations are irrelevant to the client adviser relationship. Introducing or maintaining such considerations may indeed create a conflict between the adviser’s obligations to the client and wider moral views of their advice. Cadesky et al. have made the point that a professional torn by such conflicts may need to step aside as an adviser. In a report intended to lead to the establishment of a model Taxpayer Charter (Cadesky et al. 2013). the authors state (inter alia) that tax 14 Walker

v Hungerfords (1987) 19 ATR 745. v Vahexi Pty Ltd 99 ATC 4055. 16 Symond v Gadens Lawyers Sydney Pty Ltd [2013] NSWSC 955. 15 Bell

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professionals and staff of revenue authorities may adopt codes of behaviour based on ethical considerations, rather than on formal legal requirements. These “…introduce the concept of duties and loyalties owed to the community and its social and political institutions, and distinguish these from those owed to the law” (Cadesky et al. 2013, 187). This, they say, may lead to a conflict between the lawful instructions of the client and the wider interest the professional owes to the community. This conflict means the professional must make a choice, and if they choose to obey the ethical code, they may need to decline to act for the client. If the choice is to comply with the client’s instructions the only action compatible with their ethical obligations may be “…to resign or accept the disciplinary consequences” (Cadesky et al. 2013, 187).

10.4 Codes of Ethical Conduct Attempts have been made in many jurisdictions to resolve the conflicts that tax professionals face in giving tax advice. In the UK, evidently in response to the criticism referred to above of tax professionals, the Chartered Institute of Taxation (CIOT) has adopted a code entitled “Professional Conduct in Relation to Taxation”. This code is the joint product of seven professional bodies in the UK (and globally) whose members have to deal with tax advice.17 The code is emphatic on the subject of tax evasion which it says a member must never be knowingly involved in. As for other forms of tax minimisation the “PCRT” “…sets out the Fundamental Principles and Standards for Tax Planning all members are expected to follow” (CIOT 2017). The PCRT is deliberately placed within a moral context and the foreword explains that Tax advisers operate in a complex business and financial environment and a core purpose of the tax system is to fund public services and to ensure the good health of our economy and society. Tax advisers therefore have a responsibility to serve their clients’ interests whilst upholding the profession’s reputation and the need to take account of the wider public interest (CIOT 2017).

The PCRT will evidently be used in disciplinary proceedings involving members of the organisations involved. The PCRT establishes five Principles and five Standards and is applicable to all members providing advice on UK tax matters regardless of their employment contracts or membership of other professions and regardless of where in the world they work. The five principles under the PCRT are: integrity; objectivity; professional competence and care; confidentiality; and professional behaviour (CIOT 2017, 6–8). 17 The bodies are the Association of Accounting Technicians (AAT); Association of Chartered Certified Accountants (ACCA); Association of Taxation Technicians (ATT); Chartered Institute of Taxation (CIOT); Institute of Chartered Accountants in England and Wales (ICAEW); Institute of Chartered Accountants of Scotland (ICAS); and the Society of Trust and Estate Practitioners (STEP).

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These principles are consistent with expectations of advisers operating in similar professions in other jurisdictions. The five standards in the PCRT (CIOT 2017, 8–10) are a guide to how professional services in tax are to be provided. Such services (principally advice) must: be client specific; be lawful; include disclosure and transparency both where required by law and “wherever it is appropriate given a wider relationship or dialogue with HMRC relevant to that client”; include documentation of concerns where the member is genuinely and reasonably concerned whether the advice is in breach of the standard; and based on professional judgement and relevant documentation of the exercise of that judgment. The terms of the standards in the PCRT code should be welcomed for a number of reasons. They require the tax adviser to consider the propriety of their advice having regard to the law and their client’s circumstances and they require the tax adviser to document the fact that they have exercised their judgment in relation to the advice given where there might be a call to defend the correctness and appropriateness of the advice given. In this respect the PCRT is certainly onerous. The PCRT seems to articulate a wider duty on the part of the professional to the operation of the tax law and the reputation of the tax profession that is superior to their duty to their client. This seems to be clear from the guidance that has been issued by the CIOT (CIOT 2019). In that advice the following response is provided to the FAQ (Frequently Asked Question) “What is my responsibility if a client wishes to engage in planning which I do not consider to be appropriate or does not sit comfortably with my business principles and ethics?” (CIOT 2019, 6). The response given is: You do not have to advise on or recommend tax planning which you do not consider to be appropriate or otherwise does not align with your own business principles and ethics (CIOT 2019, 7)

The guidance does go on to qualify this by warning that If you owe a legal duty of care to the client to advise in this area, you should ensure that you comply with this by, for example, advising the client that there are opportunities that they could undertake, even though you are unwilling to assist, and recommending that they seek alternative advice….Ultimately it is the client’s decision as to what planning is appropriate having received advice. However, you should ensure that the client is made aware of the risks and rewards of any planning, including that there may be adverse reputational consequences (CIOT 2019, 7).

By this means the overriding legal obligation to a client seems to be recognised, but it is interesting that the tone of the guidance places the tax advisers’ business principles and ethics first. A similar, but statutory, code applies to tax advisers in Australia although it is less refined than the PCRT in the guidance afforded registered tax agents about tax planning advice. The Australian code of conduct is a part of the Tax Agent Services Act 2009. It sets out the principles which govern the professional conduct of registered tax agents in five categories namely: honesty and integrity; independence; confidentiality; competence and “other responsibilities”. The parallels with the PCRT will be

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obvious. The “other responsibilities” refer to procedural elements associated with prompt and truthful responses to the administrative requirements of and communications from the Tax Practitioners Board which is the body that administers the registration of tax agents nationally and administers the Act including the code. But they also contain certain key expectations of tax agents that are of relevance to this discussion. These are that professionals subject to the code must: • …not knowingly obstruct the proper administration of the taxation laws. [and] • …advise [their] client of the client’s rights and obligations under the taxation laws that are materially related to the tax agent services [they] provide.18

This seems to suggest that obedience to the law, and presumably access to the liberties it may afford clients, is overriding of any competing norms that might temper the agent’s inclination to give advice as to the actual application of the tax law. The Australian code is much less nuanced than PCRT as to the giving of advice that may involve tax avoidance. As close as it gets to this are the point already made about advising on rights and obligations and the requirements that advisers: Act with honesty and integrity19 ; Act lawfully in the best interests of their client20 ; and Take reasonable care to ensure that taxation laws are applied correctly to the circumstances in relation to which they are providing advice.21 Closer to the PCRT approach is the professional code applicable to accountants in Australia. The Accounting Professional and Ethical Standards Board (APESB) has issued “APES 220 Taxation Services” which is a guideline for all accounting professionals who are members of the three main accounting bodies in the country.22 These state that members shall abide by their public interest obligations when they provide taxation services. There is no specificity as to what these “public interest” obligations may be. More pointed is the advice in relation to tax schemes which stresses that the decision as to whether or not to participate in a tax scheme is that of the client.23 However APES 220 is by no means laissez faire. The code requires the professional (subject to the agreed scope of work) to “give the Client or Employer sufficient information to enable the Client or Employer to be fully informed of the details of the scheme or arrangement and its current and future ramifications including the risks and uncertainties…”.24 There may be no participation in misrepresentation and advisers are specifically not permitted to 18 Section

30-10 (11) & (12) Tax Agents Services Act 2009. 30-10 (1) Tax Agents Services Act 2009. 20 Section 30-10 (4) Tax Agents Services Act 2009. 21 Section 30-10 (10) Tax Agents Services Act 2009. 22 Chartered Accountants Australia and New Zealand, CPA Australia and the Institute of Public Accountants. 23 Para 5.1 APES 220. 24 Para 5.2 APES 220. 19 Section

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…promote, or assist in the promotion of, or otherwise encourage any tax schemes or arrangements where the dominant purpose is to derive a tax benefit and it is not reasonably arguable that the tax benefit is available under Taxation Law. Accordingly, a Member shall not provide advice on such a scheme or arrangement to a Client or Employer other than to advise that in the Member’s opinion it is not effective at law.25

Thus, any ambiguity in the law, it seems, must tend (on a reasonably arguable standard) to favour the client’s position otherwise the adviser is not permitted to advise on it other than in the resolution of such matters.26 This is not very different to the PCRT requirement. Under APES 220, in the case of advisers serving entities that predominantly promote tax schemes advisers covered by the code may not have any financial interest in such an entity. One wonders how this requirement is managed in practice.

10.5 Conclusions In light of these various approaches to the regulation of tax advisers through statutory controls and professional standards what can one conclude about the obligations that tax advisers bear to their clients and to the tax system? Many aspects seem clear, a few seem to be open interpretation and one area, if the UK experience is an indicator, may be changing as a result of public pressure. Tax advisers may not engage in illegality and may not be party to that of their clients. They may not facilitate evasion of the tax law nor advise on transactions that rely on false records or documents or that rely for effectiveness on misrepresentation or lack of disclosure to the revenue authority. Fraud or misrepresentation are not legitimate aspects of the practice of a tax adviser. Tax advisers have a duty of care to their clients. They are required to understand their client’s affairs to the extent necessary to provide correct tax advice that is suited to their client. They are expected to take care in applying the law free from error of law or fact. Clients are entitled to rely on this in the service they pay for and the adviser’s failure will be open to a claim for compensation on the part of the client. Advisers have an obligation to be competent and professional and to maintain skills and knowledge. They should be up to date in the current law as it applies to their client’s circumstances. In cases where they are not, they would be obliged to identify the gap in knowledge and inform the client of this and the possible implications so that the adviser or the client can seek supplementary advice from the relevant expert. Leading from this, advisers have an obligation associated with professionalism to communicate clearly and frankly with clients and appraise them of the risks associated with the course of action that the client is determined to take. Clients are to appreciate their tax position and the implications of the choices they are making.

25 Para 26 Para

5.4 APES 220. 5.5 APES 220.

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Advisers have a duty of confidentiality to clients and except where required to by law may not reveal to others any confidential information concerning their clients ranging from basic information such as name and addresses to even more sensitive information pertaining to connected entities, contractual terms, and choices and decisions that may have been influenced by consideration of the tax implications of such choices. Advisers should follow the instructions of clients and it is wise as a practical measure to document these. Ultimately it is the client’s tax advice and the client’s decision as to whether to follow it. The adviser has a duty to assist the client to the best of their ability in fulfilling the instructions of the client provided there is no breach of the adviser’s legal obligations in doing so. Advisers must avoid conflicts of interest between acting professionally and independently for the client and other imperatives that may compete. They must thus not be financially interested in the outcomes of the advice afforded clients other than to the extent of their reasonable and legitimately calculated fee. They should not promote schemes or investments to clients if they have a financial interest such as a commission associated with the clients’ decision to participate in such a scheme or investment. Tax advisers have an obligation to obey the law and this overrides obligations to act in the best interests of the client. They should clearly explain to clients where these boundaries lie. It is preferable that clients be fully informed of these boundaries in advance in order to minimise risks of, for example, self-incrimination. It is clear that tax advisers are subject to ethical standards and the items identified above demonstrate this although there is clearly a substantial overlap between legal requirements of tax advisers and requirements that may be imposed under professional ethics. It would be surprising if this were not so. However, this reference to ethics as distinct from law would appear to be a point that is perhaps moving under the recent inordinate pressure on professionals and administrations to curtail the use of tax avoidance practices. The tension here is epitomised in the observation by Cadesky et al. above that the adoption of codes of behaviour based on ethics rather than formal legal obligations may set the professional up to have to make a choice between following their strict legal (and perhaps morally unpalatable) obligations to their client or to follow the ethical code that has placed normative considerations in competition with the legal obligations. This is clearly what the UK’s PCRT code does as it evidently permits a tax advisor to decline to “advise on or recommend tax planning which you do not consider to be appropriate or otherwise does not align with your own business principles and ethics” (CIOT 2019, 7) provided this position is not compromised by the direct terms of the letter of engagement. Despite this saving proviso the PCRT is based not only on the interests of the client but also on “upholding the profession’s reputation and the need to take account of the wider public interest” (CIOT 2017, 3). The Australian accounting profession’s more vague reference to the public interest27 is somewhat similar in that it is stated to be an overriding consideration in the provision of tax advice. 27 More

vague because there is no definition of public interest in the Standard.

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This point of distinction is possibly a result of the contemporary pressure that public frustration with tax avoidance has created, but it could also be a point of distinction between accountants and other non-lawyers in tax practice and lawyers in tax practice. The latter profession would appear (see the work of David Bloom QC referred to above) to be accepting only of legal obligations to pay tax and legal imperatives at play in tax avoidance situations. The former appear to be mindful of the public perceptions of their profession, especially of late. This may suggest a bifurcation of the tax adviser profession on this point. Should this professional distinction be known and appreciated there can be little doubt as to which branch of the tax profession an amoral client would prefer to consult.

References Australian Senate Economics References Committee. 2018. Corporate tax avoidance: Much heat little light so far. Bloom, David. 2016. Tax avoidance—a view from the Dark Side. Melbourne University Law Review 39 (3): 950–980. Brooks, Richard. 2019. Tax, Lies, and Videotape. Private Eye Special Report Issue 1494. http:// www.private-eye.co.uk/issue-1494/special-reports/tax-lies-and-videotape. Cadesky, Michael, Ian Hayes, and David Russell. 2013. Towards Greater Fairness in Taxation—A Model Taxpayer Charter Preliminary Report. Society of Trust and Estate Practitioners (Final version 2016. Amsterdam: IBFD). Campbell, Katherine, and Duane Helleloid. 2016. Starbucks: Social Responsibility And Tax Avoidance. Journal of Accounting Education 37: 38–60. CIOT et al. 2017. (Republished 2019). Professional Conduct in Relation to Taxation. CIOT et al. 2019. PCRT help sheet B: Tax Advice. Cohen, Nick. 2010, November 14. How Vodafone Made Tax Dodging Respectable. The Guardian. Freedman, Judith. 2004. Defining Taxpayer Responsibility: In Support Of A General Anti Avoidance Principle. 4 British Tax Review: 332. Furness, Hannah, and Christopher Hope. 2012, June 19. Jimmy Carr tax avoidance scheme investigated by HMRC. The Telegraph. HMRC. 2015. Guidance Promoters of Tax Avoidance Schemes (POTAS). House of Commons Committee of Public Accounts. 2013. Tax Avoidance: The Role of Large Accountancy Firms. Forty-fourth Report of Session 2012–13, HC 870. Leach, Ben and Alastair Jamieson. 2019, December 19. Marks and Spencer Targeted as Tax Protests Widen. The Telegraph, https://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/ 8212040/Marks-and-Spencer-targeted-as-tax-protests-widen.html. Mason, Anthony. 1975. Where Now? Australian Law Journal 49: 570. Monk, Ed. 2010, October 28. Vodafone Closes Oxford St Store at £6bn Tax Protest. This is Money. Rose, Charles A. 2011. Tax Lawyer’s Dilemma: Recent Developments Heighten Tax Lawyer Responsibilities and Liabilities. Columbia Business Law Review 258. Wheatcroft, George S.A. 1955. The Attitude of the Legislature and the Courts to Tax Avoidance. Modern Law Review 18 (3): 209.

Michael Walpole is a professor and the head of the School of Tax and Business Law, UNSW Sydney Business School.

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Michael’s research interests include tax transfer pricing and GST/VAT and he has worked at the OECD on several VAT topics. Michael’s Ph.D. thesis was on the taxation of goodwill and he has undertaken a number of research projects on the taxation of intangible property. He also researches aspects of tax administration and costs of tax compliance as well as the ethics of tax practice. Michael has authored and co-authored several books including Proposals for the Reform of the Taxation of Goodwill, Understanding Taxation Law and Compliance Cost Control. Michael has also written and presented many papers on his research topics to practitioner and academic audiences in Australia and overseas. He is editor of the Australian Tax Forum and he is also author and co-author of a number of articles on GST, taxation of intellectual property, tax administration and taxation compliance costs, especially psychological costs of taxation compliance. Michael is an International Research Fellow at the Oxford University Centre for Business Tax in the Said Business School, University of Oxford. In 2010 and 2012, he was engaged in a project at the Centre for Business Tax to study the role of tax in choices made by large companies when locating valuable intangible property. In 2012, Michael was also a Visiting Professor in the Centre for Tax Policy and Administration at the OECD in Paris. He continues to participate in OECD projects. Michael has been awarded the Hill Medal by the Australasian Tax Teachers Association (ATTA) for his contribution to tax teaching and is a past President of ATTA.

