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TAXATION THEORIES: DOES THE ISSUE OF HUMAN RIGHTS ARISE? Puseletso Letete, University of South Africa

ABSTRACT

Taxation as a study of both economics and law has recently gained widespread

interest and appealed to many students of law. These studies of taxation tend to

ignore how issues of human rights norms (which arise in some of the approaches

which are used to determine payment of tax) relate to the basic notions and theories

of taxation (Lang 2007). The argument is that the development of taxation principles

or approaches may be seen to diminish the ability of individuals, especially those

with few resources, to freely determine their political status and freely pursue their

economic, social and cultural development in terms of Article 1 (1) of the

International Covenant on Civil and Political Rights. The article looks at the extent

to which the taxation theories which are discussed can have an impact on

individual’s rights and how this can be addressed.

KEYWORDS: taxation theories; human rights; value added tax

INTRODUCTION

This article is intended to look at the basic principles of taxation; the theories which

underlie the choice between income based taxation and sales expenditure taxation as

types of tax systems; and the arguments which dominate the issue of the shift from

direct taxation to indirect taxation. This is particularly influenced by recent

developments in taxation which relate to the widespread implementation and support

of value added tax (VAT- which is a type of indirect taxation) around the world.

The article further examines how human rights norms relate to taxation and how

such issues can be approached within the context of taxation.

THEORETICAL BACKGROUND

Taxation is a concept which is used to refer to the means of transferring tax to

government. There are different ways of undertaking the transfer of tax to

government and these methods are discussed with the relevant theories. The

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objectives of taxation are to raise revenue for essential public financed activities and

structures by the government ‘without reverting to excessive public sector

borrowing’ (James and Nobes, 1999/2000). Secondly, taxation is used to relieve

inequalities of income and wealth which may result in class differences amongst the

public. Thirdly, taxation is intended to achieve neutrality in gathering resources for

governments. In this sense taxation is used to ensure that the tax system as far as it is

possible minimizes interference in the process of allocation of resources (Tanzi and

Zee, 2001). Neutrality should be understood to mean that the tax system is not

discriminatory between different kinds of taxpayers. The fourth objective of a tax

system is simplicity (Emslie ed, 1994). The obligations arising from the tax system

should be clear and transparent. When a tax system is simple and its administration

requirements are clearly set out, it is easier to comply from the taxpayers’

perspective (Hoffmann, 2003).

The various objectives of a tax system in different jurisdictions should be guided by

measures which do not ‘deviate substantially from international norms’ and

practices’ as argued by Tanzi and Zee (2001). A tax system has to take into

consideration the following principles; equity, efficiency, neutrality, and certainty

(Smith, 1872).

THEORIES OF TAXATION: TWO CONFLICTING THEORIES

There are two schools of thought which underlie this debate. The first school of

thought supports the theory that income should be used as the indication of ability to

pay tax. This is called the ‘ability to pay’ theory. The second school of thought is the

‘benefit theory’. This theory supports the use of expenditure as the measure of an

individual’s ability to pay tax (Kay and King, 1990).

The Ability to Pay Theory

This theory requires that for a given level of public expenditure, the total cost of

financing it should be divided among individuals according to their ‘ability to pay’.

This ability to pay is guided by the income which an individual earns and that

determines their contribution towards public expenditure. The common measure of

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ability to pay is income though it is also possible to consider the use of expenditure

and wealth of an individual in determining their ability to pay tax. This indicates that

‘ability to pay’ is measured in terms of monetary resources of an individual in the

sense that income, expenditure and wealth are an indication of the use of resources

which can be expressed in monetary terms.

The other school of thought in support of ability to pay theory supports the use of

expenditure rather than income as a test of ability to pay. The taxpayer’s ability to

pay is measured by spending his earnings. This means the level of a taxpayer’s

expenditure is the determining factor as to whether the taxpayer is liable to pay tax

or not. The fact that the taxpayer may not have income is not relevant. Tax liability

arises only from expenditure taxes such as VAT which is paid by the consumer on

all taxable goods and services. This means that the taxpayer who enjoys spending

most of his income earnings is disadvantaged, whereas one who saves his income is

likely to escape taxation according to this school of thought.

The Benefit Theory

The traditional approach towards determining the choice of the tax base was that the

amount of tax which the individual has to pay has to be related to the benefit that he

derives from public expenditure. According to this theory, it is crucial to determine

the benefit(s) which an individual derives from the services provided by the public

sector. This will be used as a guidance to determine the tax they have to pay on the

basis of what they get from the public benefits. (This approach supports the theory

that expenditure should be the means towards determining tax liability.)

