AGAINST FAIRNESS: A BRIEF CRITICAL LOOK AT CONCEPTS USED TO ANALYSE A TAX SYSTEM

Introduction

Looking at the income tax system is a social process.  The observer  brings along her/his social, political, ideological, economic and gender  assumptions to the ITAA[1] and judges it accordingly.  Further, the ITAA  plays an immense part in distributing society's resources, and thus it is  a thoroughly social institution.  Our tax system should be judged with  reference to an ideal; one of the best ways to understand what 'is' is to  compare it with what 'is not' and what 'might be'.  However, the concepts  of equity, efficiency and simplicity do not provide the theoretical bases  for doing so.  To fully imagine an ideal tax system there would need to  be a critique of existing economic and social relations, as well as a  suspension of 'common-sense' notions of 'equity' and 'fairness':  as  Gramsci says[2], hegemony produces and thrives on 'common-sense'.  After  a look at the 'EESy' criteria, a more critical approach is outlined and  it is suggested that looking at the current tax system is a 'SIMPLe'  process.  The essay then concludes by arguing that the ideal tax system  would be 'RED' (acronyms explained later!).

1.  EESy

1.1  Equity

What is equity?  Despite its 'social justice' connotations, it need not  be a very radical notion.  Much writing on equity and tax[3] centres  around 'horizontal equity' (broadly, that like cases should be treated  alike and should be treated consistently and impartially) and 'vertical  equity' (a notion that there should be some kind of 'fairness'  relationship between people on different incomes).

On first glance, the concept of 'horizontal equity' accords with  'general' concepts of fairness and, perhaps, social justice.  Why should  someone who earns $10 000 as income from capital gains not be made to pay  the same tax as a PAYE worker on the same wage?  This notion of equity is  tied up very closely with notions of equality and fairness[4].  It is  essentially a procedural or formal notion - it is a method for making  decisions, and provides no substantive criteria for deciding which cases  are 'like' nor when to appeal to 'equity'[5].  The notion of an abstract,  impartially applied procedural rule such as this has been seen to have  many benefits for jurists:  it accords with 'intuitive' notions of  fairness, and individuals will participate in social interaction if they  feel that the rules are 'fair'[6].  'Vertical equity' is far more vague:   some may feel that it is satisfied by a flat rate tax, while others may  feel that this would totally contravene the point of vertical equity. 

This rough sketch reveals some problems with 'equity'.  First, notions of  equity and fairness are so contested that almost anyone could see their  tax system as being 'equitable'.  Most sides see at least the need to pay  lip service to the concept of equity - remember that old chestnut  'restraint with equity'[7] suggesting that the concept need not have any  kind of 'social justice' connotations. 

Secondly, the approach is ahistorical.  Justice as equality of treatment  is a thoroughly bourgeois notion.  The early bourgeoisie demanded that  they be treated as free owners of commodities with equal rights as  traders to exchange their commodities on the basis of laws that were  equal for them all[8].  This notion of formal equality (the assumption  that every human being counts as one human being only, in that so far as  the common thing that human beings possess is their humanity, no-one  possesses more 'humanity' than anyone else) necessarily produces  substantive inequality[9]. 

"Right can by its very nature only consist in the application of an equal  standard; but unequal individuals (and they wouldn't be different if they  were not unequal) can only be assessed by an equal standard in so far as  they are regarded from a single aspect, from one particular side only ...  [E.g. in an employment contract] they are regarded only as workers and  nothing more is seen in them, everything else being ignored.  Further,  one worker is married, another not; one has more children than another,  and so on.  To avoid all these defects, right, instead of being equal,  would have to be unequal."[10]

Thirdly, because common-sense notions of horizontal 'equity' are  predominantly procedural in nature, the substantive guidelines of when to  be 'equitable' and what the substance of that decision should be take the  existence of current social structures for granted.  Some people may  deplore the inability to deduct childcare expenditure, but the solution  is invariably a piecemeal legalistic one:  pass a law which rectifies  this situation, thus satisfying the equity requirement.  Rarely is there  a questioning of why childcare is still predominantly the moral and  financial responsibility of the family (or in most cases the mother), and  not a 'public' duty.  This is all assuming that there is something  'inequitable' about not being able to claim childcare expenses:  notions  of 'justice as fairness' do not even require us to make that step.