Part III

Tax Law Enforcement

Chapter 11

Taxpayer Rights and Protections in a Digital Global Environment Duncan Bentley

Abstract This chapter explores the impact on taxpayer rights of digital developments in electronics and systems, artificial intelligence, and security. Using an integrated rights framework comprising principles of tax administration and compliance, together with legal rights, it sets out the challenges and opportunities offered by digital disruption. It addresses issues such as proportionality, discrimination, equity and fairness, transparency and bias in legal and administrative decision-making, security, privacy and confidentiality. The chapter takes a global and comparative perspective in addressing significant legal issues that require detailed research and debate. It emphasises the opportunities for government service obligations to taxpayers, using artificial intelligence and secure systems, to provide advanced assistance to taxpayers and businesses and boost economic growth and trade. The chapter concludes that the opportunities are available to enable global implementation of an integrated rights framework to protect taxpayers even more effectively through digital disruption. Keywords Taxpayer · Rights · Digital · AI · Administration · Compliance

11.1 Introduction Over the last thirty years the concept of taxpayer rights has developed and matured. One of the first overt discussions took place in 1987 with the first International Fiscal Association seminar on Taxation and Human Rights (IFA 1988). The OECD soon engaged and noted the importance of mutual trust between taxpayers and tax authorities, largely to engender voluntary compliance with the tax laws (OECD 1990). Since then the concept of taxpayer rights has become part of an ongoing discussion, such that it is the topic of international conferences and a growing body of literature. From the early stages of discussion and research, however, there has been a distinct divide in approach. On the one hand, the legal jurisprudence focused on legal rights and enforcement (e.g., Albregtse and Van Arendonk 1998; Persson-Österman 1999; D. Bentley (B) Swinburne University of Technology, Melbourne, Australia e-mail: [email protected] © Springer Nature Singapore Pte Ltd. 2020 R. F. van Brederode (ed.), Ethics and Taxation, https://doi.org/10.1007/978-981-15-0089-3_11

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Baker 2000). On the other, tax authorities and the OECD, in particular, focused on, funded and supported a significant body of compliance driven research (e.g., Roth et al. 1989; Hasseldine 1993; Wickerson 1994). I tried to draw the two strands together in a comparative study of international taxpayer rights in 1998 (Bentley 1998), and in 2007 in an examination of the theory, origin and implementation of taxpayers’ rights (Bentley 2007). However, to a large extent, the underlying legal and ethical basis of rights has taken second place in the debate. The concept of rights and, even more so, the concept of taxpayer rights, comes late to the design of legal systems. There is legal protection for citizens who are the subject of administration by state actors. However, to give effect to particular taxpayer rights, laws tend to be retrospectively interpreted or amended (e.g., Englisch 2016, 411). It is only relatively recently that specific taxpayer rights legislation has been introduced in some jurisdictions, such as the United States (Christians 2016, 509). There are jurisdictions with no legislated taxpayer bill of rights, but in which taxpayers are afforded significant protection, often administratively (Bentley 2016, 291). In others, particularly civil law jurisdictions, it is suggested that the concept of taxpayer rights as a distinct class of rights is interpreted narrowly (Tieghi 2015). This approach has largely worked until now. The legal rules applicable in each jurisdiction can be tailored to its citizens. The network of international treaties and agreements provide some amelioration of the unintended consequences arising from transactions and interactions across borders. A focus on tax administration and voluntary compliance with the domestic tax rules makes sense. The digital transformation of our world changes the ground rules. Global digital platforms, often much larger and more influential in the daily lives of individuals and businesses than governments, threaten a narrow, single jurisdictional approach to legal rules. The tax laws are no exception. While digital disruption provides powerful opportunities, it also threatens the traditional legal order. I demonstrate in this chapter that we have the basis for the solution to digital disruption. If we are to confront technological challenges and the rapidly developing interconnectivity of the global economic order, it is vital that we integrate the sophisticated administrative rules and procedures to assure effective taxpayer compliance with the legal rules that underpin human rights generally and taxpayer rights specifically. I define this as an integrated rights framework and explore it in detail below. So that we can navigate our way to a solution, we need to return to some of the fundamental principles that underpin our current legal order. I begin the journey in this chapter by examining how taxpayer rights might develop in a global digital environment. We are at an early stage of disruption and so my observations are tentative, and should be challenged and explored. However, they attempt to provide a basis for the ongoing discussion and, more importantly, analysis and research. This chapter is written from a legal perspective. I follow Twining in taking a general view of jurisprudence, incorporating a range of legal theories where applicable (Twining 2000). However, the concepts of rights and duties are framed within that legal theory rather than broader concepts of ethics and morality.

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In this chapter I reflect research, observations and experience drawn from comparative legal sources, with reference to other disciplines. The chapter is primarily normative, is informed by analysis, and necessarily influenced by my training and research in largely common law jurisdictions.

11.2 Taxpayer Rights and a Legislative Rights Framework Taxpayer rights are a subset of human rights. In Western legal systems, from which the common and civil law families originate, taxation has traditionally been seen as deriving from property rights (Murphy and Nagel 2002, 42). It suggests some element of freedom of the individual.1 Historically, the authoritarian concepts of feudal overlordship to some degree were based on a principle of mutual aid and basic rights celebrated in the Magna Carta. However, the reality of genuine individual rights emerged much later, with taxation of the individual in close lock-step (Daunton 2001). The primacy of the nation state emerged in the twentieth century. Empires disintegrated, the United Nations was established, the United Nations Declaration of Human Rights was signed and peoples asserted their right to self-determination.2 While the world map is constantly redrawn, the principles of sovereignty and the right of sovereign states to tax underpins the international legal order. Arguments abound over traditional approaches to the jurisprudence of the nation state. Santos argues for a radical reassessment of how we view globalisation (de Sousa Santos 2002, 259). He notes the tension on the one hand between the opening up of borders through interaction and interdependence, which he calls rights to options; and, on the other hand, a tendency emerging to develop new regional, national and local identities, which he calls rights to roots (259). He asks whether globalisation is simply the successful imposition of a new localism (259). While Twining adopts a more traditional approach, he agrees with Santos that ‘the phenomena of legal pluralism are central to understanding law in today’s world’ (Twining 2002, 310). Twining identifies challenges to traditional analysis of nation states and their legal systems. He argues that they are not closed orders to be studied in isolation; they cannot be restricted to the two types, municipal state law and public international law; and the conceptual frameworks and vocabulary of legal discourse must change to describe legal phenomena across jurisdictions, traditions and cultures (Twining 2002, 336). These challenges are fundamental to current developments globally and digital disruption specifically. Rights have their origin in the traditional universalism of Western ethics (Twining 2002, 351). Legal rights historically and taxpayer rights in particular are based in municipal law and reflect the particular characteristics of the legal system in which 1 For

example, Acemoglu and Robinson (2012) suggest that the economic prosperity that allows taxation is founded in inclusive economic institutions and secure property rights. 2 For a history, see Boylan (2014), Barreto (2013), and Forsythe (2018).

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they are found. Constitutional and wider protections for human rights, including through international treaties, have increased. However, this has not extended directly to taxpayer rights. Constitutional limits on taxation have traditionally been restricted to general procedural rights, such as the right to representation or the right to trial for criminal proceedings. States normally leave as broad a scope as possible to tax those residing in or connected to them. This extends to international treaties, which normally specifically exclude their application to taxation, so that they do not limit signatories’ rights to tax. How do we then create a legal framework for taxpayer rights? I have previously developed a classification of taxpayer rights based on the mechanisms available for enforcement (Bentley 2007, Chap. 4). Primary legal rights describe protections through the process of law making and the characteristics that make a law valid. Primary legal rights are usually legally enforceable. Sometimes there are special mechanisms that give them priority over other laws. The most common kind of primary legal rights are constitutional protections3 and, where they have direct application in domestic law, such as in the United States and the Netherlands, international treaty law protections.4 Secondary legal rights describe rights that are enforceable by law and are concerned with the operation of the law, whether specifically or generally. For example, most jurisdictions provide by law for the general administration of the tax law. There may also be specific laws determining whether a ruling by the tax authority is binding and in what circumstances or setting maximum penalty rates for administrative breaches of a law, such as when a tax return or tax payment is lodged late. Secondary legal rights applicable to taxation are often found in laws not specifically made for taxation, for example, those governing criminal and civil procedure. They provide rights available in tax matters, such as the right to appeal, to legal representation and to legal privilege for certain documents. Primary administrative rights are formal rights provided through administrative power or discretion, and are often delegated to the tax authority. Depending on the jurisdiction they could be secondary legal rights. For example, many of the rights that in civil law jurisdictions are legislated, in common law jurisdictions such as the United Kingdom, Australia, Canada and New Zealand, are protected administratively. An obvious example is the bills or charters of taxpayer rights, which in common law jurisdictions are often administrative, but to have a similar effect in many civil law jurisdictions require legislation. The advantage of administrative rights is that they are often applied more broadly, as they are within the control of the tax or administrative authorities. This gives the tax authorities scope to limit their application or interpretation in the event of unintended consequences that threaten the effectiveness of tax administration. Whereas legal rights are usually construed more narrowly as they are much more difficult to change (Bentley 2007, 166).

3 For

example, Germany has a long history of Constitutional protection of taxpayers through constitutional limits on the right of the State to tax. See Englisch (2016), 412. 4 For general discussion, see Mendez (2013), and Verdier and Versteeg (2017), 149.

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Secondary administrative rights are effectively pragmatic rights that respond to the basic relationship between taxpayers and the tax authority to ensure the effective operation of the tax system. They to some degree describe the set of rules that ensure a positive engagement and user experience for the taxpayer when dealing with the tax authority. Many of the charter rights in common law jurisdictions have focused on issues like waiting times on telephone or online queries, or the behaviour of tax officers when they deal with a taxpayer. Secondary administrative rights often go to standards of conduct and service, which are more concerned with using these expectations to improve tax authority culture than providing any binding right. That said, in some jurisdictions, an ombud or similar office may use these articulated standards to provide redress to a complainant. The legislative rights framework is complementary to the compliance framework discussed below. The vast majority of taxpayers engage with the tax authority, either directly or through an intermediary, in a series of ongoing and ordinary transactions. These include payment of consumption or sales taxes on most purchases, the deduction of tax from earnings either automatically from salary or wages or as an instalment of business taxes, and financial transactions taxes. Tax returns of all kinds are largely automated and most queries are increasingly dealt with online or through simple interactions with tax officers. For the vast majority of transactions administrative rules and service standards provide an appropriate framework. The system is also designed to comply automatically with most legal rights.5 It is taken for granted that they apply. It is generally only in more complex interactions and transactions that detailed legal rights are examined specifically, or where transactions involve those from other jurisdictions who may not be familiar with the systems and rules applicable. In these cases, right claims may be contested and most systems provide forums to resolve conflicting interpretations. Increasingly, as with the compliance framework, alternative dispute resolution mechanisms, including third parties such as ombuds, are available to de-escalate potential conflict. The aim of an integrated rights framework is to escalate issues to the appropriate decision-maker as quickly and seamlessly as possible. However, each level of decision should include opportunities for early intervention and dispute resolution to resolve conflict effectively and appropriately while maintaining taxpayer rights and recognising taxpayer obligations. Only those cases that involve significant issues for the individual or the system should require escalation to the higher courts for adjudication. The latter should provide support for taxpayers without means and ensure that taxpayer rights are appropriately protected against the state. This is important in the context of the earlier discussion, given the power imbalance between citizen and state. It recognises the broader impact that state action has on taxpayer perception of the legitimacy of the state. The legal framework is valuable as we examine digital developments in a globally connected world. However, the traditional approach may need to change. Where administrative rights may well provide sufficient protection in a traditional, sovereign 5 This

is increasingly applicable globally. See OECD (2017d).

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jurisdiction, in a globally connected digital world this may need to be reassessed. Taxpayers will increasingly move outside the normal; they will increasingly no longer operate in the system that they are used to. Like taxpayers from a different jurisdiction, taxpayers may need to examine carefully the nature of digital transactions to ensure that their rights are protected. The danger will come with automation and digitisation. Everything will seem normal and yet the detail of how transactions and taxpayers are treated will become increasingly technologically complex and opaque. Importantly, given the scale and nature of digitisation, there is a tendency to take a utilitarian perspective. While automation can develop high degrees of personalisation, there are those who are still and will remain for some time disenfranchised from the digital world. There will come a time when digital becomes the compulsory platform on which all taxpayers must operate. However, as with the physical world, it will require careful analysis to ensure that all minority groups facing barriers to engage are able to do so. However, before we re-examine the basic principles of taxpayer rights, both legal and administrative, and how they should apply in a digital world, it is important to reflect on commonly accepted characteristics of a ‘good’ tax system. Economic and administrative principles normally frame the design and implementation of a tax system and the laws should reflect those principles whilst also reflecting the characteristics of ‘good’ laws. The next section explores the accepted principles of economic and administrative design of a tax system and how it is intended to apply. An integrated approach will allow a richer examination and validation of approaches to taxpayer rights in a digital world.

11.3 Public Finance and Administration—The Principles and Compliance Framework The theoretical basis for an equitable and efficient tax system echoed the principles identified in 1776 by Smith (1993, 450). These theories were extended by scholars such as Haig (1959) and Simons (1938).6 However, most reviews of tax systems have both political and economic objectives and, while they blur the economic definitions, they attempt to give broad effect to the economic functions of government. Musgrave,7 one of the most influential public finance theorists, divides the economic functions of government into: • overcoming the inefficiencies of the market system in economic resource allocation; • redistributing income on a socially acceptable basis; and 6 The

unlikelihood of implementing a comprehensive income tax on net accretions to wealth led to Bittker (1967) raising the question of how to determine an optimal second-best policy, 925. 7 Musgrave (1959) and Musgrave and Musgrave (1989).

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• smoothing cyclical fluctuations to ensure high levels of employment and price stability. The challenge in a digital global environment is that from an economic perspective, there are multiple systems with different inefficiencies to overcome, including the significant barriers and inefficiencies of operating as nation states. Nonetheless, the major tax reforms of the last 60 years, have applied a remarkably consistent set of principles, although their interpretation has developed over time (Alley and Bentley 2005, 579; Australian Government 2009, 2.1; Messere et al. 2003, Chap. 2). The Carter Commission Report of Canada in 1966 was highly influential internationally and its form and approach have helped shaped subsequent reviews, particularly in English-speaking jurisdictions.8 It is an approach adopted by both the OECD, the IMF and other international tax advisers when countries undertake serious reform of their tax systems.9 Although, as noted in a 2010 review of the Australian tax system, ongoing research ensures better and stronger understanding ‘about the way taxes and transfers affect people’s behaviour and the economy’(Australian Government 2009). The OECD has consistently applied the approach and extended the research through its work to address the challenges of electronic commerce and digitalisation. The 1998 Ottawa Report on Electronic Commerce: Taxation Framework Conditions (OECD 1998) provided a framework for the 2015 Base Erosion and Profit Shifting (BEPS) Action 1 Report (OECD 2015), which identified the breadth of the challenges to taxation and tax administration through digitalisation well beyond BEPS. Its 2018 Interim Report sought to address some of these issues, but largely within existing paradigms (OECD 2018b). Any government, to achieve its economic functions as set out by Musgrave, whether it has a market or other economy, needs funding to allocate resources and achieve some form of income redistribution. The tax system provides that funding and the means of redistribution. The shape of the funding process rests upon the values underlying the tax system. Alley and Bentley (2005) have summarised the values set out in a number of the more important reports and other sources as follows.

11.3.1 Equity and Fairness10 Taxation system design should take account of horizontal and vertical equity. It should treat people in similar circumstances in the same way: this is horizontal equity. It should ensure that tax is allocated fairly between people in different circumstances: this is vertical equity. The caveat is that equity is not always measurable. The question as global distance diminishes through digital connection, is how and to what extent 8 Carter

Report (1966). Its influence discussed in Head (1987), 143. the excellent technical analysis, covering the drafting experience of such experts in, e.g., Thuronyi (1996); Shome (1995); Jenkins (1994), 75; Theodore (1992); and Bird and de Jantscher (1992). 10 Alley and Bentley 2005, 622. 9 See

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equity should begin to transcend sovereignty? The European Union and other groupings are grappling with this, but digital interconnection will increase the visibility of inequities.11 It is important that the public perceives the tax system as fair. The implementation of tax reform must often contend with aberrations that breach the principles of equity, but are nonetheless seen as fair. This is perhaps founded in self-interest rather than logic. For example, failure to tax capital gains would seem to breach both vertical and horizontal equity (Asprey 1975, Chap. 23; Carter Report 1966, Chap. 15; Head 1984, 148). Yet, countries such as New Zealand have not fully extended income taxation to taxation of capital gains (McCaw 1982) and the public can still perceive the tax system as fair (Tan 1998, 710). Importantly for a rapidly changing world, perceptions of fairness can change rapidly. For example, trends in international tax rates, taxation of multinationals and concepts of avoidance and evasion have captured the public imagination, but with different results in different countries (Dyreng et al. 2017, 441). Fairness should expressly recognise the disadvantaged in society and ensure that treatment of taxpayers is consistent with society’s values. This aspect will become increasingly important in a global digital environment as values and the way they are protected will differ between jurisdictions. Inter-nation equity should be considered for international elements. There is a principle flowing from inter-nation equity that a jurisdiction has a responsibility not only to protect its own allocation of revenue, but to protect the rights of its taxpayers in that process as against other jurisdictions. In other words, it is not enough for a jurisdiction simply to assert its right to tax. For the full application of inter-nation equity, it should also ensure that taxpayers required to pay tax are suitably protected in the process. Both principles, with different degrees of emphasis, underpin the networks of international agreements governing taxation. The perception of fairness usually relates in large part to the implementation of tax rules. The manner in which the system provides and enforces taxpayers’ rights can therefore be critical to the perception of fairness. Likewise, whether a right adds to a taxpayer’s perception of fairness provides a useful measure of the value of that right. In a digital environment with the proliferation of action and reaction from global citizens, governments will face increasing risks of global citizen reaction if they are perceived to act unfairly.

11.3.2 Certainty and Simplicity12 Tax rules should not be arbitrary and should be internally consistent. Certainty requires clear statutes and timely and understandable administrative guidelines that are accessible to all taxpayers and are not obviously contradictory (Bentley 2007, 11 See,

for example, (2018a) and Lagarde (2018). and Bentley (2005), 622.

