Title : Against Fairness: A Brief Critical Look at : Concepts Used to Analyse a Tax System Author : Adam Bandt Organisation : Murdoch University School of Law Keywords : Taxation; equity; efficiency; simplicity; Abstract : The author examines from a Marxist perspective the criteria of equity, efficiency and simplicity commonly used to critique taxation systems. Contradictions arising from the use of these ideals are discussed by reference to the Australian tax system. By contrast with capitalist ideology, the author concludes that an ideal tax system should be revolutionary, empathic and democratic. 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ISSN: 1321-8247 EMAIL RETRIEVAL: send message "get elaw-j bandt.txt" URL: gopher://infolib.murdoch.edu.au:70/00/.ftp/pub/subj/law/jnl/elaw/ refereed/bandt.txt ftp://infolib.murdoch.edu.au/pub/subj/law/jnl/elaw/refereed/ bandt.txt -------------------------------------------------------------- AGAINST FAIRNESS: A BRIEF CRITICAL LOOK AT CONCEPTS USED TO ANALYSE A TAX SYSTEM Adam Bandt _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 Quarterly_8 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.