1.2  Efficiency

Efficiency is essentially defined in neo-classical economic terms as that  which does not distort the market.  It takes for granted the whole  capitalist economic infrastructure and assumes that the market should be  left to provide its optimum output thus totally glossing over or  ignoring underlying tensions between capital and labour[11]. Cnossen[12]  in an article on share taxes, argues that corporations are the business  form in which 'capital and labour are combined for productive, mutually  beneficial, purposes', and that in imposing a tax on corporations (as  opposed to shareholders) we may be distorting 'the most efficient  allocation of capital.'

Despite his claim to objectivity, Cnossen is making a political  statement.  This concept of efficiency reinforces a system where a select  few appropriate the surplus value of the labour of many; it gives  corporations and those who control them carte blanche to do as they will  with social resources; it perpetuates exploitation of 'developing'  countries by multi-national corporations seeking inexpensive labour[13]. 

1.3  Simplicity

In its Draft White Paper, the Labor government decided that, for ease of  conveying meaning, for reducing compliance costs and for avoiding  unnecessary litigation, the tax system should be as simple as  possible[14].  However, the State must still provide 'incentives' to  those with capital:  one of the benefits of doing so through tax  concessions (creating a complex tax system) rather than direct grants is  that it conveniently 'hides' subsidies[15].  There is thus a  contradiction which hampers any 'true' simplicity.  Further, the  allowance of deduction of compliance costs under s. 69 will benefit those  who have finance to seek professional advice, or corporations who can set  up special tax advice units.  It does not follow that simplicity will  reduce compliance costs, nor that it will avoid unnecessary litigation,  for these issues have a class aspect - profit-oriented companies must get  an edge over competitors, and if this means employing tax lawyers to find  loopholes in legislation or to effectively hide their costs, then so be  it[16].

2.  Having a Critical Look at the Tax System is SIMPLe

2.1  SI - Self-Interest

The ITAA is premised on the notion that tax-payers are all rational  self-interest and income maximisers.  Most of its provisions[17] make no  attempt to address the effects that class or gender have an ability to,  for example, afford practitioners who can create complex income-splitting  schemes:  it works on an assumption that all rules can apply to all  people in a like manner.  Further, it positively encourages people to  pursue profit-making (e.g. s. 51 allows deductions for expenses incurred  in the course of carrying on a business or producing assessable income).   The assumption that we are all naturally self-interested individuals not  only ignores the impossibility of giving an explanation of an individual  outside of a relational[18] or social context[19], but it is also an  androcentric[20], western[21] view of the self.

2.2  MP - Means of Production

The ITAA, as an integral part of the capitalist state, reflects and  supports the current means of production.  At its core is the  encouragement of business:  s. 51.  Interpretations of its sections have  insisted on the strict liberal split between work and 'hobbies', between  public and private[22].  Even the tax on capital gains reflects a desire  to encourage investment in more 'productive' areas, and it doesn't apply  to motor vehicles or principal residences, giving greater real benefit to  wealthy people than workers[23].  Why does the ITAA take the existence of  companies for granted?  Why does the dividend imputation system, being a  $500 million dollar imposition on the revenue of the country to subsidise  'incentive' and 'investment', essentially 'redirect the tax burden away  from the ruling class'[24]?  Why do a large number of Australian  companies still only pay between one and ten percent of their declared  profits as income tax[25]?  Inequality and exploitation inherent in our  class society is reflected and supported by the State.  Thus, Paul  Keating on the Labor Government's dividend imputation scheme:  [26]

"It will restore the position of the stock market as mobiliser of  investment funds and reduce the previous bias in favour of corporate debt  finance over equity;  it will mean that entrepreneurs trying to get new  businesses off the ground should find it easier to raise equity finance:  it will make investment in these enterprises more attractive for  investors; it will improve the climate for productive investment and  enhance economic growth for Australia; and it will provide increased  incentives for all Australians to participate in the ownership of  Australian companies by significantly reducing tax on dividend income."