12 Alley

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67). There is a danger as digital transactions become the norm, and transcend traditional borders and structures, that existing rules become arbitrary. For example, the consumption tax treatment of online purchases. The complexity of global application of domestic taxes also makes it more difficult to assess the impact of new taxes, for example, such as the US Foreign Account Tax Compliance Act.13 Tax rules should be as clear and simple to understand as the complexity of the subject of taxation allows, so that taxpayers can anticipate in advance the tax consequences of a transaction including knowing when, where and how the tax is to be accounted. This has proven a challenge in tax systems generally, but more especially in electronic commerce.14 Digital developments promise to make this one of the primary challenges for governments as they try to integrate global digital transformation into 20th century tax systems designed for sovereign states. There should be transparency and visibility in the design and implementation of the tax rules. This normally requires consultation. However, developments in digital taxation and administration are likely to require new approaches to allow expert analysis as part of the consultation given the specialist technical requirements in both design and application. Certainty and simplicity are two of the most favored, yet most elusive, qualities of any tax system. The pace of change adds to the challenge faced by tax administrations. Change drives complexity as taxpayers must learn, understand and adapt to new rules. They often only become clear and therefore certain over time, as they are interpreted and applied. Add to this automation and artificial intelligence and moral challenges arise. In the 21st Century how should we balance certainty against simplicity; how opaque does administrative process become in implementing tax laws before it is arbitrary?

11.3.3 Efficiency15 Compliance and administration costs should be minimised and payment of tax should be as easy as possible. Because minimising taxpayer compliance costs and making compliance easier is thought to improve revenue collection, it is a prime focus for tax authorities and this is dealt with in more detail below.16 An associated area of concern for tax authorities is how to reduce the cost of administering the tax system. It is in these areas that digital developments will likely have most impact both domestically and to reduce unnecessary costs and inefficient decision-making 13 The

arbitrary effects are described by Christians (2016). Inland Revenue and HM Customs and Excise (1999) para 2.9, OECD The Committee on Fiscal Affairs (1998), and the statement on p 6, that ‘The tax rules should be clear and simple to understand so that taxpayers can anticipate the tax consequences in advance of a transaction, including knowing when, where and how the tax is to be accounted.’ For a useful analysis and literature survey, see McKerchar et al. (2006). 15 Alley and Bentley (2005). 16 For a wider discussion and details of the literature, see Evans et al. (2001) and ATAX (2006). 14 E-Commerce and Indirect Taxation (1998),

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between jurisdictions. Although it is a narrow view of efficiency, potentially it could have the most impact on the widest number of taxpayers. It is likely that efficiencies and cost reductions will be a primary advantage that will drive digital disruption. Government productivity and tax collection will be direct beneficiaries. So, too, will be seamless tax collection for taxpayers, including across borders. However, there will be trade-offs and given the technical complexity of both the rules and technologies, they will not be easily assessed.

11.3.4 Neutrality17 The tax system should not impede or reduce the productive capacity of the economy. This is a free-market view and has been observed as a design principle, although the difficulty in measuring the impact of taxation to date has limited its use. This may change with accessibility to big data and advances in computing power. Business decisions should be motivated by economic rather than tax considerations. Taxpayers in similar situations carrying out similar transactions should be subject to similar levels of taxation. Global taxation and digital platforms have highlighted the importance of this principle and how it can impact on revenue collection. It underpins the focus on BEPS. It has also been used to support legislation to introduce reverse charge rules for consumption taxes and their application to low value online imports. Capital import neutrality and capital export neutrality should be considered. This principle is becoming increasingly relevant in the context of cross-border structuring where the structures have little connection to particular jurisdictions. Nations are likely to continue to use import and export regulation and incentives, including those governing taxation, to enhance their economic competitive advantage. Neutrality applies to substantive tax policy and the formulation of the regulatory framework implementing it. Although relevant to wider legal principles such as nondiscrimination, those are usually considered in the context of equity and fairness. Neutrality, given its economic focus, has traditionally had little impact on taxpayer rights. In a global digital context this is likely to change.

11.3.5 Effectiveness18 The system should collect the right amount of tax at the right time without imposing double taxation or unintentional non-taxation at both the domestic and international levels.

17 Alley 18 Alley

and Bentley (2005). and Bentley (2005), 623.

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The system should be flexible and dynamic to ensure a match with technological and commercial developments. The system should ensure sustainability both to meet the changing long-term demands for government revenue and to meet the long-term demands of a fair and equitable society taking account of any changes to its demographic and structural make-up. The system should ensure continuous realignment with long-term government plans and forecasts. The potential for active or passive non-compliance should be minimised while keeping counter-acting measures proportionate to the risks involved. Tax authorities are increasingly focusing on risk to allocate their resources. In a digital context, the balance of principles will become a moral choice. The greater the degree of automation and technical complexity, the more effective the tax system is likely to be. But the trade-off will be certainty, simplicity and, potentially, fairness. A significant challenge for global digital taxation remains how to make it effective. Taxpayers and individual taxpayer rights are likely to remain secondary in highly complex, technical, and politically-charged, international negotiations between jurisdictions. Effectiveness and long-term sustainability are closely linked. Tax authorities must operate within policy-settings that include the robustness to deal with digital disruption but with the capacity to respond effectively to changing circumstances. It is essential that governments respond holistically in their planning, including in their shaping of the tax system to respond to the forecast disruption to society. Digital disruption through comprehensive and rapid changes to the workforce19 will be accompanied by potentially significant climate change, changing demographics, and the potential for disease epidemics. The principles will always compete and the art of taxation design is to balance the principles most effectively in achieving the intended purpose. As the Carter Commission (Carter Report 1966, 17) put it: We realize that some of the objectives are in conflict, in the sense that movement toward one goal means that others might be achieved less adequately. Simultaneous realization of all the goals in some degree will constitute success if, as we hope, our choices as to the appropriate compromises adequately reflect the [informed] consensus.

However, achieving the principles, values or goals that underlie the tax system must only be done in the context of the broader framework of taxpayer rights. The basis that taxpayer rights have in law must always ‘trump’ a principle without such a basis (Dworkin 1986, 225, 1977, 116). In the design process, which is relevant to a model, the principles should be taken into account to provide the best outcome for the taxpayer, while preserving to the greatest extent possible, achievement of the balance of goals envisaged by the Carter Commission. To the extent that tax policy does not support a balance, there are also concerns for taxpayer rights. For example, pursuit of effectiveness by giving the revenue authority a wide discretion is at the expense of certainty. It may seriously undermine the right 19 See

OECD (2017b), 13, OECD (2017c), World Economic Forum and Boston Consulting Group (2018).

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of taxpayers to know how much tax they should pay and provide procedures leading to arbitrary imposition of taxes. As identified above, the primary focus of tax authorities for many years was to maximise compliance (Evans et al. 2001). Tax authorities adopted a compliance model based in responsive regulation (Braithwaite 2011, 475). The theory, often reflected in a compliance pyramid, recognised the contextual factors that a tax authority could help shape to improve compliance (Braithwaite and Braithwaite 2001, 215). Its aim was to influence taxpayer behaviour, engage with taxpayers and develop willing participation (Whait 2015, 130). For most taxpayers, who either want to comply or who try to comply with the law, and who form the base of the compliance pyramid, the tax authorities make compliance easy and provide extensive education and nudges to help them comply. For the smaller group of taxpayers who don’t want to comply, the aim is to deter by the threat of detection and by overtly using the full force of the law against the even smaller group of taxpayers who have decided not to comply (Bentley 2016, 296). Recent compliance research has identified the importance of both legitimate power and reason-based trust as key determinants of effective tax compliance.20 This usefully supports the merging of economic and legal concepts in developing an ethical approach to taxation. While it could be framed as a pragmatic, transactional response to predictable human behaviours, the theory focuses on a service climate, based on well-defined rules and standards, in which taxpayers comply because they see the tax authorities as largely supportive and competent within a stable environment (Gangl et al. 2015, Sect. 5). The next step in developing the optimal compliance environment is to develop a confidence climate based on automatic cooperation and trust (Gangl et al. 2015, Sect. 5). This state of habitual compliance is founded in shared moral values and a commitment to society: taxpayers observe the spirit of the law, removing the need for “specific and complicated tax legislation” (Gangl et al. 2015, Sect. 5). It is remarkable that tax authorities can genuinely frame their compliance in such terms. Yet the OECD longitudinal reports on tax administration show consistent improvements in taxpayer engagement, satisfaction and compliance (OECD 2017d). However, the theories also offer the salutary warning that taxpayer confidence is not linear and a consistent diminution in trust can significantly undermine both compliance and perception of legitimate authority (Kirchler et al. 2008). One of the most concerning elements of the divergence in views evident in the OECD report into the tax challenges of digitalisation is the consequent threat to taxpayer trust in a system where global transactions may become obviously inconsistent with the basic design principles outlined above (OECD 2018b).

20 Kirchler et al. (2008), 210; Hofmann et al. (2014), analysed in more detail in Bentley (2016), 298.

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11.4 An Integrated Rights Framework Tax system reviews are usually framed in economic terms, recommending policy settings that shape the architecture of tax systems (Asprey 1975; Carter Report 1966). Beyond reference to the legislative and administrative frameworks as instruments to deliver economic policy, there is generally little consideration of how an integration of policy, regulation and administration would deliver a more effective tax system (Bentley 2016). It is left to those who both implement recommendations and subsequently adapt the system to ongoing change, to integrate as best they can. To generalise, Common Law jurisdictions are favoured with wide-ranging administrative powers and discretions to support adaptation by tax authorities (Thuronyi 2003; Sawyer 1999, 1345, and in the context of legal privilege, Italia 2014, 642). However, Civil Law jurisdictions tend to demonstrate a richer jurisprudence supporting the availability and use of legislative frameworks through change (Nykiel and S˛ek 2009; Albregtse and van Arendonk 1998; Gribnau 2003). In neither, other than sometimes through the tax administration, do other disciplines, for example, behavioural psychology, government and politics and management change theory, systematically influence policy design (Gangl et al. 2015; James 2010; Alley et al. 2015; Alley and Bentley 2008, 122). The interpretation of human rights more generally reflects the concerns of scholars such as Twining and Santos, discussed above, that the closed orders of the twentieth century are giving way to global perspectives and interaction. Pluralism is driving a requirement to understand context within sovereign jurisdictions even as these become more difficult to assert. Taxation, even at the global level, may remain the preserve of law and economics in its formulation. However, rights of the citizen in an increasingly connected world may drive change even here (e.g., Keane 2009; Alley et al. 2015). In a digital world, there is a danger that neither governments nor their citizens may realise the impact of developments on taxpayer rights. The result could be a significant loss of trust.21 An effective integrated rights framework embodies the universal rights recognised in municipal and international law. Those rights themselves reflect accepted values, although their interpretation may depend on context and worldview (Bentley 2007, Chap. 3). Economic policy and theories of government take and extend those values in devising the architecture and operation of often radically different societies. It is helpful to articulate the values or rights that should frame any tax system. Doing so will provide a means to evaluate whether, when and in what context digital change may impact on taxpayer rights and therefore the integrity of the tax system. Protection of taxpayer rights focuses on limiting and shaping how the state’s agencies exercise their legislative and administrative powers. It is the classic balancing of rights and duties and is drawn from an earlier comprehensive examination and analysis of these fundamental principles (Bentley 2007; Hohfeld 1913; Wellman 1985, 102). The shortcoming of this approach is that it is necessarily formulated in the traditional conceptualisation of taxation as a product of economic policy implemented 21 The

‘Slippery Slope’ Framework described in Kirchler et al. (2008).

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through legal rules and an administrative system. Digital developments will provide an opportunity to extend the approach used here and I will identify avenues for exploration in the subsequent analysis. However, the broad legal and economic requirements of a tax system that currently reflects protection of fundamental rights can be set out as follows (Bentley 2007, 219): 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16.

Tax must be imposed by law. Tax law must be published. Tax law must not be imposed retroactively. Tax law must be understandable. Tax law must not be contradictory. Taxpayers must be able to obey the law. Frequent change must not undermine the tax law. Tax law must be applied. Taxpayers need pay no more than the correct amount of tax. Tax law should not impose double taxation. Tax rules should not discriminate and there should be equality before the law. Tax rules should satisfy the principle of proportionality. Taxpayers should have the right to privacy. Taxpayers should have the right to confidentiality and secrecy. Taxpayers should have the right of access to information. Taxpayers should have the right of access to the courts, which should demonstrate the following characteristics22 : a. b. c. d. e. f.

an independent and impartial tribunal; a fair and public hearing; a fair trial; the right to remain silent; the right to representation; and public judgment within a reasonable time, with reasons for the decision.

Primary legal rules provide the framework for all other rules. The laws that underpin the system should have certain characteristics. These generally go beyond the tax law and represent the basis of primary legal rights applicable in most legal systems. Although they are fundamental to the design of a legal system and are largely implicit or taken for granted, they are framed and shaped to the jurisdiction where they apply. The point is that they are not universal and have meaning and interpretation that depends on context, the history and legal family in which they are situated, and the dynamic characteristics of each sovereign state. We only have to look at the often tortuous negotiations to reach generally accepted interpretations of international double tax agreements or multilateral information sharing agreements to appreciate the complexities. Much of the problem with such negotiations is that they have to take existing complex systems and try to mesh them. This will prove equally difficult in the context of digital disruption. However, most 22 The

European Convention (1950) Art 6.

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legal systems accept the fundamental legal principles set out above that should apply to a tax system, even if how they are applied is often completely different. While this takes a traditional approach to rule-making, in determining a moral position, a fundamental requirement for effective rule-making is to ensure that the application of these rules is critically examined from the perspective both of the jurisdiction itself, but also from developing universal norms (Kennedy 1979, 219).

11.5 What Are the Digital Developments to Which This Framework Should Apply? Popular terminology characterises as digital disruption the rapid and accelerating pace of change driven by technological discovery and its increasingly pervasive implementation throughout global societies (Schwab 2016; and on the effects: OECD 2017a, 8). Governments, systems and the way that society operates are all affected to different degrees (McKinsey Center For Government 2017; IMF 2017). Tax systems must respond and while the administrative processes are likely to do so rapidly to maintain pace with digital technologies and taxpayer user expectations, how tax systems themselves will change remains highly contested (OECD 2018b). This tension between the different pace and nature of development of systems of tax policy, regulation and procedure and systems of tax administration reflects that of systems generally. For institutions operating in the economy, whether firms, not-for-profit entities or government, there are structural questions of how to manage change, how to innovate and at what pace. The management literature defines it as structural ambidexterity, or the ability to exploit and improve existing operations at the same time as creating new models for which the improvements to existing operations are often irrelevant (e.g., O’Reilly and Tushman 2013, 324). Particular examples can be seen in the development of new business models based on platforms, big data, project-based and virtually connected workforces, and value-chains that derive revenue that is not necessarily connected to where much of the business operation occurs. The OECD consultation on digital challenges to tax systems suggests that most stakeholders are comfortable that the tax system itself is sufficiently robust to adapt incrementally to the fundamental changes both to the business models and characteristics of taxpayers, and to the tax administration and how it operates. There seems insufficient consideration of the risk that those views are wrong. Tax systems may well be one of the few elements of society where incremental change continues, although this seems unlikely if the society itself is experiencing disruption. However, even if it is only administration of the tax system that changes, it is important to understand what those changes are likely to be and how they might impact on taxpayer rights and obligations. Primarily this falls to the tax authorities. As noted above, a utilitarian and pragmatic response to apparent system improvements may mean that only those elements that obviously have ethical implications are

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meaningfully considered. Most changes will only be assessed after the fact if and when issues arise. Accordingly, to overcome the dangers of unthinking acceptance of iterative change within a tax administration it is important to refine frameworks and principles to aid decision-makers when they have to assess the implications of change. It is also important that they are built into decision-making processes and cascaded down to each level of tax administration. For example, as automation becomes part of revenue authority decision-making, the design, development and structuring of the programs and algorithms to deliver the new or revised processes will need to include instructions that take account of taxpayer rights. This type of work will increasingly be outsourced to third party providers as the specialist technical skills become more difficult to acquire and retain within a tax administration workforce. Tax administration supervisors will often not have the technical expertise to know how tax rules as required by regulation should be framed in writing the code for automated processes. The issues are discussed further below. Before examining rights issues, I analyse below the elements of both the system changes and the development of AI which are likely to impact on taxpayer rights. The degree of impact will differ and the extent will become clear often only as the technologies develop.

11.5.1 Electronics and Systems Most jurisdictions are undertaking substantial changes to their electronics and systems. For example, the Australian Government and ATO systems are being designed and configured to implement23 : 1. current operational requirements, which involve updating and adapting existing systems and assuring continuity of service; 2. current strategic requirements that deliver known future technologies to deliver digital strategies; and 3. future operational and strategic requirements, which will require adaptation to deliver unknown future technologies. Technology implementation is iterative as it takes time to plan and implement. Legacy systems may slow development and some new systems may either fail or be superseded relatively quickly with newer and better technologies. This impacts taxpayers and will do so much more frequently than in the past. Significant technological change in delivery of tax administration to taxpayers will become systematic rather than occasional. It is important that the regular design and configuration of new systems and processes, which changes taxpayer interaction with the tax administration, ensures that taxpayer rights in those processes also receive systematic attention. 23 Australian

Government Department of the Prime Minister and Cabinet (2015), endorsed in Productivity Commission Inquiry Report (2017), 93, and implemented in Australian Government (2018).

