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 individuals 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

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 individuals 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

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 taxpayers ability to pay is measured by spending his earnings. This means the level of a taxpayers 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

about the issue of whether an individual can actually afford or is able to contribute to the states 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

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.