2.3  LE - Legalism

Conflict arising over the implementation of the ITAA is adjudicated by  judges and argued by lawyers.  Profoundly social questions such as the  redistribution of wealth within society get reduced to issues of  interpretations of subsections, and social theorists rarely get an overt  look in.  Further, many judges still work under the (mis)apprehension  that there are 'rules' for determining, for example, the distinction  between a business and a hobby, or between income and capital.   This  misapprehension is rooted well within the liberal legalism which sees Law  as being a body of abstract rules applied to individuals in specific  cases to give a right answer.  Such an approach is unable to adequately  address conflicts or issues which arise as a result of a person's class,  gender or race:  it neglects the structural bases of the law and does not  put the operation of the law into any wider social context[27].  It  represents an epistemological positivism which naively insists on a  strict break between fact and value and argues that cases must be decided  on their facts, and privileges 'objective knowledge' over 'subjective  emotion'. [28]

3  RED:  The Ideal Tax System

3.1  R - Revolutionary

Looking at an ideal tax system is revolutionary in two senses.  First, it  requires the observer to suspend commonsense notions of 'equity',  'fairness' and 'human nature' and look at them critically.  What are the  philosophical and economic assumptions underlying these concepts?  Are  they peculiar to a certain culture, nation or time in history?  What  power interests are served by holding these assumptions?  Just as we  challenge tax laws, we must also challenge our own assumptions about  society.  The second sense of 'revolutionary' is that an ideal tax system  should go along with an ideal society.  This would be one where material  oppression is ended and the competitive spirit of capitalism is not  elevated to 'human nature':  a new means of production, and just as  importantly, of resource distribution.  [If, in conceptualising an 'ideal  tax system' we remain stuck within the parameters of capitalist,  masculinist ideology, we are going to see 'inequities' and 'inequalities'  arising every day.]

3.2  E - Empathic

An ideal tax system should be predicated on a notion of self which goes  beyond narrow, individualistic conceptions.  From the moment that we are  born (indeed, even before then) we are dependent on others, and it is  impossible to talk about 'an individual' and ascribe her/him any  characteristics without reference to a social context.  In fact, it is  only social relations that enable us to make sense of the concepts of  'individuals' and 'society'[29].  This is a crucial factor:  an ideal  system of distributing resources between people should take into account  the peculiar situation amid needs of an individual or group of  individuals.  From each according to their ability, to each according to  their needs.

Further, this will involve bringing emotion 'back into' tax.  Some may  say that it never left:  Barwick CJ and Kitto J have been known to get  fairly passionate about business tax deductions.  Nonetheless, an ideal  tax system would not work under the misapprehension that all  'non-rational' knowledge should be excluded from issues of distribution  of resources.  This would free us up to make decisions in certain cases  without feeling like we needed to stretch or make an exception to 'The  Rule'. Insisting on 'pure' rationality can lead to some absurd  decisions.  It may also mean a different, less adversarial forum for  deciding cases; one which allowed for discussion and 'values' without the  current strictures of court proceedings and 'legal reasoning'. 

3.3  D - Democratic

An ideal tax system would be democratic both in its substance and in its  administration.  In the ideal society (free with every ideal tax system)  there would be no 'competition' which created and masked exploitation.   All members of the society would have control over the society's  resources, and thus the content of a tax system would be decided by all  people.  The administration of an ideal tax system would also be  democratic. It would mean actually following up and ensuring the payment  of tax by those owning companies.  It would also require a recognition  that rules and laws are things made by people:  they are not some kind of  God-given formula which we should reify and all feel subordinated to.  We  must rid ourselves of this kind of 'fetishism' and refuse to allow the  words written by certain people to cast loose of their moorings and float  into the realm of the sacred[30].  This would mean local communities and  ordinary people deciding how to distribute society's goods, and a refusal  to be in awe of the whims of a few.  Obviously, some co-ordination and  consistency would be needed, but we must move beyond 'simplicity', which  reflects powerful business groups' calls for greater certainty in  investment[31], and towards democracy.

4.  Conclusion

Notions of equity, efficiency and simplicity do not of themselves  challenge the relations of the existing means of production, and as such  they overlook the causes of the 'inequities' that they are supposed to  remedy.  Taking a look at the ITAA is relatively SIMPLe, and leads to the  conclusion that judging an ideal tax system is a matter of transcending  commonsense conceptions such as 'fairness' and looking critically at the  operations of corporations and members of the ruling class.  This leads  us to a RED approach:  a truly ideal tax system.