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Governments used to use proprietary systems. They could own and control all of the hardware and software. This is increasingly unlikely for large parts of the government technology infrastructure as governments have embraced cloud technologies, integrated platforms, and the need to adapt to rapidly changing standards, simply to provide a seamless technology delivery platform (Productivity Commission Inquiry Report 2017, Chaps. 4, 8 and Appendix D; Australian Government 2017). Governments are also working closely with third parties both on projects and applications and these often require ongoing input (Australian Government 2017). While governments attempt to provide leadership on security, standards and the rules governing information management, it is important that they also identify the implications for specific regulatory environments with significant user interface, such as taxation, health and social services (Productivity Commission Inquiry Report 2017, 172). Each regulatory framework will have its own nuances and whereas health and other areas are generally services to the citizen, administration of taxation requires significantly different forms of digital protection. It is notable that smaller OECD countries, by virtue of their size and level of development, are often able to move more swiftly than other countries. For example, Norway (Norwegian Ministries 2012), Singapore (Inland Revenue Authority Singapore 2018a), and New Zealand (New Zealand Inland Revenue 2018) all use agreed principles, which underpin their enterprise architecture. They adopt common administrative standards, enterprise-wide components, common security standards, and standards for re-use of public information (Australian Government Digital Transformation Agency 2018; New Zealand Inland Revenue 2017, 2018). The plans for these four jurisdictions apply broad principles focused on delivering a high-quality experience for citizens interacting with government. It is consistent with the ethos of a compliance framework focused on engaging with taxpayers, making it easy for taxpayers to comply with the tax rules and nudging them to comply should they be tempted not to.24 The 2012 Norwegian principles (Norwegian Ministries 2012), with minor additions from the other jurisdictions,25 provide a basis for understanding how the architecture will be configured (“Principles for System Integrity”). • Service Orientation: To facilitate life event personalisation, requires push communications and discoverable, joined-up services, with secure, single authentication. • Interoperability: ICT systems must be able to exchange and share data, services and information with other systems, through standardized interfaces and reusable digital platforms. This includes third party service, data integration, and use of natural systems. • Accessibility: Electronic user services require open and extensible design, with universal user access regardless of time, location, and channel.

24 Norwegian

Ministries (2012) 59. Productivity Commission Inquiry Report (2017) 311 recommends a principles-based, outcomes focused approach. 25 See particularly, the work of Australian Government (2017).

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• Security: Information and services must comply with confidentiality, quality, accessibility, and monitoring requirements, while providing streamlined authentication. • Openness: Public ICT systems must be based on open or approved standards with appropriate government support. The systems should not entail compliance with special technology requirements on the part of users and should allow third party provision. • Trust: Requires increased transparency and coordination of digital transformation with built-in assurance for high risk/high impact projects, with clear benefits realisation. • Flexibility: The public sector should establish and develop ICT systems to facilitate changes in use, content, organization, ownership, and infrastructure. • Scalability: ICT systems should facilitate changes in terms of the number of users, data volume and lifespan of services, while ensuring stability of project and service delivery. While the Principles for System Integrity reflect those supporting tax policy design discussed above, they highlight the potential for creating a seamless user experience that could potentially impact each taxpayer right. There may well be good reason to favour automation and useability over minor infractions of taxpayer rights. However, it is important that the decision is made rather than being simply a consequence of implementing a system, and that the decision is appropriately considered and intentional. Any decision-maker should be at the right level and understand the consequences. Major capital investment and significant infrastructure projects usually do involve high-level internal stakeholder consultation. Nonetheless, in practice, issues of ethics and justice are not usually within the scope of such consultations nor the impact of technological processes. Taking a simple example, if the code automating the update of regulations that governs automatic pre-filling of returns either takes a particular interpretation of a law which is being tested before the courts or a simplified approach to allow cost-effective automation, it is critical that the decision is taken by the appropriate decision-maker and not simply by a coding team. The same would apply where rules are created to govern how artificial intelligence can extract and source data from different systems and databases to support taxpayers. The aim of tax administrators is to use technologies to deliver a tax system that best meets the policy design criteria. However, the electronics and systems need to integrate taxpayer rights protection into every aspect of their design and implementation.

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11.5.2 Artificial Intelligence and Tax Administration 11.5.2.1

The Opportunity for Tax Authorities

Artificial intelligence (AI) draws on the increasing availability of large-scale information sets (big data). It is a catch-all term for several stages of use ranging from low-level machine learning to allow process automation (for example, pre-filling of tax return information), through to advanced cognitive insights and embedding new technologies into every-day activity (for example, image recognition to validate automated tax collection on business transactions or the use of automated, highlevel, interactive decision-making) (Bughin et al. 2017). The following analysis is necessarily limited, but identifies areas of obvious impact on taxpayer rights. Early stage artificial intelligence relies on stable, well-defined and highly structured information sets to enable effective machine learning and reliable and ascertainable outcomes. However, over time tools and capability are emerging to deal with smaller information sets. The computing capability allows high-speed processing to build on traditional replication and insert machine learning to develop decisionpaths. For example, if the information set contains decisions made with reasons (for example, the basis for allowing deductions for business expenses), the machine can be programmed to recognise these decisions and build a database that it draws on to make decisions consistent with the original decision-set, including building in variations. During the learning stage this is tested, corrected for errors and the machine continually improves (or is programmed to self-learn) based on additional information and corrections. Base-level examples include voice support on mobile phones and chatbots used by tax authorities and most large-scale customer service organisations.26 Tax authorities hold large datasets in electronic form and many tax authorities are advanced users of basic AI and machine learning to provide more effective service to taxpayers and third parties, such as tax intermediaries. As AI develops along the continuum from base level to advanced cognition, it automates or simulates work requiring some level of human intelligence, or cognition (Ertel 2017). While AI may not replace human activity in many tax administration roles, it will support most roles to some extent and will make tax authorities both more effective and efficient. This will include high level strategy, design, and implementation of the lower levels of the compliance pyramid. Implementation at this level forms the largest part of the tax administration system and entails supporting the majority of taxpayers with the vast majority of transactions and interactions, where the taxpayers simply want to comply or will comply with nudging. Most of these operations will in time be implemented through AI. Human interventions will likely focus on the higher end of the tax compliance pyramid, but will also be supported and made highly effective by AI. A combination of human intervention and advanced AI will deal with the higher levels of 26 For a general description, see Ertel (2017), the definitions in Lu et al. (2018), Chap. 1, and Logan

(2018).

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the compliance pyramid, including conflict escalation, complex decision-making, anti-avoidance, and prevention, identification and prosecution of fraud. A significant advantage of AI is that it can draw together in the automation process a multidisciplinary perspective that delivers the full range of expertise required of modern tax administrations. Disciplines such as law, economics, behavioural psychology, statistics, criminology, management, and public relations, will inform the design and delivery of the processes supporting human decision-makers (Cath et al. 2017). These will in turn be supported by the range of engineering and scientific disciplines building the AI capability (Stoica et al. 2017, 1; Hildebrandt 2016, 2018). The scope for global collaboration will inevitably be deployed at scale, whether or not changes occur to the tax system to reduce reliance on jurisdictional borders. The momentum has built from global co-operation on the one hand in addressing electronic commerce and now digitalisation, and on the other in developing a broadly agreed framework to deal with harmful tax competition and, more recently, Base Erosion and Profit Shifting. One of the significant challenges will be the speed of development of the technology and the inability of regulation to keep up (Scherer 2016, 358). The emerging issues for taxpayer rights are dealt with below. Tax administrations are ideally placed to lead government adoption and implementation in AI and failure to do so could undermine their legitimacy (Centre for Public Impact 2017). Tax administration relies for its efficacy on intermediaries such as the professional and financial services sectors. They are the sectors among the most advanced in adopting AI (Chui et al. 2018). For this reason, most tax administrations are leaders in government technology adoption to support the effectiveness and efficiency of both administration and compliance (Alley and Bentley 2005; Darono and Ardianto 2016). This ranges across cognitive computing, blockchain technology, artificial intelligence and robotics (OECD 2017d).

11.5.2.2

The Developing Characteristics of Artificial Intelligence

Large datasets enable effective use of AI. Taxpayer, tax administration and related government data sets have characteristics that facilitate AI. They are: • Accurate: a significant proportion of the information gathered does so in a form that complies with legal or regulatory definition and facilitates automated validation at scale. Taxpayers, intermediaries and tax authorities check and validate information leading to assessment to tax, whether as part of a preliminary decision-making process, such as an advance ruling, or during the assessment and collection of taxes. • Comprehensive: tax systems are designed to capture, in developed and emerging economies, any transaction with monetary or financial implication and draw together the information from all connected sources to assess taxes relating to all parties to the transaction. The tax systems are increasingly connected to other government databases to provide details of all life events of taxpayers and potential

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taxpayers, whether individuals, businesses or other recognised legal or identified illegal entities. Defined and standardised: tax administration meets highly technical and specified regulatory requirements and is generally in a format that cleanses the data of irrelevant information. Identified (Zhou et al. 2017): the system depends on extensive validation of taxpayer identity and labelling of data connected with each identity for automated search and use both in the tax system and related systems. This has become fundamental to most effective government welfare and transfer systems, which are already some of the most automated national and, for example in Scandinavia and parts of the European system, international systems. Longitudinal: The combination of tax and welfare systems provides unmatched comprehensive historical detail of societies. While, this is critical for accurate determination of long-term trends, it also provides rich data for forecasting and analysis across every aspect of society. When combined with government access to data through other regulatory means, for example from sources as diverse as security, immigration, and social media, it will enable governments, if they so choose, to plan accurately, based on rich and reliable data about everyone and everything within their jurisdiction. User focused: The power of platforms such as Amazon, Alibaba, LinkedIn and Facebook is their use of big data to tailor a comprehensive, personalised and highly targeted experience for their users. Tax authorities such as New Zealand are already interacting with taxpayers to respond proactively to life events, such as birth, death and retirement. I will explore below how this will become an expectation. However, the power of tax and connected datasets lies in their unmatched ability to create the ultimate user experience, should a government so choose.

The first stage in applying AI is to extend current process automation of digital and physical tasks. Most tax authorities are implementing the initial steps on the AI continuum by designing their infrastructure architecture and capability to deploy process automation at scale. They are increasingly using large datasets and the early stages of machine learning, with the aim of deploying it more broadly. The process supports all aspects of compliance and revenue-base protection, from real-time use of compliance-focused analytics to compulsory use of automated reporting for business transactions (OECD 2017d, Chap. 4). Tax authorities are not operating in isolation. Financial intermediaries and digital platforms comprising growing and material parts of the global economy, for example financial institutions, digital marketplaces and online global retailers, are both digitally advanced and operate in most jurisdictions. For tax authorities in an early stage of development, they provide significant opportunity to derive the information to authenticate incomes and transactions, and to build, relatively easily, effective datasets with the characteristics identified above. Every stage of the tax compliance process from return, through assessment, objection and appeal, to collection and enforcement, draws on available datasets. It is simply a question of how quickly the systems in any jurisdiction can become connected

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and interoperable. Interoperability will extend both ways allowing information flows into and out of the tax administration system. For the system to operate effectively, tax authorities will need to ensure that its systems are interoperable directly with third party providers, for example, banks and large and medium sized taxpayers, to ensure accurate transfers of metadata. For individuals and small enterprises, the tax authority requires a platform portal to allow approved third parties to provide applications that can connect and allow taxpayers and intermediaries to provide and receive the requisite data. The potential for seamless cross-border information flows adds an additional layer of complexity. The users and providers in current cross-jurisdictional systems information sharing architecture operate largely within the constraints of a closed system. Information flows will increasingly become two-way to provide seamless trade and commerce that supports the growing network of trade agreements. Whether these are bilateral or multilateral, the growth of trade in knowledge and services will make jurisdictional boundaries increasingly difficult to police in a global information infrastructure. Tax administration will grow to support this seamless interconnectivity to assure the revenue base. There will need to be associated services, support and deep use of AI to maintain taxpayer trust, engagement and compliance. Tax authorities are already leading developments in government service provision to limit the risks to revenue of not doing so. The challenge is establishing high level governance, security and data flow protocols to meet as yet unidentified risks both to governments and taxpayers. The ability for machines to interact, transfer or migrate information is an early step and can prove insurmountable with existing machines or architecture. Legacy systems will inevitably impede the rapid adoption of automation, creation of useable datasets and AI, particularly in smaller and poorer jurisdictions. Add to this, the significant barrier of developing the capability to use advanced technologies and systems. Early indications suggest that the demand for expertise to implement and operate AI capability will significantly outstrip supply. The hiring, and continuous skilling, upskilling and reskilling of tax personnel to keep pace with technological development will be challenging. While a disadvantage for those economies least able to afford it, delay may prove a significant advantage in the protection of taxpayer rights for their citizens as they will then adopt later iterations of technologies that have in-built protection. Technological development is staged, stepped and iterative. It is not smooth and does not follow a consistent trajectory. New technologies are increasingly tested in the marketplace and need multiple iterations to reach maturity. While individual products change quickly, as can be seen in the smartphone market, underlying technologies can also quickly become obsolete. Governments and tax authorities have to become familiar with and adapt to this process so that they can provide the services citizens demand and operate a contemporary tax administration. Given the investment costs for early adopters, smaller and comparatively wellresourced tax authorities will move more quickly. Fortunately for taxpayers, these jurisdictions also generally have the most advanced rights protection and are required

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by their legal systems to consider the ethical implications of technological development and how it affects citizens’ rights. Development from automation, through machine learning, to advanced AI with cognitive insight and cognitive engagement, will likely have a number of features. Many technologies are in early stages of development and how they will affect taxpayers and their rights is uncertain. However, articulating the features provides the basis to consider issues that will likely arise. • Before considering outcomes, it is important to reflect on how AI and advanced cognitive engagement will develop. Currently, in general terms, reinforcement learning relies on machine learning to label data, test how it can be used, review the data and operations, and continuously correct and improve. This is based on complex algorithms largely designed and developed by data scientists in conjunction with subject matter experts and then improved either by human intervention or, more commonly, by the programs themselves. An alternative methodology uses generative adversarial networks in which more than one network is programmed to compete to refine understanding of concepts. Given the complexity of the technologies, systems and the multiplicity of potential stakeholders, it is becoming increasingly difficult to break down processes into individual steps and to articulate the basis underlying any one step. • Machine learning will facilitate increased use of free form and natural language. Data gathering will increasingly allow effective and accurate collation of free form information sources that allow systematic interpretation, application and use of the information. Although this will begin with documents, over time it will include voice, image and other records. • Pattern recognition is a by-product of deep datamining. Governments generally have access to the most comprehensive and detailed citizens’ records. When these are combined with social media, location data, visual image capture and the increasing capability to retain conversations through telecommunications or potentially from recorded images, privacy could lose its meaning. • While the issue of intrusion is significant, it does offer enhanced security through authentication. Initially, this is in the form of voice and image recognition. In future it could incorporate the most secure forms of individual identity available, including different forms of genetic fingerprinting. However, these features may only either be available or be made available in certain jurisdictions, depending on that society’s appetite for recording and using the information. • The obverse of intrusion will be the significant opportunities for government and tax authorities to follow the lead of large technology providers such as telecommunications companies, financial institutions and online retailers, and provide comprehensive and personalised services to taxpayers. This will be done cheaply and efficiently at scale, thereby significantly improving government productivity. • Early success by tax authorities in providing services in real-time in conjunction with improved compliance suggests this is an area of particular promise. Tax authorities already use automated payment systems, auditing, and enforcement to varying degrees. Potential system, process and productivity improvements are

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significant, particularly where government adopts and connects with large-scale third-party systems, processes and capabilities. • For tax administration there are two early opportunities, which will soon become system requirements. The first is interoperability and data transfer across government and, in federal jurisdictions, across governments (OECD 2017d). The second is the same but across jurisdictions.27 The political and other barriers that impede this currently will give way, driven by the way societies operate and meld, both with pervasive global commerce and increasing social and virtual interconnectivity. • A significant feature of AI is the material improvement of predictive capability. At the macro level this improves economic forecasting and decision-making to inform policy development and the implications of different options. It should significantly improve tax administration and compliance through improved evidencebased system design. At the micro level, nudging and personalised intervention at scale based on predictive behavioural analysis of individual taxpayer characteristics and circumstances will address compliance risk at every level of the compliance pyramid (e.g., James 2017; Kirchler et al. 2017). • Tax administration is about applying rules to collect taxes and administer the system to do so. This is based on large scale data collection, analysis and decisionmaking. The self-assessment systems in operation globally demonstrate the efficacy of standard approaches based on clear and transparent rules. Much of the cost of administration is concerned with non-standard transactions, disputes or in addressing non-compliance. This usually requires some level of non-standard decision-making, which is often complex. AI will increasingly ensure that most tax administration is system and process driven, reducing non-standard issues that often arise through human intervention. The other features of AI discussed, have demonstrated that even for complex decision-making there are opportunities to reduce the need for human analysis, interpretation and evaluation in developing the issues for decision.

