Introduction
I am often asked what I mean by "’tax justice’. As a result, and as a contribution to the Briefing Sheet series I am developing, I have written the following summary of what I think tax justice is. It is also available as a briefing sheet.
Tax justice
Tax justice is a broadly based concept. It relates to individuals and all taxable entities. But it also relates to tax systems as a whole.
Tax compliance — the duty of the taxpayer
For the individual taxpayer tax justice is about tax compliance. This happens when the individual seeks to pay the right amount of tax (but no more) in the right place at the right time where right means that the economic substance of the transactions they undertake coincides with the place and form in which they report them for taxation purposes.
Tax and society
But tax justice is about much more than the individual: tax justice is also about the existence of tax systems that promote social well being within and between societies. It is about the creation of environments in which all people can prosper. That necessarily means that the state institutions and businesses that meet the needs of people can also prosper. But it means yet more than that: it means that those who fail to prosper are protected from misfortune until such time as they can prosper again.
That means tax justice is about four things above and beyond the duty of the individual to be tax compliant. First it is about understanding why we tax. Second it is about defining the attributes of a good tax system. Third it is about defining the process that delivers tax justice and finally it is about understanding transparency — without which tax justice is not possible.
The 5 Rs for taxing
There are five reasons for taxation. Tax is used to:
1. Raise revenue;
2. Reprice goods and services considered to be incorrectly priced by the market such as tobacco, alcohol, carbon emissions etc. and by providing tax reliefs e.g. for childcare;
3. Redistribute income and wealth;
4. Raise representation within the democratic process because it has been found that only when an electorate and a government are bound by the common interest of tax does democratic accountability really work; and finally to facilitate:
5. Reorganisation of the economy through fiscal policy.
If tax justice is to prevail taxes must be set taking all these considerations into account.
The 10 Cs of a good tax system
An efficient taxation system has nine attributes with one over-riding characteristic to which they all contribute. An efficient tax system is:
1. Comprehensive — in other words, it is broad based;
2. Complete — with as few loopholes as possible;
3. Comprehensible - it is as certain as is reasonably possible;
4. Compassionate — it takes into account the capacity to pay;
5. Compact — it is written as straightforwardly as possible;
6. Compliant with human rights;
7. Compensatory — it is perceived as fair and redistributes income and wealth as necessary to achieve this aim;
8. Complementary to social objectives;
9. Computable - the liability can be calculated with reasonable accuracy;
All of which facilitate the chance that it will be:
10. Competently managed.
In combination these are key attributes of a good tax system.
The 6 steps to tax justice
Tax justice can be defined as a six stage process:
1. Define the tax base. This is the first essential step in creating progressive taxation and in promoting the better use of resources within society.
2. Find what is to be taxed. If the tax base cannot be accurately located then there is no point trying to tax it.
3. Count the tax base. Unless the tax base can be quantified it cannot be taxed.
4. Tax the tax base at the right rates of tax. In the process making sure the inter-relationship between the various tax bases is properly managed to ensure that the essential revenue raising, repricing and redistributive qualities of a just tax system is vital.
5. Allocate the resulting revenues efficiently and to best social effect
6. Report - governments must be accountable for what they do with tax revenues or the democratic principle fails.
The 11 steps to financial transparency
Tax justice cannot happen by chance. To achieve it information is needed. That means all potentially taxable people, whether they are human beings or legal entities created under law, must be transparent about what they do, are and have done.
Financial transparency exists when the following information is readily available to all who might need it to appraise transactions they or others might undertake or have undertaken with another natural or legal person:
1. Who that other person is;
2. Where the person is;
3. What right the person has to enter into a transaction;
4. What capacity the person has to enter into a transaction;
And with regard to entities that are not natural persons:
5. What the nature of the entity is;
6. On whose behalf the entity is managed;
7. Who manages the entity;
8. What transactions the entity has entered into;
9. Where it has entered into those transactions;
10. Who has actually benefited from the transactions;
11. Whether all obligations arising from the transactions have been properly fulfilled.
Creating tax justice
Tax justice is not simple, as is already apparent. That, however, is not a problem: a great deal of what humans do is not simple, and yet it is achieved none the less. Tax justice is possible: that is what is important.
These five criteria, tax compliance on the part of taxpayers and the four sets of attributes on which just tax systems are built, are the foundations of tax justice. Together they create a world in which social justice can prevail for all.
That is what tax justice seeks to achieve.
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“This happens when the individual seeks to pay the right amount of tax (but no more) in the right place at the right time where right means that the economic substance of the transactions they undertake coincides with the place and form in which they report them for taxation purposes”
So let’s assume someone has all his/her assets are in, say, Nassau, where they are managed from. He/she files a tax return there (there is no tax payable) and doesn’t use any of the proceeds in the UK.
