1

Introduction

The human ends of government are individual and collective at the same time.
Gerhard Colm, ‘Theory of Public Expenditures’

Overview
The Tax State
People in wealthy countries live in a state that is defined by the power to tax
and dependent on taxation to fund government, which we call a ‘tax state’.1
Most of the member states in the Organisation for Economic Co-operation
and Development (OECD) are tax states. This book discusses taxation law and
policy in the economic, social, legal and political context of tax states and
explores the many challenges faced by these tax states in the twenty-first
century.
A tax state is a particular form of fiscal governmental organisation that
relies on tax revenues extracted in a sustainable fiscal bargain with taxpayers,
who may be citizens, investors, workers or multinational enterprises,
depending on the context.2 Tax states evolved over the last three centuries
but they are fundamentally a product of the twentieth century. Many success-
ful tax states are democratic; the slogan ‘no taxation without representation’,
with historical origins in Magna Carta, made famous in the American revolu-
tion of the eighteenth century, was repeated as far afield as the Australian
colonies in the nineteenth century.3 During the twentieth century, successful
tax states combined economic growth to lift incomes and well-being, with
effective taxation that harnessed the returns for public expenditure and redis-
tribution across their populations.

1
Joseph A Schumpeter, ‘The Crisis of the Tax State’ [1918] (1954) 4 International Economic
Papers 5–38, trans. Wolfgang Stolper and Richard A Musgrave. The term ‘tax state’ was coined
and its ‘crisis’ was first proclaimed by Rudolf Goldscheid, State Socialism or State Capitalism
(1917): Richard A Musgrave, ‘Schumpeter's Crisis of the Tax State: An Essay in Fiscal Sociology’
(1992) 2(2) Journal of Evolutionary Economics 89–113.
2
Margaret Levi, Of Rule and Revenue (Berkeley, CA: University of California Press, 1988), 49.
3
Ballarat Reform League, ‘Taxation without Representation Is Tyranny’, Eureka Stockade, Colony
of Victoria, Australia, 11 November 1854.

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 4 Introduction

This book examines the evolution of tax law in a fiscal bargain for a ‘good
democracy’.4 The fiscal bargain established through taxation, like govern-
ment itself, has a dual character, forming both the collective organisation
and individual choices and outcomes. Taxation has quasi-constitutional
status and is a lever for governmental management of the macroeconomy
through fiscal policy. At the same time, taxation law (with property and
other laws) demarcates what individuals own and consume privately and
what is shared in the state.5 Taxation affects the preferences and behaviours
of individuals across all economic and social spheres. For example, taxation
influences an individual’s decision to work for a wage in the market or
unpaid in the home; as a sole contractor or an employee; to invest in a
house or in shares; to set up a business in a company or a partnership; to
reduce or increase the use of polluting energy; to donate to a charity; to
shop online; to stay in one’s country of origin or move abroad. Tax laws
also produce new behaviours specific to the tax system including decisions
to seek advice in tax planning, to work for cash or in the informal or barter
economy, or to carry out schemes for tax avoidance or tax evasion
activities.

Challenges for the Tax State

In the twenty-first century, mature tax states face an array of economic and
social challenges. This book explores the evolution of tax law in response to
challenges to the fiscal bargain between citizens and the state, the distribution
of taxation on workers and capital and the boundaries of the territorial tax
state. These challenges for the tax state include:

• slowing economic growth;

• globalisation and digitalisation of the economy;
• aging and longer lived populations, forcing governments to rely on a smaller
working age population to pay taxes;
• the changing nature of family and care, including fewer children and more
elderly, combined with a dramatic increase in women’s market work;
• inequality of wealth and income within and across generations;
• the gig economy, which increases risk, insecurity and fragmentation of work
while wages stagnate;

4
Following John G Head, who sought to develop a ‘normative theory of public economy, based
upon the premise of individual preference in a democratic society’, Public Goods and Public
Welfare (Durham, NC: Duke University Press, 1969), 223.
5
Liam Murphy and Thomas Nagel, The Myth of Ownership: Taxes and Justice (Oxford: Oxford
University Press, 2002).