11.5.3 Challenges We stand at the cusp of a technological revolution that threatens our conception of who we are as humans and how we interact to create our society. The tax system is representative of many fundamental areas in which we must consider the ramifications of technological and human evolution. In considering the balance between society and the individual in the context of taxation, the analysis thus far suggests that there are four perspectives that should

27 OECD (2017d) reports that Nordic tax administrations have already developed capability to pre-fill

100% of the data for selected groups of taxpayers resulting in significant reduction in administrative costs and high levels of compliance. Pre-filling and automation are being replicated rapidly by other tax authorities.

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frame our thinking. We are considering technological development and so it is important that any technology system satisfies the Principles of System Integrity identified above, which ensures the system’s integrity and operability. The second perspective is that in the current global legal system each jurisdiction must maintain its integrity and ability to operate as a society. The third perspective that flows from this is that governments must work together to preserve the integrity and operability of the international legal order unless and until it is agreed that it should change. The fourth perspective is that of the rights and duties of the individual as legal persons within both their own jurisdiction and as global citizens with certain fundamental human rights. In the context of taxation, the integrated rights and the compliance frameworks articulated above provide the principle with which to test the balance of rights between citizen and government and between governments. The next section examines issues arising from the features of technological development in the context of those frameworks. Its aim is not to resolve, but rather to identify issues requiring further consideration and potentially resolution. It is critical that there is broader and deeper informed debate in the formation of new technologies. They have the potential to alter our conception of ourselves as human beings and we owe it to ourselves to understand what that will mean both locally and globally.

11.6 Taxpayer Rights: Are the Current Principles Sufficient? 11.6.1 Sovereignty, Constitutionalism and Inter-nation Equity A fundamental question that comes with the digital disruption of the nation state is whether legal systems are robust enough to deal with incremental and pragmatic encroachment. This applies both at international and national level. Rights and their application, particularly since the United Nations Charter and the Universal Declaration of Human Rights, have become the subject of treaties, constitutions, statute and case law. They are accepted as forming an integral part of the substance of international law, which under Article 38 of the Statute of the International Court of Justice, comprises: a. international conventions, whether general or particular, establishing rules expressly recognized by the contesting states; b. international custom, as evidence of a general practice accepted as law; c. the general principles of law recognized by civilized nations; d. subject to the provisions of Article 59 [that the decision of the Court has no binding force except between the parties and in respect of that particular case], judicial decisions and the teachings of the most highly qualified publicists of the various nations, as subsidiary means for the determination of rules of law.

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Nonetheless, the municipal laws of states do not necessarily accept general principles, practice and even conventions, particularly those pertaining to rights. In some jurisdictions, it is uncontroversial that international law should aid the interpretation of statutes; whereas in others what constitute authoritative legal materials depends largely on the judges (Blackshield 2008). We return therefore to Twining’s recognition that to understand law and its application requires us to embrace legal pluralism (Twining 2002). However, we also have to recognise two further challenges to the practical adoption of this view in the context of taxation and taxpayer rights. Firstly, sovereignty over taxation is widely recognised in treaties through margins of appreciation over matters, including taxation, deemed critical to the existence and operation of the state (Bentley 2007, 42). This has limits. For example, Article 1 of the European Convention on Human Rights was early on interpreted to require a fair balance between the public interest demands of the community and the requirement to protect individual rights.28 Nonetheless, international law is based on recognition of municipal sovereignty and institutional integrity of nation states. Courts will generally be cautious in interpreting otherwise, finding a clear basis in law to do so.29 Secondly, despite global integration through vehicles such as trade, commerce, cultural exchange and tourism, there appears little appetite for renunciation of sovereignty, but rather, as Santos argues, there is a tendency towards a new localism (de Sousa Santos 2002). While there has been extensive co-operation in taxation through multilateral agencies, the successive projects to contain harmful tax competition and BEPS have not engendered a general consensus advocating a move away from national systems to a global framework for taxation (OECD 2018a). Rather, the focus has been on maintaining national taxation but helping to connect it in a way that protects each country’s tax base.30 Many of the advantages of digitalisation, particularly AI, have the potential for much deeper and more comprehensive cross-jurisdictional integration both within and across jurisdictions. The danger is that there will be features that develop with the technology, which may not fit neatly within either municipal (different levels of national taxation) or international law definitions. These new features will meet none of the criteria for recognition as international law under Article 38. There will have been no time for their development as a principle and little opportunity before their adoption for moral and ethical consideration and debate. There are at least five ways that features of global digitalisation might practically breach a country’s sovereignty or its constitution, through implementation of digital systems. It will be the role of legislatures and courts to determine, often after the 28 ECHR, Sporrong and Lönnroth v Sweden, App. Nos. 7151/75 and 7152/75, Series A, No 52, [1982] ECHR 5, 18. 29 CJEU, 22 February 2018, Joined Cases C–398/16 and C399/16, X BV and X NV v Staatssecretaris van Financiën, ECLI:EU:C:2018:110. 30 Even here there is a reluctance to explore new technologies that could ameliorate many of the challenges to the tax base. Early opportunities in the context of electronic commerce remain unaddressed. See the discussion in Bentley and Quirk (1999).

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event, whether the implicit abnegation of sovereignty becomes explicit or must be unwound. For the purposes of this chapter my focus is on the associated implications for human rights generally and taxpayer rights in particular. There is a danger that a pragmatic, utilitarian approach could unravel in some areas, almost unthinkingly, generations of legal commitment to protect human dignity and civil rights. On the other hand, it is equally plausible that human and taxpayer rights may be better protected through global digitalisation, in the same way that the margin of appreciation to limit the rights of taxpayers has been reduced, but formally under treaty mechanisms, for signatories to the European Convention on Human Rights. Assume, for the purposes of the five issues below the example of cross-border information exchange for a range of uses in tax administration and enforcement. The technical requirements of systems that operate across borders will build algorithms and other technologies such as digital identity into those systems. They will use automation and advanced cognition to deliver practical outcomes that will facilitate effective administration with a positive user experience. They will seem both fair and reasonable, and deliver information, analysis and support to taxpayers and administrators that is currently impossible. 1. The technical complexity of the algorithms and how they are formulated may extract information and use it in ways where it is not apparent that a law or right within one or more participating jurisdictions will be breached or unwittingly extended. 2. The technical requirements may be scoped explicitly to avoid potential breaches or extension of a law or regulation, but the nature of the implementation may nevertheless result in breach, or it may be discovered as an unintended consequence. In these circumstances, the breach or extension is likely to result from a minor system configuration required to make the new system work, or to work within the available technology and budget. 3. The technical requirements may have acknowledged that they were adopting a contestable view of the law, later found to be wrong, but the technical and wider benefits were used to justify the decision. 4. The technical requirements built into a highly successful global system may deliver administrative and enforcement benefits that satisfy the laws in a majority of powerful jurisdictions, and they may require any participating country to amend its laws as required to join the system. 5. A bloc of powerful countries may exercise overt global power to force other countries to change their laws simply to engage in global trade or commerce. In all these circumstances, current approaches to interpretation of the law suggest that national sovereignty as determined under each country’s constitution, and recognition of that sovereignty in international law, should trump alternatives. However, pragmatic, or utilitarian consequences, may force a different result. There may be legislative intervention to preserve the new status quo (Mercuri 2013). Alternatively, particularly in common law jurisdictions, judges might interpret the law in new ways

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to accommodate the change. Coper argues that we expect judges to achieve a measure of certainty, deliver a result that is reasonable and be generally consistent with a range of external sources of law (Coper 1983, 52). The effect is the same: technology may shape the law and impinge on sovereignty by forcing change reactively rather than the process being an intentional consideration through the legislative mechanisms created for this purpose in each jurisdiction (Corkery et al. 2013; Hildebrandt 2016, 2018). It may not be right or wrong, but simply a new reality that we should acknowledge. However, the examples below may create a deeper level of discomfort with the concept that realism must trump principle and or legalism. As Coper argues, ‘legalism and realism will not only characteristically be in tension; each, separately considered, will be capable of yielding different answers, amongst which choices must be made’ (Coper 2018, 174). A related issue that digitalisation will exacerbate is inter-nation equity. This is part of the basis for the long-term OECD work to reduce harmful tax competition and BEPS (Corkery et al. 2013). Already, digital interconnection is increasing the visibility of the inequities. It is not confined to nations, as given the economic size of the largest global digital companies, they too can reinforce those inequities. Without changes to the traditional global tax system, the inequities are likely to remain self-reinforcing based on the use of power by nations and blocs of nations. The difference in a digital world is that there are many more taxpayer companies which are significantly larger than many countries than in the past. They also wield greater power, are less tied to physical locations and, although they operate as global entities, do not have the level of constraint in operating that a country does. It will depend upon their shareholders and boards whether they will operate to uphold and contribute to, or simply use the global legal systems and frameworks for their own advantage. As the world’s largest taxpayers, collectively, they could become some of the primary decision-makers concerning inter-nation equity and therefore the success or otherwise of municipal tax systems.

11.6.2 Consistency and Proportionality of Exceptions to Laws and Treaty Obligations A principle used in the design of tax law is to ensure, as far as possible, that laws are consistent and do not arbitrarily or unfairly discriminate between taxpayers. This is seen most clearly in European Union jurisprudence (Deák 2009, 44). Englisch notes that the approach applies in German domestic law such that the legislator may choose among different sources of tax revenue, but thereafter equality of treatment between taxpayers requires consistency in the design and application of tax laws (Englisch 2016, 416). The German Constitutional Court has considered principles such as sufficient relevance, significant public policy considerations, necessity, and internal coherence in individual cases (Englisch 2016, 417).

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The principle considers proportionality in striking a fair balance between the state and taxpayers (Bentley 2007, 247). Digital rules should ensure consistency and coherence with other regulatory requirements and other forms of taxation on nondigital transactions. Examples raised frequently in the BEPS consultation relate to the rules for permanent establishments, and for transfer pricing (OECD 2017d). AI may be able to address issues of discrimination between taxpayers more effectively than the standardised approach necessary when dealing with tax laws currently. AI potentially provides the tools to apply highly personalised applications at scale. This may allow tax law design to take account of personal circumstances, for example types and level of disability, or family or work arrangements, that are simply not feasible under current administrative arrangements. The converse is that standardisation to meet system requirements may create discrimination and inconsistency. This could be a particular issue where new systems require data migration from legacy systems in which complete records, histories or information are either not available or cannot transfer. The cost may be too great or capacity not available to re-enter data. Errors may also arise through the process of data re-entry that may create discrimination and inconsistency. It may need new or adapted legal principles to ensure the system can continue to operate, when these cases are tested.

11.6.3 The Making and Operation of Laws To protect rights, it is best to embed them when making law or regulation (Bentley 2007, Chap. 5). Some taxpayer rights have constitutional protection as they are a subset of human rights more generally. For example, the right to a fair trial or representation is often a constitutional right (Elkins et al. 2013, 61). Others are developed as secondary legal rights and rely for their effectiveness on mechanisms such as pre-legislative scrutiny or, once enacted, interpretation provisions (Bentley 2007, Chap. 5; Campbell and Morris 2015; Horne and Le Sueur 2016). The reality is that constitutions are seldom made or changed and, in most jurisdictions, law-making is a complex and contested process (Alley et al. 2015). Taxpayer right protection is, as discussed above, largely designed to support compliance rather than forming an integrated rights framework. The danger with this approach in the context of digital disruption is that the fundamental principles, policies, and ethics that shape law are ill-considered and give way to pragmatic mechanistic solutions that support improved taxpayer compliance. For example, Mercuri suggests that there is a danger of this occurring with bulk exchanges of information under the OECD Automatic Exchange of Information concept (Mercuri 2013). Decision-makers use economic principles to shape tax policy and administration, and while these can align to legal, moral, and ethical considerations, the principles are too broad for legal application. One set of principles, for example efficiency and effectiveness, can easily justify their substitution in regulatory design for another

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set such as equity and fairness, without any recourse to the underlying legal rights framework. In designing regulation at whatever level, the issue is not just, as many political processes suggest, a popular perception of fairness or effectiveness that plays well at the polls or in the media. It is whether the proposed regulations meet the requirements for a valid law in the relevant jurisdiction. The tests are markedly different and, unless the application of treaties in domestic law, the constitutional role of the courts, and the rule of law are to diminish, the economic and administrative response to global digitalisation is likely to meet some hard barriers to implementation under existing laws. Early consideration and amendment of the legal framework more generally, and the taxation framework in particular, is critical. These arguments could be construed as an attempt to slow the pace of change and maintain the status quo. Quite the contrary. If digital disruption is to succeed, like any change, we must consider how it integrates individual rights. Financial technologies and integration of government and governments is at the cutting edge of change, so tax administration and health administration are necessarily in the vanguard of change affecting the most citizens. How does it work in practice? Assume a tax administration wishes to provide a personalised service to taxpayers in business, such as real-time tax collection and reporting across all jurisdictions both domestic and international in which the taxpayer operates and where appropriate inter-governmental agreements exist. The platform created to deliver will draw on data available to those governments across multiple systems. It will necessarily include third parties to provide hardware, software and capability. Assume appropriate legal and governance protocols to operate exist. Arguably, it is simply an extension of the highly successful integration of many European systems allowing cross-border tax compliance, collection and information sharing. However, as noted above, AI will escalate the interoperability to significantly greater levels of complexity. It will incorporate the latest technologies supporting personalisation, digital identity, cognitive insight and cognitive engagement. In practice, this means that a system will be designed to fit the high-level government enterprise architecture and operate across all connecting systems, domestic and international. The programs will need to fit the system specifications to work. Each program comprises code that is written in specific coding languages, is highly complex and mathematically advanced, and develops exponentially through machine learning. The code requires high levels of expertise. The analyst writing the program is seldom the legal or policy subject matter expert and must interpret the meaning provided by the subject matter expert when writing the code. The code requires specificity of meaning so that it can create rules for every element of every transaction. The subject matter expert and programmer must postulate every potential variation for every decision in framing the rules that the machines across the system will follow in developing and applying their AI. The issue is not some dystopian future in which the world is run by machines. It is that humans need to write the code that machines will apply and develop based on that code.

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There are insufficient subject matter experts currently and foreseeably capable of writing the code to capture the legal and regulatory requirements of complex AI systems. The code developed is not transparent or accessible even in its primary formulation. As machine learning based on that primary formulation develops, the code itself becomes even less accessible and, even where unintended consequences are found, often practically and from a cost perspective, the only solution is to apply a ‘patch’ as part of the ‘lifecycle management’ of any system. The patch itself may require multiple updates until the problem is fixed. This process may itself be builtinto the system and automated. However, it needs to be done intentionally. This is no different to the implementation of laws and administrative regulation in a physical environment. It is simply that the digital complexity and scale makes the consequences so much more significant. It is also much more difficult to fix or unravel. There are potential effects that go to the heart of valid tax (and general) lawmaking. Tax must be imposed by law. In complex systems, variations may occur through the implementation of the system, may not be visible, or the consequences may not be remediable. Tax law must be published and understandable. Tax must not be imposed retroactively, must not be contradictory and taxpayers must be able to obey the law. The broad rules and principles will still meet these criteria, but the detail will increasingly be invisible to taxpayers, lawmakers, and administrators. They will often only know that there is a problem when it happens, and they may not be able to fix it. There will have to be other ‘workarounds’.31 The same issues apply to the operation of the law: the requirements that frequent change should not undermine the law; that the law must be applied; that taxpayers should pay no more than the correct amount of tax; and that tax law should not normally impose double taxation. The size, scale and complexity of at best opaque and at worst unknown operating systems mean that the frameworks for operation of tax laws needs review. It is vital that this should occur continually in advance of change, rather than as a reaction to system failures or unanticipated consequences. Otherwise, we risk taking an approach to our fundamental values reminiscent of the metaphor of the frog in tepid water being boiled slowly alive.

11.6.4 Administrative Interpretation and Exercise of Discretion Administrative interpretation of the law and exercise of discretion are critical elements of the effective administration of tax law (Bentley 2007, Chap. 8). Although administrative discretion is more widely used in common law jurisdictions, it is fundamental to the operation of tax systems generally (Nykiel and S˛ek 2009, 367).

31 But

note the type of simplification proposed by Bentley and Quirk (1999) as an alternative and the reconstruction of the way law is viewed proposed by Hildebrandt (2016, 2018).

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Both legislative and administrative decision processes are likely to take advantage of automation and AI. The process for creating the code to develop automated decision-making described in the previous section provides challenges and potential limits. For most administrative interpretation and decision-making it is a requirement to provide reasons for the decision. While these can be at a relatively high level, it is likely that where a decision is automated, a higher level of transparency will be necessary, to demonstrate the factors and rationale for a decision. For example, there may be hundreds of thousands of decisions relating to the application and appropriateness of a tax penalty. Through AI the machine can analyse and evaluate prior decisions quickly and effectively; it can also include in its program complex associated factors and information from multiple sources that would normally be beyond the capacity of a human decision-maker. Nonetheless, if challenged, it will be important that the process leading to the decision and the reasons are clear and accessible. The decisions must also be demonstrably fair and non-discriminatory (Bentley 2007, 379). Using AI this way, may prove difficult. First, there is the issue of complexity discussed above, in which it must be clear that there are no biases embedded in either the algorithms or the machine training and learning process (Agrawal et al. 2018). Every decision-maker has biases, conscious and unconscious, but those embedded in the algorithms and approaches used as a machine learns, are insufficiently transparent for easy analysis and evaluation. This may make the cost of a challenge, which is often a fundamental right, prohibitive. The expertise to determine machine-based reasons may not be available. Second, the views and values of society change, often reasonably rapidly over time. Legal and administrative decisions must reflect contemporary values and morality. While machine learning can take account of changes as new scenarios occur or are programmed into the machine, legacy systems and legacy code may still distort to some degree the decisions made. For example, Bennett Moses discusses the development of in-built bias in the context of changing views of gender and race, and the concerns about predictions based on historical patterns and correlation (Agrawal et al. 2018). Third, legal decision-making based on an expert interpretive framework arguably uses a different form of reasoning to machine learning.32 Machine learning identifies patterns and correlations in historic data and makes inferences based on deduction. Legal and interpretive decision-making is often inductive, analogical, value-laden, contextual, and focuses on normative questions of principle and policy (Farrar 1997, 149). There is an issue of at what point human decision-making should take over from AI. Inferential deductions may produce rational decisions and the programmed explanations may well seem authentic and yet come to different conclusions from those a human would make. However, given the accuracy of automation and AI using a robust methodology, the US courts have tended to defer to that expertise

32 Decision-making

processes discussed in Chan and Bennett Moses (2016), and the approach in U.S. Courts analysed through Wisconsin v Loomis (2016).