Why, under your goofy definition of tax compliance, would anyone pay taxes in the UK? Economic substance takes place in Nassau, tax is filed in Nassau. What is your problem?
Well, Ted, Nassau will be pretty bloody crowded with everyone being actually resident there. Then let’s look at the assets which you want to imagine being in Nassau. This must exclude all real estate. It must exclude anything based in real work because there ain’t much going on in Nassau except pen-pushing (unless you do manage to get all the people living there!). Now the cash, yes you can have money wealth there, but to get a return, the money must be invested somewhere where real work takes place, that is where the people are. Thus the economic substance is back onshore.
Your example is hypothetical and like most hypothetical examples it turns out to be logically impossible.
@James from Durham
Very many thanks for this comment
It seems very clear that Ted G has no idea what the difference between form (in Nassau) and substance (inevitably elsewhere as nothing but abusive re-branding of transactions takes place in locations like Nassau).
I appreciate the fact for people like you the difference is glaringly obvious.
Richard
@Richard Murphy
All right.
What about if a UK resident has his/her assets held in a Swiss or Luxembourg brokerage account and invested in pan-European companies (not in the UK)? So the investment management (substance) is conducted in Switzerland or Luxembourg, and the return (substance) is generated everywhere but the UK.
Why would he/she pay tax in the UK under Richard’s definition of tax compliance?
Why not admit that your language makes no sense.
Here’s a more real-life example:
I have been living and working in the UK for more than 7 years but intend to return to my home country to retire. My retirement savings in my home country (accumulated from earnings before I came to the UK) are invested conservatively in a “ladder” of long term government bonds. When each bond matures I roll the principal into a new bond. Unfortunately HMRC requires capital events to be accounted in Sterling, even when their “economic substance” is elsewhere. The pound has devalued alarmingly against my home currency since the bonds were bought, so each bond repayment appears in Sterling terms to generate a capital gain which is taxable in the UK. There’s no corresponding taxable event in my home country, so the double taxation agreement is no help.
If I was a UK-born billionaire pretending to be domiciled in, say, Belize, I could use the remittance basis to escape UK tax, even if my bonds had been bought with UK earnings moved offshore. But small fry like me can’t afford to pay the statutory £30,000 bribe to HMRC, so I’m stuck with paying UK tax for a fictitious “gain” on an asset which has no fiscal connection with the UK.
Is this tax justice?
@Another Richard
Yes that is tax justice
You have made a gain under UK tax law
You could have put the funds in a UK pension and you would not have a taxable gain
That was your choice
You have the consequence
When the option was legally available to avoid the charge your claim you should be tax free is completely groundless
@Ted G
So investing through a nominee outside the UK should make all investment income of UK residents tax free should it?
Does the concept of tax residence have no meaning for you?
The substance is the person investing is in the UK
The form of claiming their investment is elsewhere is meaningless. There obligation is to pay tax in the UK
What is your problem in understanding such straightforward logic, bar a desire to evade tax at all costs?
I use the word evade wisely – that is what you appear to be promoting
As I said, those funds were earned (and taxed at home) before I came to the UK. Could I really put them into a UK pension?
@Another Richard
You could certainly have invested them in UK govt bonds. On maturity, the “gain” would then have been tax free. Clearly the money is not in a pension scheme at present. It is just savings. Did you not take financial advice?
@Richard Murphy
Relax Richard, I am just pointing out that your definition of tax compliance makes no sense, that’s all.
@Another Richard
The description of your background (arrived here only a few years ago, intend to return to your country of origin) seems to indicate that you are a non-domiciled resident, in which case you should be largely exempt of this non-sense.
I could, but why would I want UK bonds (or a UK pension) when I plan to return home to retire? Trading a fictitious capital gain (in Sterling) for a genuine capital loss (in my retirement currency) doesn’t seem a good bargain.
@Ted G
Once you’ve been resident for 7 years, non-domicile gets expensive (£30,000 annual bribe to be permitted to use the remittance basis).
@Another Richard
You prove Ted G does not understand the basis of UK tax
@Ted G
You might call tax “nonsense” but in the process you reveal a contempt for society, democracy, the rule of law and your obligations as a citizen
Frankly, you show yourself to be a commentator from outside society promoting abuse of the common good
That is your right
But I have no obligation to let you promote that view here
So you are joining the select few whose comments are automatically deleted on this blog.
This is consistent with the moderation criteria for this blog specified here: http://www.taxresearch.org.uk/Blog/comments/. The editor’s decision is final.
Discussions about taxation seem to me to make little sense if welfare payments and similar economic or financial transfers are excluded. Aren’t things like Child Benefit, Jobseeker’s Allowance or pollution grants under the EU ETS (Carbon Emissions Trading Scheme) all part of the same system? After all, welfare transfers are often little more than negative taxes.