DOES THE ISSUE OF HUMAN RIGHTS ARISE IN THE APPLICATION OF

THESE THEORIES? ANALYSIS OF THE THEORIES

The analysis of the theories revolves around the notions of efficiency and equity and

how those relate to the issue of human rights. Efficiency in this context refers to

whether the tax enhances or diminishes the overall welfare of those who are taxed.

The question here is whether individuals are under any obligation to transfer their

resources to states. Any attempt to raise revenues results in a transfer of resources

from individuals to states. Does this obligation not hamper the human right of an

individual to choose whether to contribute or not to the resources of a state? What

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about the issue of whether an individual can actually ‘afford’ or is ‘able’ to

contribute to the state’s resources?

In view of the benefit theory, it can be argued that since this theory depends on the

benefits the individual derives from the service, it will be relevant to examine the

fundamental human rights instrument on whether one is mandated to contribute to

the resources of a state. On this issue of the interrelationship between taxation and

human rights, Christians provides that, “we may begin with a premise that whether

human rights principles ought to inform tax policy choices depends on whether the

UDHR, the ICCPR, the ICESER, or other human rights principles or agreements

impose requirements or restrictions on the way states impose taxation. According to

Christians (2009) an examination of these documents reveals that none contain any

explicit structures on tax policy per se.

The major difference between these theories is seen in their treatment of saving.

Under expenditure (consumption) tax, ‘consumption incurs the same tax liability

regardless of the year in which the individual chooses to use and spend. On the other

hand income tax is criticised for discriminating against saving because it results in

the double taxation of savings. Savings under income tax is initially taxed as part of

income in the year when it is earned and paid out to the taxpayer. This income is

taxed again as part of savings (and interest thereof) in later years and classified as

income to the taxpayer. Relating VAT to this argument, taxation only takes place on

the use or consumption of an item.

CONCLUSION

This discussion reveals that there are different types of taxation systems which are

underpinned by the two theories of income based and sales expenditure taxation.

These types of taxation are influenced by the ability to pay theory and the benefit

theory. This paper raises challenging issues on how to determine liability to payment

of tax, whether the ‘ability to pay’ approach or the ‘benefit’ approach should be

adopted. The discussion uses the examples of determining liability to tax with the

use of an income tax and VAT as examples. The article also draws attention to the

issue of human rights which is raised by the application of these two theories. It

concludes that there is a need to consider the human rights of individuals with

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reference to international human rights standards and instruments in regard to

taxation theories.

REFERENCES

Christians A. “Fair Taxation as a basic human right” Legal Research Paper Series

No. 1066 (2009), Accessed March 14, 2012 at http://ssrn.com/abstract=1272446

Emslie T.S.,Davis D.M. & Hutton S.J. (1994) Income Tax Cases and Materials Ghai Y. “Human Rights and Social Development: Toward Democratization and Social Justice” UNRISD Programme Paper No. 5 (2001)

Hoffmann L., (2003) “Tax Avoidance” British Tax Review No.2 p.197-206 International Covenant on Civil and Political Rights (ICCPR) (1966)

James, S. and Nobes, C. (1999/2000) The Economics of Taxation: Principles, Policy

and Practice 7th ed. (Pearson Education Ltd: Great Britain)

Kay, J.A. and King, M.A. (1990) The British Tax System 5th ed. (Oxford University Press: Great Britain) Lang A., “Rethinking Human Rights and Trade”, 15 Tulane Journal of International and Comparative Law 335, 401 (2007) in Christians A. “Fair Taxation as a basic human right” Legal Research Paper Series No. 1066 at p.4, Accessed March 14, 2012 at http://ssrn.com/abstract=1272446 Smith, A. (1872) Wealth of Nations Book V, Chapter II

Tanzi, V. and Zee, H.H. (2001) “Tax Policy for Developing Countries” Economic Issues No.27 IMF Publications, Accessed October 10, 2011 at www.imf.org/external/pubs/ft/issues/issues27/index.htm Tanzi, V. and Zee, H.H. “Tax Policy for Emerging Markets: Developing Countries” IMF Working Paper WP/00/35 p.3. BIOGRAPHY Puseletso Letete is a senior lecturer in tax law at the University of South Africa.