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(Coglianese and Lehr 2016–2017). Accordingly, as AI extends its reach, it is critical to determine both acceptable methodologies and legitimate boundaries in advance. Racism, sexism and the biases that make us human (e.g., De Martino et al. 2006) become difficult to undo if the algorithms implementing AI are complex and difficult to ascertain other than from the output (Angwin et al. 2016). One of the major advantages of machine learning is that it should be possible for adjustments to be programmed into the system once biases become apparent (Verhulst 2018). However, at a granular level, for example, taxpayers may query how data is labelled and, if it is unclear, they may lose trust and dispute assessments. Addressing such issues early to reassure taxpayers is important to reduce negative engagement. AI offers significant opportunities to complement humans in administrative decision-making (Coglianese and Lehr 2016–2017, 1147; Oswald 2018). How it should occur remains controversial and requires careful assessment for the protection of taxpayer rights (Bennett Moses and Chan 2014). AI may be used mainly for decision-making that does not require expert interpretation, which may still be the preserve of humans (Bennett Moses 2017, 569). It is likely that we need guidelines that determine when we entrust decisions to AI. Critical features from a rights perspective, will be whether the content and matter of the discretion is significant, the binding quality or effect is substantial, or the potential application is broad (Bentley 2007, 292, 377). Any decision must have a rationale showing that is appropriate and necessary to achieve the objectives legitimately pursued. It must show that where there is a choice between several appropriate measures the least onerous is chosen, and where disadvantages are caused they are not disproportionate to the aims pursued. The exercise of discretion must be demonstrably fair and reasonable in matters of procedure and substance (Bentley 2007, 292, 377).

11.6.5 Privacy, Confidentiality and Security Privacy and confidentiality are two of the most contentious issues for digitalisation and AI. All tax systems protect confidential tax information to varying degrees and would prevent unauthorised access to, browsing of, and release of taxpayer information. Generally, there is a level of disclosure across government departments, for law enforcement and related purposes, and for courts and tribunals.33 The level of disclosure is increasing to allow information exchange under treaty arrangements and to support multilateral cooperation and enforcement.34 On the other hand, transparent reporting is increasing, both as a means to support anti-avoidance activity and as a general feature of a digital age, in which social

33 Australia:

Tax Administration Act (1953) sch 1, s 355-45–s355-75.

34 Australia: Tax Administration Act (1953) sch 1, s 355-70 and Australia: International Tax Agree-

ments Act (1953) s 23. For a comprehensive analysis see, Dirkis and Bondfield (2013), 115.

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media is pervasive. This is underlined by the Principles for System Integrity, discussed above. They are predicated on ensuring security; together with the openness, trust and transparency, which are all required to deliver a high-quality user experience. They are expectations and potentially should be seen as rights of citizens generally and taxpayers in particular. The user experience already embedded in most administrative charters of taxpayer rights should provide the basis for digital delivery with performance benchmarks that are enforceable. The design must meet service, privacy, confidentiality, and security requirements. The issue of user experience is discussed separately below. The challenges for automation and AI are broadly similar to those that already exist. The solutions will offer advantages and invite changes in perspective, which will require choices between principles. There are three significant issues that need early research and consideration: 1. Information exchange within jurisdictions, between government departments and between different levels of government, is not yet seamless and different countries have different levels of permission and capability. Cross-border information exchange is becoming more common with BEPs (Mercuri 2013). When systems allow automatic information exchange using AI and advanced data analytics, they will combine with the capability to translate across language and the different types of tax system. They will use advanced methods of identification and may provide far greater levels of detailed information or allow information provided to connect far more effectively to information already held within the receiving systems. The issue for decision is not simply how to create effective mechanisms to reflect the legal position in both states for the sending, receipt and use of the information. It is how to implement those mechanisms in code so that they are sufficiently transparent for review without making the process so clumsy that they outweigh the benefits of automation and AI. 2. Third party provision of hardware, software and services within the tax system will increase, with often blurred lines of accountability and liability, with tax authorities often becoming facilitators of technical solutions, as is being pioneered in New Zealand (KPMG 2017) and Singapore.35 The issues become more complex in determining how the privacy and confidentiality principle applies to expanded groups of third parties, often governed by derivative contracts, sometimes with no connection (or regulatory obligation) to the governments of the jurisdictions involved (OECD 2016). Loss of control of the total system by the tax authority means there will be potential security, information and use breaches.36 Although ease of access and use will build taxpayer confidence and satisfaction, a major data breach can quickly undermine trust (OECD 2017d, 163). What will the remedies be where there is a breach and who bears the risk and the liability for failure? (Deshpande et al. 2017) Given that many will cross borders, should 35 See Inland Revenue Authority Singapore (2018b) and the IRAS marketplace to work with developers on Application Programming Interfaces (APIs). 36 Australia: Privacy Amendment (Notifiable Data Breaches) Act (2017) (Cth); US Department of Commerce National Institute of Standards and Technology Framework (2018).

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there be a limited liability scheme that provides protection within legislated limits, to protect taxpayers? If so, should this be administered locally or as a global scheme for participating countries? Should there be oversight by an independent body to assure taxpayer protection, just as in many countries there are consumer protection and corporation law watchdogs and ombuds? 3. Security, cybersecurity and cybercrime threaten to become larger issues than physical crime and conflicts (Australian Cyber Security Centre 2017, 17). Governments and tax authorities are already under significant threat as the holders of the most comprehensive databases of information, particularly on their citizens. Maintaining a digital advantage is one of the most important reasons to move as quickly as possible to fully digital government. It also supports use of third parties, who are often in a better position than government to respond quickly and effectively to threats. The reality is that the speed and scale of risk increases, but so does the capacity to protect citizens (Boes and Leukfeldt 2017, 185). Technologies such as blockchain and quantum encryption will support solutions for secure, trusted transactions and storage as they or variants develop (Deshpande et al. 2017; Iansiti and Lakhani 2017, 4). These will range from immutable recording and reporting of data, through management of encrypted digital identity, to mechanisms for smart contracts and auditing of digital records and transactions. The questions around failure are similar to those for third party provision. Another question is whether security will place a prohibitive barrier on cooperation with states with lower levels of security?

11.6.6 Fairness, Accessibility and the User Experience Almost every aspect of tax system design and formulation of legal or administrative protection of taxpayer rights is wrapped in the economic or legal principles of ‘fairness’. Contemporary expression frames it as a positive user experience. This is fundamental to improving taxpayer compliance and articulates the values underlying a taxpayer-centric formulation of taxpayer rights. AI can take the user experience to a different dimension. The tax compliance framework is predicated on improving taxpayer trust and engagement (Braithwaite and Braithwaite 2001, 215; Kirchler et al. 2008). The integrated rights framework brings together tax compliance and regulatory protection in a robust taxpayer centric model of engagement. If AI can embed the principles of the integrated rights framework, it will extend the practical meaning of taxpayer rights while supporting taxpayer obligations. However, the underlying values must be predetermined to ensure that pragmatism does not unwittingly trump individual protections: that a utilitarian approach does not override individual rights before the implications are fully known. It is likely that digital capability and third-party reporting will allow all business transactions to be digital with real-time reporting. Businesses could then expect

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automated tax reporting using the information collected. Businesses would validate and approve the returns as currently happens in many jurisdictions with pre-filled returns. An extension through automation and AI is that the tax authority, given that most businesses are small or medium sized enterprises, could also be expected to provide cash flows statements, management accounts and full audited financial accounts for all except the largest businesses or those operating with jurisdictions that do not have the requisite information exchange capability. AI will mean that the tax authorities have sufficiently comprehensive information to help improve business success and avoid business failure. Tax authorities already use ‘nearest neighbour’ messaging and nudging to manage risk and influence behaviour. If taxpayers provide government with all of their information and the tax authorities know how to help them succeed or fail, particularly given the focus by governments on building economic growth, AI should be used to the fullest extent possible to support taxpayers. While due care and legal caveats will be in place, the accuracy, comprehensiveness and scale of AI analytics available to tax authorities should significantly improve general economic and trade performance and provide reciprocal benefit to taxpayers as citizens. Over time government should legislate that it must not only collect information to police compliance, but grow the economy by supporting and assisting taxpayers. For most businesses, this change would provide a significant cost saving, making business more competitive and reducing the compliance burden on taxpayers generally. Professional and financial services will change in nature, and provide higher order expert advice, which a computer cannot provide. There will be associated productivity improvements for advisers. The pressure on tax authorities to provide similar service improvements will be exacerbated by growing global trade. Individual taxpayers are currently proactively supported in life decisions from childbirth, through retirement to death in New Zealand. This should become the norm for all tax authorities. Individual compliance should not only be minimal, but there will be expectation that governments use the comprehensive lifetime information that they collect to provide a range of services automatically to taxpayers. Tax, welfare and health information then become not simply a repository in government datasets, but provide the government with commensurate responsibilities that should become obligations they are required to provide to taxpayers.

11.7 Conclusion Taxpayer rights have come of age. While they are central to compliance frameworks, they are increasingly integrated into a legal rights framework. The rules supporting tax systems, on the other hand, face global disruption. BEPS may provide a veneer of agreement, but the OECD-led discussions on digitalisation reveal how fragile international agreement is on which taxing jurisdiction has the right to tax and to tax what. This is further apparent as taxpayers exploit the lack of systemic agreement on substantive tax policy to reduce their tax burden

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(Dirkis 2012–2013, 83). While political ire, economic power, or incentives may force or tempt some taxpayers to operate in certain jurisdictions in compliance with the domestic rules, it will often be at the expense of other jurisdictions. An integrated rights framework provides amelioration of state power, where citizens are caught in the crossfire of global digital disruption and economic skirmishing. It provides for consistent application of established rules and principles to determine tax policy, regulation and administration. More important, the framework provides the basis to shape the parameters for effective digital development. Digital developments, from electronics and systems, the potential application of AI, to advances in identity, tracking and cybersecurity, will reshape global society. We have to determine how we respond proactively both to known and unknown future technologies. As importantly, we also need to develop a clear understanding of potential scenarios so that we can be proactive and not reactive. Reactive decisions tend to be sub-optimal (Polasky et al. 2011). It is inevitable that there will be failure and digital scale means it will be visible. Managing taxpayer and government response to innovation while protecting taxpayers remains a challenge. It needs preparation, debate and research in advance of failures occurring so that ignorance in crisis does not drive poor policy-making and associated regulation. Security breaches, for example, will be larger scale and have widespread impact. It will need care to balance the response. The balance will be between appropriate protection of security and confidentiality and the opportunity that governments have to increase significantly rights to service and personalisation of support. It applies to all government services, but the regulatory frameworks for and reach of the taxation, health and welfare systems mean that they are likely to gain most visibility. This will be particularly important in the context of third-party access and, in the tax context, their access to tax systems and information. Taxpayers will demand transparency, but we need to determine what that means in a world of AI. So, too, the concept of fairness may change; particularly if the nation state obstructs consumer choice and free will. The tax system will follow such decisions. One of the most significant challenges is the capability that tax authorities will require to implement a tax system effectively in a digital environment, let alone a sophisticated system that incorporates the elements of an integrated rights framework. There will be trade-offs between utility and rights. We need to understand them. There are multiple challenges and we need to develop principles that will allow us to take full advantage of the opportunities. The same digital capability that raises concerns about consistency and proportionality, equity and fairness, effective operation of the rule of law, bias and discrimination, transparency, privacy and security, also provides the capability to solve these challenges. Taxpayer protection and services can be personalised and built into tax systems as never before. It should be done early and intentionally. It could give substance to global application of a highly effective integrated rights framework across all participating jurisdictions. The result based on the research would be an increase in trust between the citizen and the state.

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Inland Revenue and HM Customs and Excise. 1999. Electronic Commerce: The UK’s Taxation Agenda. London, United Kingdom. Inland Revenue Authority Singapore. 2018a. https://www.iras.gov.sg/irashome/About-Us/OurOrganisation/Turning-25---Towards-A-New-Digital-Era/. Accessed 2 December 2018. Inland Revenue Authority Singapore. 2018b. https://www.iras.gov.sg/irashome/About-Us/PublicEngagement/Partnership-with-Software-Developers/. Accessed 2 December 2018. International Monetary Fund. 2017. World Economic Outlook. https://www.imf.org/en/ Publications/WEO/. Accessed 2 December 2018. KPMG, New Zealand Inland Revenue. 2017. Independent Quality and Technical Assurance, Business Transformation Programme, IQA6/TQA5. https://www.ird.govt.nz/resources/0/f/0f962fcc75ea-4bbd-a4f2-45b4d5a92334/IQA6TQA5-2017.pdf. Accessed 2 December 2018. Lagarde, Christine. 2018, May 25. Address to St. Petersburg International Economic Forum’ St. Petersburg. http://www.imf.org/en/news/articles/2018/05/25/sp052518-lagarde-address-tost-petersburg-ief. Accessed 2 December 2018. McCaw, P.M.. 1982, April. Report of the Task Force on Tax Reform. Wellington: Government Printer. McKerchar, Margaret, Kristen Meyer, and Stewart Karlinsky. 2006. Making Progress in Tax Simplification: A Comparison of the United States, Australia, New Zealand and the United Kingdom. Paper Presented at the 7th International Tax Administration Conference, Sydney, Australia. McKinsey Center For Government. 2017. Government Productivity: Unlocking the $3.5 Trillion Opportunity. https://www.mckinsey.com. Accessed 2 December 2018. New Zealand Inland Revenue. Digital Transformation Agency. Business Transformation Programme. https://www.ird.govt.nz/transformation/bt-programme/bt-programme-sectioncontents.html. Accessed 2 December 2018. New Zealand Inland Revenue. 2017. Transformation Briefing for the Minister of Revenue. Wellington, New Zealand. https://www.ird.govt.nz/resources/5/c/5c310209-3cd6-4e57-be8c8eee94d85848/transformation-briefing-for-the-minister-of-revenue.pdf. Accessed 2 December 2018. Norwegian Ministries. 2012. Digitizing Public Sector Services: Norwegian eGovernment Program. https://www.regjeringen.no/globalassets/upload/fad/kampanje/dan/ regjeringensdigitaliseringsprogram/digit_prg_eng.pdf. Accessed 2 December 2018. OECD. 1990. Taxpayers’ Rights and Obligations – Practice Note. https://www.oecd.org/tax/ administration/Taxpayers’_Rights_and_Obligations-Practice_Note.pdf. Accessed 2 December 2018. OECD. 1998. The Committee on Fiscal Affairs Electronic Commerce: Taxation Framework Conditions. www.oecd.org/dataoecd/46/3/1923256.pdf. Accessed 2 December 2018. OECD. 2015. Addressing the Tax Challenges of the Digital Economy, Action 1—2015 Final Report. http://dx.doi.org/10.1787/9789264241046-en. Accessed 2 December 2018. OECD. 2016. Rethinking Tax Services: The Changing Role of Tax Service Providers in SME Tax Compliance. http://dx.doi.org/10.1787/9789264256200-en. Accessed 2 December 2018. OECD. 2017a. Future of Work and Skills. Paper presented at the 2nd Meeting of the G20 Employment Working Group. Hamburg, Germany. http://www.oecd.org/els/emp/wcms_556984. pdf. Accessed 2 December 2018. OECD. 2017b. Getting Skills Right: Good Practice in Adapting to Changing Skill Needs. http:// www.oecd.org/employment/skills-and-work.htm. Accessed 2 December 2018. OECD. 2017c. Getting Skills Right: Skills for Job Indicators. http://www.oecd.org/employment/ skills-and-work.htm. Accessed 2 December 2018. OECD. 2017d. Tax Administration: Comparative Information on OECD and Other Advanced and Emerging Economies. http://www.oecd.org/ctp/administration/tax-administration-23077727. htm. Accessed 2 December 2018. OECD. 2018a. Making Globalisation Work For All: Policy Responses and the Role of Mutilateralism. Berlin. http://www.oecd.org/about/Make-globalisation-work-for-all.pdf. Accessed 2 December 2018.