Once you open up the analysis to taxation *and* welfare, much more fundamental issues arise than Richard’s “Five Rs” and “Ten Cs”. Who should the government give the economic rights to natural resources to (eg oil, minerals, fishing rights)? Who should receive the economic benefits of land and the services government supplies to it? Who should be given the benefit from the issue of new money in the economy (seigniorage)? Who should be granted exclusive monopoly and oligopoly rights (radio spectrum, hackney carriage rights, water rights, power and communications networks)?
Richard hasn’t even shown that any taxation is necessary to “raise revenue”, “redistribute income and wealth”, or “raise representation within the democratic process”. Public Economists understand that worthwhile government spending results in economic rents arising on land, monopolies and natural resources. The current system of giving these rents to private interests is a choice made by society to transfer wealth to the wealthy. This undermines these main purposes of taxation.
And it’s farcical to even consider “tax justice” when the specie of taxation (irredeemable bank promises backed by public credit) is still under control of profit-seeking enterprise.
I believe that most taxation in the UK and and should be phased out. The economic benefits of natural resources, including land (geographic and economic) should be collected by the government and distributed on an equal per-capita basis. The government should also become the sole issuer of money (legal tender for payment to government). This approach is likely to be a far more stable way of promoting economic justice than trying to juggle endless special taxes, welfare payments and covert transfers.
In short, we should collect economic rents of land and of fossil fuels, renationalise the money supply and distribute the surpluses as a Citizens’ Dividend (aka Citizens’ Income, Basic Income Guarantee). Once you’ve done this, review what, if any taxes or welfare payments are needed.
I know that Tax Research UK yearns to promote the common good. Isn’t it about time that we hear more about turning the commonwealth from private to public benefit? This is the key to economic justice!
Adrian
There’s nothing wrong with dreaming
I think pragmatically your thinking is a long way from realisation
My vision is for the possible in my lifetime
Best
Richard
Richard,
I think your comment is very constructive. Is economic justice possible in our lifetime? Is it a realisable goal? What progress (if any) has been made already?
The example of Taiwan (Republic of China) is instructive. The constitution requires the collection of land rent for public purposes. They have a form of Land Value Tax. Their economy has grown rapidly, with improved stability and social justice – compared (for example) with Thailand which has had injustice and financial crisis. Taiwan shows that land rent for public purposes is achievable and effective.
Even in Iraq, the government has resisted the privatisation of oil rents. The state has purchased oil extraction services at public auction. The oil is the property of the state. The US wanted drilling licences to transfer ownership to private business. This approach was largely rejected. Norway has retained the oil revenue for public purposes too, creating a huge sovereign wealth fund for the benefit of the people. Oil revenues for public purposes can be achieved.
In Britain, universal welfare (for children) has been a welfare success story. Stable, popular and efficient, Child Benefit shows the success of universality. It is a pragmatic approach to child welfare which has none of the drawbacks of recent gimmicks – like Child Trust Funds, Child Tax Credit etc. Alaska shows that oil revenues can readily be shared out equally (Alaska Permanent Fund Dividend). Popular and efficient.
And banking reform is very much on the agenda. The issue of Transaction Taxes vs Deposit levies vs profits taxes is a major focus of yours, Richard. But why advocate Transaction Taxes when these are furthest from the source of economic rent? Profits taxes are little better. A deposit levy is a long way from ideal, but makes more sense in my opinion.
Britain’s most influential budget, The People’s Budget of 1909 showed just how popular economic reform can be, given the right advocates. Lloyd George and Winston Churchill were the top-notch leaders the kind we are sorely lacking today. Reforms were scuppered by the (land)Lords. But now power has shifted. The right reform proposals could have delivered a big parliamentary majority. No party offered them. And no party won.
We both hear people bemoaning the challenges of today. Unemployment, deficits, poverty, tax avoidance, pollution, high house prices. Surely if you know and understand the solutions it is a moral responsibility to present them? It’s not even as if you’d meet much resistance phasing out an unpopular and unfair tax (like Stamp Duty Land Tax or Council Tax).
The Location Value Covenants (LVCs) I advocate are a pragmatic solution to the problem of tax reform. Surely campaigners should look closely at new economic reform ideas like this? see : http://www.systemicfiscalreform.org/ LVCs offer each person the opportunity of switching to a fairer, simpler system. Doesn’t that make sense to you?
Your vision might be achievable in your lifetime. But my thinking has the potential to drive a popular revolution for real economic reform. We must both “speak truth to power” and tell the economic story how it really is. I fear that by promoting your vision, you are hiding the truths.