NOTES

1.  Income Tax Assessment Act 1936.  All references to sections are to  sections in this Act.

2.  See Simon, R, (1982) Gramsci's Political Thought pp. 63-64.

3.  Cf. Boucher, T, (1991) "The Simplification Debate:  Too Simplistic?" 

26(5) Taxation in Australia (Sydney), 277.

4.  Pateman, C., (1981) "The Concept of Equity" in Troy, P. ed., A Just  Society, p. 22.

5.  Id.

6.  Rawls, J., (1976) "Justice as Fairness" in Blowers, A., and Thompson,  G., eds., Inequalities, Conflict and Change; Castallena, R., (1987)  Justice and Economic Life:  An Interpretation of Marx's Critique of  Capitalism, 83-88, 90.

7.  Pemberton, J., (1988) "The End of Economic Rationalism" Australian  Quarterly8 Winter 1988, p. 63.

8.  Marx, K., in Selsman, H. & Martel, H., (1987) Reader in Marxist  Philosophy.

9.  Hirst, P., (1976) "Political Philosophy and Egalitarianism" in  Blowers, A., and Thompson, G., eds., Inequalities, Conflict and Change.

10. Marx, K., (1875), "Critique of the Gotha Programme" in Bottomore, T,  and Rubel, M, eds., (1963) Karl Marx:  Selected Writings in Sociology  and Social Philosophy.

11.  See, e.g., Scott, J., (1985), Corporations, Classes and  Capitalism, pp. 21-27; Marx, K. in Buttomore & Rubel, eds., supra no.

10, pp. 102-117, 137-220.

12.  Cnossen, S., (1984), "Alternative Forms of Corporation Tax", 1(3)  Australian Tax Forum, pp. 253, 260-1, 273-5.

13.  Corporations are not democratically owned.  Nor are they socially  responsible:  See, e.g., Connell, R.W., (1977), Ruling Class, Ruling  Culture), especially Chs 4 & 10; Donaldson, M (1989), "Bondmania" Arena

88, p. 26 for an outline of Alan Bond and his companies' atrocities in  Chile.

14.  Draft White Paper, Reform of the Australian Tax System (1985), p.

15.

15.  Passant, J., (1990, "Tax:  A Look at Some of Labor's Changes", 19(3)  Federal Law Review pp. 316-317.

16.  Ibid, p. 318.

17.  Provisions outlining marginal tax rates excluded.

18.  Kerruish, V., (1991) Jurisprudence as Ideology, Ch 2.

19.  Bhaskar, R. (1979) "On the Possibility of Social Scientific  Knowledge" in Mepham, J (ed), Issues in Marxist Philosophy; Voluntary 2)

20.  Smart, C (1990), "Law's Power, the Sexed Body and Feminist  Disclosure" 17(2) Journal of Law and Society, p. 203; MacKinnon, C  (1983) "Feminism, Marxism, Method and the State:  Toward Feminist  Jurisprudence" Signs (Summer 1983), p. 635; Eisenstein, Z (1988), The  Female Body and the Law.

21.  See eg. Capra, F., (1982) The Turning Point.

22.  Cf. Freeman, A., & Mensch, E. (1987), "The Public/Private  Distinction in American Law and Life" 36 Buffalo Law Review, p. 242;  Collier, R. (1991), "Masculinism, Law and Law Teaching" 19 International  Journal of the Sociology of Law, p. 446.

23.  Passant, J., op. cit., pp. 312-313.

24.  Ibid, p. 314.

25.  Ibid, p. 320.

26.  House of Representatives Debate 1987, Voluntary 154, 1945 (2 April

1987), quoted in Passant, op. cit., pp. 313-314; see too Draft White  Paper, supra, n 14, pp. 1-3.

27.  Cassells, J., and Maloney, M., (1988), "Critical Legal Education:   Paralysis With a Purpose"  4 Canadian Journal of Law and Society, at  pp. 112-120; Halpern, S., (1982), "On the Politics and Pathology of Legal  Education" 32 Journal of Legal Education; Collier, R., (1991), supra n

22, p. 429.

28.  Cassells, J. and Maloney, M., ibid, pp. 112, 115.

29.  Kerruish, V., (1991), op. cit.

30.  Ibid, Ch 4; Ch 7.

31.  Passant, op. cit., p. 320.