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OECD. 2018b. Tax Challenges Arising from Digitalisation Interim Report. http://www.oecd. org/tax/tax-policy/tax-challenges-arising-from-digitalisation-interim-report-9789264293083en.htm. Accessed 2 December 2018. Productivity Commission Inquiry Report. 2017. Data Availability and Use. No 82. https://www.pc. gov.au/inquiries/completed/data-access/report/data-access.pdf. Accessed 2 December 2018. Schwab, Klaus. 2016. The Fourth Industrial Revolution: What It Means, How to Respond. Paper presented at the World Economic Forum, 16 January 2016. https://www.weforum.org/agenda/2016/ 01/the-fourth-industrial-revolution-what-it-means-and-how-to-respond. Accessed 2 December 2018. Shome, Parthasarathi (ed.). 1995. Comprehensive Tax Reform: The Colombian Experience. IMF Occasional Paper No. 123. IMF, Washington DC: IMF. Stoica, Ion et al, 2017, December 15. A Berkeley View of Systems Challenges for AI. Working paper [cs.AI]. https://arxiv.org/pdf/1712.05855.pdf%20:%201.pdf. Accessed 2 December 2018. Tieghi, Giovanna. 2015. The Italian Taxpayer Bill of Rights 15 Years Later. Paper presented to the International Conference on Taxpayer Rights, Washington DC, 18–19 November 2015. US Department of Commerce National Institute of Standards and Technology Framework (2018) developed in response to Executive Order 13636 https://www.nist.gov/framework. Accessed 2 December 2018. World Economic Forum and Boston Consulting Group. 2018. Towards a Reskilling Revolution: A Future of Jobs for All. http://www3.weforum.org/docs/WEF_FOW_Reskilling_Revolution.pdf. Accessed 2 December 2018.

Statutes Australia International Tax Agreements Act 1953 (Cth) s 23. Australia Privacy Amendment (Notifiable Data Breaches) Act 2017 (Cth). Australia Tax Administration Act 1953 (Cth). Europe. The European Convention, Art 6 for the protection of Human Rights and European Union Fundamental Freedoms (1950).

Duncan Bentley is a Professor and Deputy Vice-Chancellor (Academic) at Swinburne University of Technology, Australia. He is a Visiting Professorial Fellow at the University of New South Wales and Emeritus Professor at Victoria University, Australia. Professor Bentley is a Fellow of the Australian Academy of Law, an Honorary Fellow of the South African Institute of Tax Practitioners, Chartered Tax Adviser, and Fellow of the Institutes of Chartered Accountants in Australia and England and Wales. He is an active member of several professional bodies, including the Law Council of Australia and has a particular focus on internationalisation and trade in education and professional services. Professor Bentley is the author of Taxpayers’ Rights: Theory, Origin and Implementation, editor and major contributor to Taxpayers’ Rights: An International Perspective and author of numerous articles on taxpayer rights and tax administration. His work has influenced policy, regulation and research internationally on issues ranging from taxpayer rights to tax dispute resolution, advance rulings and electronic and digital commerce. He has consulted globally on international taxation matters.

Chapter 12

Is There Any International Fundamental Right Against an International General Anti-avoidance Rule? João Dácio Rolim

Abstract This chapter discusses the role and main aspects of International Human Rights in the light of justifications for general anti-avoidance rules in international taxation. It analyses whether or not an international GAAR, such as the PPT (principal purpose test) of the OECD Multilateral Instrument may be against some international fundamental rights under International Conventions on Human Rights. It also argues what type of GAAR or specific rules would fit more properly as a legal tool to counteract tax avoidance and analyses its consequences in relation to taxpayers’ rights.

12.1 Introduction The main purpose of this chapter is to investigate whether an international general anti-avoidance rule would be compatible with International Law, particularly with International Human Rights Law. No consideration will be given to domestic law of specific countries, because under the Vienna Convention on Treaty Law, States may not invoke domestic law to avoid the application of treaties signed in good 1 faith. Also, the interpretation and construction of specific or general treaty provisions are submitted to the rules and principles of interpretation provided by the Vienna Convention itself and other international instruments such as the Statute of the International Court of Justice that prevail over any domestic rule of adjudication and interpretation. Thus, this chapter discusses in four parts the role and main aspects of International Human Rights in the light of justifications for general anti-avoidance rules in international taxation. Section 12.2 discusses (1) the concept of tax avoidance, (2) to what extent tax avoidance is acceptable, and (3) the principle of proportionality 1 Art.

27 of the Vienna Convention on the Law of Treaties of 23 May 1969, UNTS 1155, 331; entered into force on 27 January 1980. J. D. Rolim (B) IBDT, São Paulo, Brazil e-mail: [email protected] © Springer Nature Singapore Pte Ltd. 2020 R. F. van Brederode (ed.), Ethics and Taxation, https://doi.org/10.1007/978-981-15-0089-3_12

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that should help reach a balance between legal certainty and tax equity when these come into conflict in tax avoidance schemes. Section 12.3 provides an introduction to International Human Rights Law and how human rights, and their protection, are related to tax avoidance. Section 12.4 contains an overview of international rulings and decisions on whether the need to combat tax avoidance can serve as a justification in the public interest to restrict the fundamental rights and freedoms. Section 12.5 touches upon the Anti-tax Avoidance Directive (ATAD) as well as the Multilateral Instrument (MLI) and the Principal Purpose Test (PPT) that provide two similar international general anti-avoidance rules with different nuances, which are subsequently assessed from the perspective of the international human rights and freedoms enshrined in International Instruments.

12.2 Tax Avoidance Definition and the Conflicting Justifications for GAARs. The Role of Proportionality in Balancing Different Principles at Stake in Tax Avoidance 12.2.1 Definition and Main Characteristics A traditional distinction between tax avoidance and tax evasion is that the former is lawful whereas the latter is not. However, in an international and comparative context, tax avoidance may be abusive, and as a consequence unlawful, but not to the same degree as tax evasion, which in many countries constitutes a criminal offence and subject to harsher penalties. When tax avoidance is not abusive, it is lawful, and could be regarded as tax mitigation (Shipwright 1997; Baker 2013, 2014). Still, from an international perspective, any arrangement or transaction made by taxpayers whose sole or main purpose is to reduce their tax burden may be legitimate or not depending on the economic factual circumstances and the purpose of tax laws at stake. In this sense, tax avoidance may be abusive, wholly artificial, excessive or too aggressive, and thus illegitimate and unlawful depending on the assessment of two factors: first, the objective economic factors that may or may not give business purpose or economic substance to the transaction; and second, the specific purpose of the tax laws in play (i.e., the tax law that was supposedly circumvented and the tax law that should arguably be applied to the transactions).2 The above two factors are in line with the guiding principle set out by the OECD for determining tax treaty abuse, 2 Holmes

(2014, 358) points out that in most countries the essential issue of domestic and international tax avoidance “comes down to whether the legal form of an arrangement, which a taxpayer designs to minimize the amount of tax that it must pay, prevails over the underlying economic reality of the circumstances of the case”. A general description on the role of general anti-avoidance rules or doctrines is also given by the OECD Report (2013, 38) according to which they “limit or deny the availability of undue tax benefits, for example, in situations where transactions lack economic substance or a non-tax business purpose.”

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i.e., that the main purpose for entering into transactions is to obtain a more favourable tax position contrary to the object and purpose of the treaty provisions in play.3 Not surprisingly, the UN Commentaries on the UN Model Convention follows the same line of thought.4 A guiding principle is set out in paragraph 25 of the Commentaries on Article 1 of the UN Model Convention as follows: A guiding principle is that the benefits of a double taxation convention should not be available where a main purpose for entering into certain transactions or arrangements was to secure a more favourable tax position and obtaining that more favourable treatment in these circumstances would be contrary to the object and purpose of the relevant provisions.

Furthermore, on general anti-avoidance rules the UN Commentaries seem to be fair to state that “these two elements will also often be found, explicitly or implicitly, in general anti-avoidance rules and doctrines developed in various countries.”5

12.2.2 Justifications for and Limits to Combating Tax Avoidance To what extent would minimization and deferral of the tax burden be justifiable and legitimate? It is a customary doctrine, recognized by many countries, that taxpayers have the right to legitimately organize their activities and business in the most tax efficient way (Vanistendael 1997, 132). Starting from the point of view of pure liberalism, “a radical separation of legal form and economic substance … [is required, and] … laws must be addressed to the generality of legal subjects, without distinction as to their social or economic position” (Picciotto 1992, 79). This theory is considered untenable, due to its extreme inequalities at a socio-political level. Consequently, pure liberalism has given way to “welfare liberalism”, establishing an adequate and substantive social basis and providing conditions that allow formal equality to be realized (Picciotto 1992, 81). Thus, interventionist forms supplant the liberal forms of regulation. Although equality, ability to pay, fairness, and the concept of abuse of rights may support the adoption of general or even specific anti-avoidance provisions, these rules may damage the requirements of certainty, predictability, and protection of fundamental freedoms, which are essential elements in a liberal system. However, Picciotto again highlights that this assertion unrealistically assumes that formal rules can be defined by referring them to completely factual conditions, or objectively ascertainable circumstances. The resort to less precise standards is often made in private law (“good-faith”, “foreseeability”, “reasonableness” etc.) (Picciotto 1992, 87). Similarly, it is reasonable to affirm that tax laws based only on specific and formal rules tend to be amended often; to the extent that they could be considered 3 Paras

9.5 and 9.6 of the Commentary on Article 1 of the OECD Model Convention. 22–26 of the Commentary on Article 1 of the UN Model Convention. 5 Para 26 on Article 1 of the UN Convention Model. 4 Paras

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a battlefield between taxpayers and the Treasury. The optimal relationship between tax authorities and taxpayers should be fair play, capable of providing reasonable certainty, stability and predictability—the main objectives of those who support and defend liberal formalism as well. Thus, reasonable general or specific anti-avoidance rules may provide a fair relationship between taxpayers and tax authorities, avoiding abuse from both sides. There may not be a duty (fiduciary duty for those in charge of running a business) to avoid taxes where the avoidance would be pursued by wholly artificial or abusive arrangements. Another great advantage of anti-avoidance rules, depending on how they are provided and enforced, is that they give opportunities to find principles of taxation and grant them “a vital function in the interpretation of tax legislation”.6 A different perspective to tax avoidance considers the creation of legislative uncertainty as an essential weapon to combat artificial arrangements, unacceptable from the point of view of fairness. Moreover, such situations would not be acceptable from the perspective of equal treatment of equivalent economic situations and of tax collection itself, particularly where the economic principle of neutrality underlies a general anti-avoidance rule.7 “However, discretion and uncertainty are not necessary companions. Indeed, the exercise of discretion is how you offer certainty where legal definition cannot” (Gammie 1997, 215). For instance, in terms of anti-avoidance measures, they may be specific or general. In this latter case, some discretion is necessarily left to tax authorities and judges to consider whether there is, in each case, a business purpose other than artificially avoiding taxes. In the author’s view, the discretion by the tax authorities is more appropriate where necessary to ascertain objective factors and legal issues regarding tax avoidance; however, it must be submitted to judicial review. The broader the discretion, the closer the scrutiny necessary to avoid subjectivism, bias, and arbitrariness; and to ensure the application of sound commercial reality, particularly when assessing the business purpose of transactions. Thus, a tax assessment, levied to counter tax avoidance, must observe fundamental rights, such as absence of excessive burden of proof, fair rebuttal, no interference with taxpayers’ right to manage their own business (except where artificial arrangements are made solely or mainly for tax purposes), no excessive penalties or guarantees, no restrictions to carry economic activities while tax assessment is under way, independent commissioners and judges, and others rights, such as an overall fair assessment that is part and parcel of due process and the rule of law. Another interesting social and economic aspect is the public perception of aggressive tax avoidance in some countries, such as in the UK, where consumers have campaigned to boycott some multinationals for paying minimal taxes due to their tax avoidance schemes. As a result of that public perception, some companies became more concerned about their reputation in the UK, and searched to obtain a fair tax mark, like a fair trade label, which is available to businesses meeting certain

6 Roxan

(1998, 146). On the complexity to tackle tax avoidance, see Weisbach (1998). to the principle of neutrality, taxpayers should make economic decisions that are tax neutral, unless tax legislation states otherwise, such as in situations of tax incentives.

7 According

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non-abusive avoidance requirements.8 This could become an international trend if taxpayers and other organizations were to be more aware of the implications of aggressive tax avoidance and of their economic and political power. The work of civil society in combating tax avoidance has also become increasingly notable and important as shown by some specific non-governmental organizations such as the Tax Justice Network (TNJ) and the Global Alliance for Tax Justice (GATJ).9

12.2.3 The Role of Proportionality to Control Tax Avoidance by Balancing Rules and Principles If conflicting principles are at stake regarding tax avoidance, such as legal certainty and tax equity,10 they should be reconciled with each other in order to reach a fair balance, protecting both principles to the extent possible. In the author’s opinion, neither of them should unconditionally prevail over the other, and the principle of proportionality is an analytical tool to reach that fair balance (Rolim 2014). Moreover, proportionality coupled with reasonableness may balance all tax principles that justify combating tax avoidance, mainly equity and the doctrine of abuse of rights, against other relevant principles, such as good faith, legal certainty, and predictability.11 All of them are important and none of them should be absolute or exclusive. First, general or specific anti-avoidance rules should be suitable for the attainment of the desired objective (to avoid artificialities and abuses, for example); second, the necessity of the measure in a sense that it is the least restrictive of individual freedoms that could be adopted; and third, the requirement of the proportionality of the measure to the restrictions involved (balancing). Thus, if a tax measure, such as joint taxation of spouses, is too intrusive to the freedom to opt for separate taxation and discriminatory, it may be unlawful for being disproportionate. Treating the family as a tax unity may be reasonable either for tax avoidance or simplification purposes. However, joint taxation may be disproportionate where this tax treatment results in 8 In 2014 SSE, the UK’s broadest-based energy company was the first FTSE100 company to achieve

the Fair Tax Mark. For every business type, the criteria are divided into two main categories that assess a business on, firstly, Transparency, and secondly, Tax rate, disclosure and avoidance (www. fairtaxmark.net). 9 See further information on those NGOs at www.taxjustice.net and www.globaltaxjustice.org. 10 “Tax equity demands that artificial tax avoidance schemes should be of no effect, yet certainty demands that the tax laws should be such that an individual can arrange affairs in the expectation that he will not have to pay tax” (Tiley 2005, 101–02). 11 Other general principles of international law such as equality of States, reciprocity, good faith, the legal validity of agreements, and the freedom of the seas, may be construed and applied according to the principle of proportionality in its role of weighing apparently conflicting interests and ascertaining and making them effective and as compatible as possible with each other. As Abi-Saab et al. (2006, 459) pointed out, “… there are certain general principles of international law, or of law tout court, without which it is impossible to imagine how any legal system can function—in other words, principles inherent in the concept of legal system itself—such as the principles of good faith and proportionality.”

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taxing spouses or civil partners more heavily than non-married couples who live together, particularly if there is an underlying policy or constitutional objective for the State to recognize, protect and encourage the family.12 Another role of proportionality would be to assess which is more effective and fair in combating abusive tax avoidance: specific rules, or a general anti-avoidance rule; or still a combination of specific rules and a general principle. Here it may be worth analysing whether or not a general anti-avoidance rule can be really regarded as either a general legal principle or just a general rule. There are two main differences between rules and principles according to Dworkin (1978, 24–26). First, rules are all-ornothing norms, either they are applicable in a case or they are not, whereas principles may allow some degree of optimization in their application and enforceability as they must consider other competing principles with which they must be reconciled. Secondly, principles have a dimension of weight and importance that is lacking in rules. Sometimes rules may function as principles (see Alexy 2000, 2002, 44–66). As a matter of principle, considering how a GAAR is designed, whether or not covering a generality of transactions, its level of abstraction and indeterminacy, its degree of importance in the tax legal system, technically speaking any genuine GAAR may certainly be regarded as a principle of law. Furthermore, in its own right and definition, “a GAAR is a general statement of principle which seeks to thwart a broadly defined category of transactions which reduce or defer” tax liability.13 Thus, a GAAR functioning as a principle could be coupled with rules, such as specific anti-avoidance rules, to increase the effectiveness and fairness in combating tax avoidance. It is debatable whether a system based on general principles rather than prescriptive rules may be more appropriate, depending on the legal traditions and constitutional systems of each jurisdiction.14 Generally there is a more defence of principles, though rules are necessary, in a combination that should bring greater clarity and consistency to any legal system.15 In the author’s view, a system with general principles, such as an objective abuse of rights doctrine (taking into account objective economic factors, the principle of good faith, no application of penalties, objective ascertainment of the purpose of the tax legislation at stake, and an overall fair assessment), is more appropriate to combat tax avoidance, because it balances 12 See Thuronyi (2003, 92–5). The German Constitutional Court decision that balanced the equality

of rights of the two sexes, the constitutional protection of the family, and the purpose of ‘bringing the working wife back to the home’ (6 BVerfGE 55, decision of 17 January, 1957, excerpted in Kommers (1997, 498); and the US Supreme Court in Hoeper v. Tax Commission of Wisconsin, decided in 1931, 284 U.S. 206. See also the judgment of the Constitutional Court of Spain No. 45/89 (STC 45/1989), of 20 February 1989, based on the principle of proportionality to guarantee non-discrimination between married couples and cohabitees in the light of the protection of family. 13 Orow (2000, 58). Furthermore, anti-avoidance measures are considered as “fundamental policy prohibitions” to abusive tax planning such as in the case of transactions that “lack economic substance or a non-tax business purpose” (OECD 2013, 38). 14 See also on the challenges of tackling avoidance through rules or principles, Jones (1996). From an economic perspective, see Kaplow (1992). 15 See Sunstein (1995) and Braithwaite (2002). In taxation, in defence of principles, see Freedman (2010). Against GAAR, particularly the U.K. statutory GAAR, and apparently against principles, for its indeterminacy and lack of certainty, see Gammie (2013).

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equity and legal certainty, whereas prescriptive rules favour legal certainty only or mostly, with likely little regard to fairness. A combination of a general rule with prescriptive ones, for greater clarity and legal certainty, would be better depending again on what would be more appropriate to the legal system, tradition, and culture of each jurisdiction, but in line with international standards set out by international organizations such as the UN, OECD, and international courts such as the European Court of Human Rights, the Court of Justice of the European Union, and the Appellate Body of the WTO, as discussed further in the following Sects. 12.4.2 and 12.4.3. Furthermore, some general principles of International Law, such as good faith, abuse of rights, non-discrimination coupled with reasonableness and proportionality, may directly or indirectly be related and applicable to international tax avoidance. Where tax avoidance is an issue only for a specific type of transactions, such as reorganizations, mini-GAARs addressing only those transactions may be more efficient for the sake of simplification, clarity and legal certainty. It may not make sense for a legal system to have a huge arsenal of anti-avoidance rules where taxpayers use only few transactions for tax avoidance purposes. The same can be said in relation to different types of taxes. If avoidance is a problem only in the area of corporate taxation and not in respect of VAT for instance, it would be more efficient to implement a GAAR that covers income tax only. On the other hand, if tax abusive transactions cause a substantial loss of revenue in the VAT area as well, it may make sense to target them via GAARs. If all taxes within a system are actually affected by abusive behaviour of taxpayers, a GAAR covering all of them may be necessary; and for the sake of fairness, legal certainty, simplification, coherence, and consistency of the tax system that GAAR should be the same or at the very least very similar for all taxes. It would be a legal and economic contradiction and hard to explain why the same specific transaction, such as a reorganization, may have business purpose for income tax, but not for VAT purposes. This same issue of legal and economic consistency can be found in case of an international transaction where two or more tax jurisdictions are involved. All affected countries must accept the same standard when determining whether, for instance, an international reorganization has a business purpose. The same is true for transfer pricing rules, where under Article 9 of the UN and the OECD Model the arm’s length price and its evolving methods should be the same and accepted by all States and taxpayers involved. There are generally five ways to ensure the proper use of tax treaties that may be consistent with international standards. Firstly, the application of domestic GAAR or a specific anti-avoidance rule applicable to tax treaties. Secondly, a specific antiavoidance rule provided in the treaty itself, e.g., the beneficial owner clause, as generally applied to dividends, interests, and royalties. Thirdly, the limitation on benefits articles, generally based on ownership or control as a residence test to get treaty benefits. Fourthly, a GAAR provided in the treaty itself, such as a general beneficial owner clause, or the principle purpose test. Fifthly, an anti-abuse doctrine as a general principle of International Law.16 A combination of two types of rules (specific beneficial ownership and limitation on benefits clauses) and two or three 16 See

further on this Sect. 12.5.2 on the Multilateral Instrument.

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types of principles (domestic GAAR, Treaty GAAR, and international general principle of International Law) is possible, as shown by the States practice.17 However, either separately or in their combination, international treaty rules and principles must also be in line with the international fundamental rights to prevent violation of general principles of International Human Rights Law and any specific international fundamental right, as discussed in the next section. Having discussed some conflicting justifications and opposing principles for combating tax avoidance and concluded that the general rules to tackle it may be more appropriate by its overall fairness and its cost-effectiveness, the next section presents an overview of the international system of Human Rights protection and how it can be related to tax avoidance.

12.3 International Human Rights Instruments and Taxpayers’ Rights International human rights law is founded upon the Universal Declaration of Human Rights.18 Although this declaration constitutes soft law as it is not part of binding international law, it is a common standard set by The United Nations and carries moral weight around the world. The Declaration is supported by legally binding measures in The Covenant on Civil and Political Rights19 as well as The Covenant on Economic, Social, and Cultural Rights.20 Together they form The International Bill of Human Rights, which is used as a framework for discussing and applying human rights. International Human Rights have historically been decided and framed through treaties, declarations and conventions; however, International Human Rights Law is dependent on political will and state co-operation. They offer rights for individuals and ascertain obligations for States. The United Nations aims to protect, promote and apply Human Rights and has indirect enforcement powers such as monitoring mechanisms in order to achieve these aims. States, however, continue to have primary responsibility within their territory and domestic ratification of international law is necessary. 17 For example, the treaty between Portugal and Senegal of 2014 sets out in its Article 30 three paragraphs addressing tax treaty abuse: para 1 allows the application of domestic GAAR to the treaty, para 2 provides a general beneficial owner clause to get treaty benefits, and paragraph 3 says the treaty would be applicable if one the main purposes of the transaction at stake is to get treaty benefits. 18 United Nations General Assembly. Universal Declaration of Human Rights (Gen. Ass. Resolution 217A, Dec. 10, 1948). 19 International Covenant on Civil and Political Rights. Adopted by the General Assembly of the United Nations on 19 December 1966. 20 The International Covenant on Economic, Social and Cultural Rights (ICESCR) is a multilateral treaty adopted by the United Nations General Assembly on 16 December 1966 through GA. Resolution 2200A (XXI), and came in force from 3 January 1976.

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The United Nations is supported by several other mechanisms which aim to establish the presence of International Human Rights. The UN Human Rights Council aims to strengthen the promotion and protection of human rights around the world, whilst the UN High Commissioner for Human Rights is responsible for the coordination and oversight of human rights activities. Their mandate is to ‘promote and protect all human rights: civil, political, economic, social and cultural’. Enforcement can be a tricky topic for the UN due to State Sovereignty and specifically with regards to Human Rights as States’ own legal systems continue to be pivotal. However, the High Commissioner is capable of publicising situations of non-compliance in order to ‘shame’ governments to compliance. The UN also has 9 treaty specific bodies which review state reports on human rights and provide an annual report to the General Assembly. The Security Council offers a more aggressive enforcement option through the potential of sanctions, military interventions and criminal tribunals. They hold legally binding decisions, based on Chap. 7 of the UN Charter (actions with respect to threats to the peace, breaches of the peace and acts of aggression), although it is often difficult to reach consensus among the members on whether to take action. Regional bodies play a significant role in the application of human rights. The European Convention on Human Rights, which came into force in 1953, is focused on the Council of Europe and its 47 member states. Through the implementation of the European Convention on Human Rights, with 47 independent judges, compulsory jurisdiction and binding enforcement power, it offers the first step towards collective enforcement of the Universal Declaration of Human Rights. The Inter-American Convention on Human Rights, which came into force in 1978, is the international convention of the Inter-American Human Rights system, with 23 member states opting to accept its Court’s contentious jurisdiction. More recently, other intergovernmental organizations have also established or begun to establish regional human rights treaties and monitoring mechanisms. For example, the African Commission on Human and Peoples’ Rights and the African Court on Human and Peoples’ Rights monitor State compliance with the African Charter. In Southeast Asia, the Association of Southeast Asian Nations (ASEAN) created the ASEAN Intergovernmental Commission on Human Rights, and the League of Arab States created the Arab Human Rights Committee. These regional bodies offer additional oversight mechanisms and reinforce further the international human rights framework. While universal human rights continue to be significant for the individual, these regional bodies complement the existing framework (Franck 2001) and allow to take some cultural differences into consideration. In extreme cases of human rights violations, national courts can hold universal jurisdiction, for example with Hissene Habre in Senegal and with Pinochet and the House of Lords. Universal jurisdiction for national courts is reserved for offences with a ius cogens character and reinforces a notion of common humanity. International Courts also play a role in the implementation of Human Rights. The Nuremburg trials were precedent-setting in offering a multilateral effort for justice which judged new crimes affecting ‘humanity’. More recently the ICJ has dealt with some Human

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Rights cases such as the 2004 advisory opinion on Israel’s security wall and the 2007 ruling on genocide in Bosnia. Despite this, the ICJ holds an ‘Old’ vision of international law. It has a state-centred view which regulates inter-state relations, therefore human rights which often refer to the individual are rarely discussed. Human rights bodies each have different functions and jurisdiction. Accordingly, the layers of protection vary from State to State, depending on the existence of regional human rights systems as well as each State’s ratification of regional or universal instruments. Use of one instrument over another is dependent on various practical considerations as well as on which body has produced more favourable case law. Regional and International oversight bodies contribute to State compliance and offer accountability that may be missing at national level. Noteworthy in regard of tax avoidance is The General comment No. 24 of 2017 made by the UN Committee on Economic, Social and Cultural Rights, on State obligations under the International Covenant on Economic, Social and Cultural Rights in the context of business activities, States parties should also encourage business actors … to ensure that they do not undermine the efforts of the States in which they operate to fully realize the Covenant rights — for instance by resorting to tax evasion or tax avoidance strategies in the countries concerned. To combat abusive tax practices by transnational corporations, States should combat transfer pricing practices and deepen international tax cooperation…21

The above statement is not binding on States, but may be legally significant and persuasive to combat tax avoidance or abusive tax practices for the purpose of ensuring Covenant rights. On the other hand, it would be a contradiction if the same tax practices were regarded as a fundamental right of taxpayers. That is why in the following section it will be analysed whether or not tax avoidance can be considered as an intrusion or violation of a general principle of international law or any international fundamental right. More specifically, it will be discussed whether tax avoidance can be considered a legitimate justification to restrict some fundamental rights under the European Convention on Human Rights, such as the rights to property, nondiscrimination, and freedom of movement, as well as the fundamental freedoms within the European Union, and the WTO agreements regarding non-discrimination and restrictions to free trade.

12.4 International Courts Rulings on Tax Avoidance In this section it will be analysed to what extent international courts, such as the Appellate Body of the World Trade Organization (WTO), the European Court of 21 http://tbinternet.ohchr.org/_layouts/treatybodyexternal/Download.aspx?symbolno=E/C.12/GC/ 24&Lang=en, para 37. Still from an international perspective, see International Bar Association (2013, 7) report, according to which the “term ‘tax abuse’ also includes tax practices that may be legal, strictly speaking, but are currently under scrutiny because they avoid a ‘fair share’ of the tax burden and have negative impacts on the tax revenues and economies of developing countries.”

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Human Rights (ECHR), and the Court of Justice of the European Union (CJEU), recognize combating tax avoidance as a legitimate and imperative requirement in the public interest to justify some restrictions on the international fundamental freedoms and rights.

12.4.1 The European Court of Human Rights. Tax Avoidance and Evasion as Legitimate Restrictions of Fundamental Rights? The first case that raised the issue of artificial tax avoidance as a justification for retrospective legislation and a legitimate interference with fundamental rights was a case regarding the right to property and non-discrimination.22 The issue at stake in this case was the justification for targeting retrospectively an artificial tax avoidance scheme. Four lawyers had entered into an arrangement to realize a trading loss in partnerships dealing in commodity futures with the sole purpose of offsetting the loss against their taxable earnings as solicitors. It is worth noting that the taxpayers entered into that arrangement with the sole purpose to create a loss, and other legitimate business purposes were absent. Still with the objective of counteracting artificial tax avoidance, it is also worth noting the M.A. and Others23 case, particularly the underlying reasoning regarding the legitimacy of retrospective legislation and its impact on those concerned. The legislation at issue aimed at establishing equality of tax treatment between salaries and remuneration from stock options. The real issue was the alleged retrospective application of the new law and the Court made a dividing line in this case between acceptable retrospective taxation and possibly unacceptable taxation, taking into account the possible tax motivation to change the date of the exercise of the option to sell the stocks. The requirement of artificiality again must be present for retrospective taxation, since the Court distinguished the cases of those who brought forward the date of exercise of the options for tax reasons and those who did not. Whereas the artificiality in A.B.C.D. v. U.K. was part of the transaction as a whole, in M.A. and Others only the amendment to a genuine transaction was regarded as artificial and solely tax motivated. The following quotation summarizes the main issue of this case: In this respect the Court considers that the applicants did not have an expectation protected by Article 1 of Protocol No. 1 that the tax rate would, at the time when they would have been able to draw benefits from the stock option programme according to the original terms of the programme, i.e., between 1 December 1998 and 31 January 2000, be the same as it was in 1994 when the applicants subscribed the bonds. The Court does not exclude that the situation might have to be assessed differently, had the law applied (which it did not) even to cases in which the exercise of the stock options was possible before 1 January 1995 according to the 22 A.,

B., C. and D. v. the UK. See Baker (2005). No. 27793/95). See Baker (2005, 5–8).

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relevant terms and conditions of the stock option programmes in question. In such a situation, in which the applicants did not find themselves, taxation at a considerably higher tax rate than that in force on the date of the exercise of the stock options could arguably be regarded as an unreasonable interference with expectations protected by Article 1 of Protocol No. 1. The retroactive application of the law in the applicants’ case would not appear to have such drastic consequences as in respect of the so-called ‘pure cases’. Whether it is compatible with Article 1 of Protocol No. 1 depends, first, on the reasons for the retroactivity and, secondly, on the impact of the retroactive law on the position of the applicants.24

In Riener v. Bulgaria,25 the Court held that a fiscal sanction restricting the right to freedom of movement might not be acceptable according to the proportionality principle. In this case, a travel ban and a confiscation of passport were imposed as temporary sanctions until tax debts were paid. Under Article 2(3) of the Fourth Protocol, restrictions on the exercise of the right to movement may be lawful if they are ‘in accordance with law and are necessary in a democratic society in the interests of national security or public safety, for the maintenance of ordre public (public policy), for the prevention of crime, for the protection of health or morals, or for the protection of the rights and freedoms of others.’ The Court first held that the travel ban had the legitimate aim to secure payment of taxes, ‘maintaining of ordre public’ and protection of the rights of others as it is the law in several States of the Council of Europe.26 The Court then fully assessed the proportionality of this restriction taking into account the relevant facts of the case, in particular that Mrs Riener’s family was living abroad.27 The legal background was also scrutinized including the automatic length of the travel ban with no provision for further reassessments, citing among other authorities the UN Human Rights Committee decision in the case of Miguel González del Río v. Peru.28 In Hentrich v France29 the question arose again whether combating tax avoidance and evasion was a legitimate justification for, in this case, measures to secure payment of tax or would constitute a violation of the right to property. The Court found that a French law, which authorized the tax authorities to buy property sold below market price, was a de facto expropriation, notwithstanding its anti-avoidance purposes, as the law did not provide for any possibility of rebuttal and there were less restrictive alternatives to avoid tax evasion and avoidance. Moreover, the taxpayer could prove that the sales price was below market value for business reasons other than tax avoidance. From the above cases one may conclude that combating not only tax evasion, but also tax avoidance, is a legitimate justification in the public interest to interfere with

24 M.A. and Others (Applications No. 44814/98, 45401/99, 45732/99, 47463/99, 47724/99), at para

1 of the judgment. No. 46343/99). 26 Paras 114–117 of the judgment. 27 Para 126 of the judgment. 28 Para 121 of the judgment. 29 Application no. 13616/88. 25 (Application

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fundamental rights, but the interference must be submitted to the test of proportionality. In other words, any measure, such as either general or specific anti-avoidance rules, must be reasonable and proportionate.

12.4.2 The CJEU: Tax Avoidance and the Fundamental Freedoms In the area of direct taxation, the Court of Justice of the European Union has developed imperative requirements in the general interest to justify restrictions on the fundamental freedoms of movement of goods, persons, services, and capital, concerning direct taxation, such as fiscal supervision, combating tax avoidance, tax coherence, and allocation of taxing powers between Member States. In the area of Value Added Tax (VAT), the Court discovered a general antiavoidance rule based on the doctrine of abuse of law, as analysed below.

12.4.2.1

Tax Avoidance as a Justification for Retrospective Taxation

The Stichting Goed Wonen case30 dealt with a general scheme commonly practised in the Netherlands. A straightforward VAT-exempt leasing arrangement, under which the lessor is not eligible for an input-VAT deduction, is replaced with a (economically similar) usufruct arrangement that is not exempt from VAT and, thus, would allow input-VAT recovery. Thus, an exempted transaction with no right of input-VAT deduction (leasing) was avoided by the creation of a right in rem similar to the right of use derived from the leasing in order to create a right of input-VAT deduction, in circumstances where the economic value of the right of usufruct was not at arm’s length. The objective of the new legislation was clearly to tackle those tax motivated and seemingly artificial transactions, in a retrospective way: the amending law came into force on 29 December 1995, but took effect as from 18:00 h on 31 March 1995, the date and time the future law had been made public by a press release.31 In line with the European Court of Human Rights, the Court accepted the restriction to the fundamental right to legal certainty and legitimate expectations under the rule of law principles. Thus, unless there is a disproportionate interference with those rights, tax avoidance is recognized as a legitimate justification in the public interest. Equity, the abuse of rights doctrine, and the ability to pay principle, which underpin the tax avoidance justification, are balanced—via proportionality reasoning—with legal certainty, clarity, equality, and legitimate expectation that underlie the fundamental rights to property and non-discrimination.

30 C-376/02. 31 Para

See also Gemeente and Holin Groep, Joined cases C-487/01 and 7/02. 8 of the judgment.

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Tax Avoidance, Allocation of Taxing Rights, the Principle of Legal Certainty

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