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 5 Overview

• technological change that is accelerating a shift of economic value into

digital or intangible assets and causing increasing returns to capital relative
to labour; and
• health, environmental and resource challenges of global scope.
Globalisation and digitalisation have changed how we imagine community,
citizenship and social obligations. Yet tax laws, social security and public
goods remain, on the whole, territorially bounded in nation states. On the
one hand, individuals are increasingly direct participants as consumers in
global markets. Engaging in international social and political issues, we come
to see ourselves as global ‘citizens’.6 On the other hand, individuals support
states to vigorously renew and reinforce national territorial and juridical
borders, including the borders of the tax and welfare state. This raises ques-
tions about who is responsible for, or entitled to, redistribution and how to
achieve the effective financing of public goods in a global and digital era.
The coronavirus (COVID-19) pandemic has added to these challenges.
Governments applied their fiscal systems to dramatically increase social and
health expenditure, relying on debt while generating lower tax revenues. The
ability of developed country governments to respond quickly with fiscal
measures is a sign of the resilience of the tax state and the effectiveness of
its systems of tax collection and social security. However, the contraction in
economic activity produced by the pandemic caused disruption to govern-
ment budgets that will be felt for years to come. The pandemic has also
accelerated economic and social trends, including demographic changes, the
growth of the digital economy and the insecurity and instability of work.
Governments are likely to need increased fiscal resources to address these
challenges, yet few governments are leading on a platform of higher taxes to
rebuild or transition out of crisis. The COVID-19 fiscal crisis has arisen after
decades of attempts to shrink the state, even taking an approach of ‘fiscal
austerity’.7 Governments are concerned about slowing economic growth and
are inclined to deliver ‘stimulus’ by lowering taxes and enacting short-term
expansions in public expenditure in response to the pandemic.
Many of the issues discussed in this book are relevant to tax systems of
all countries, not only the wealthy member states of the OECD. However,
the book is not comprehensive in coverage and it omits some issues of
importance for developing country tax systems.8 The book does not address

6
William Twining, Globalisation and Legal Theory (Cambridge, UK: Cambridge University Press,
2000), 7–8; Saskia Sassen, Globalization and Its Discontents (New York: New Press, 1998).
7
Florian Schui, Austerity: The Great Failure (New Haven, CT: Yale University Press, 2014).
8
There is a wide literature on tax and development. An overview on the developing tax state in
Africa is Attiya Waris, Financing Africa (Bamenda, Cameroon: Langaa Rpcig, 2019). See also
Yariv Brauner and Miranda Stewart (eds.), Tax, Law and Development (Cheltenham: Edward
Elgar, 2013).

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 6 Introduction

environmental and resource taxation in any depth, including the policy or

legal design of a carbon tax or emissions trading scheme. These issues are
important for all countries and must be part of the global policy response to
address climate change.9 Nor does it explore in any detail the topics of trade,
excise or consumption taxes, or the role of taxes in federal systems. Inevitably,
because of limitations of language and scope, this book focuses on the
Anglosphere although it also draws on examples and literature from
European and other countries.

Structure of This Book

Part I (Chapters 1 to 4) presents concepts, principles and processes of
taxation. The remainder of Chapter 1 outlines approaches to studying tax
law in context and explains core tax concepts and statistics to support the
analysis of the tax law and policy issues discussed in the book. Chapter 2
explains the history of the ‘tax state’. It then discusses the benefit theory of
taxation as a justification for paying taxes to fund the public good, in a fiscal
bargain that constrains governmental power to tax based on consent and the
rule of law. Chapter 3 explains the process of government budgeting, the
relationship of tax and debt and approaches to fiscal discipline and budget
accountability. Chapter 4 introduces and explains the main principles of
taxation, including critical approaches to tax principles, with a focus on equity,
efficiency and resilience of tax systems.
Part II (Chapters 5 to 9) discusses selected topics of tax law in context.
Chapter 5 examines tax, work and the family, focusing on the relationship
between taxes and transfers, or the welfare state. It considers the definition of
the tax unit, the impact of taxes on incentives to work, especially for women
with care responsibilities, and challenges for taxation such as the gig economy
and automation. The chapter consider possible responses to these challenges
including a robot tax or a basic income. Chapter 6 discusses the taxation of
personal saving including capital income and gains, with a focus on retirement
saving and home ownership. It discusses inequality in capital income and
wealth and explores wealth and inheritance taxation and specific taxes on land
and property. Chapter 7 examines the corporate tax, including its incidence,
complexity and the taxation of corporations and shareholders. It then exam-
ines the tax rules applicable to business investment. It focuses on taxation of
innovation, small business, entrepreneurship and research and development.

9
Useful resources include Hope Ashiabor, Janet E Milne and Mikael Skou Andersen (eds.),
Environmental Taxation in the Pandemic Era. Vol 23: Critical Issues in Environmental Taxation
Series (Cheltenham: Edward Elgar, 2021); International Monetary Fund/OECD, Tax Policy for
Climate Change, IMF-OECD Report for the G20 Finance Ministers and Governors (April 2021),
www.oecd.org/tax/tax-policy/tax-policy-and-climate-change-imf-oecd-g20-report-april-2021
.pdf.

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 7 Disciplinary Approaches to Tax Law

Chapter 8 examines the intersection of tax with charities and philanthropy,

including the large size of the not-for-profit sector, the history and role of
charitable tax concessions and taxing charity in the international context.
Chapter 9 examines selected issues in tax administration, compliance and
avoidance. The discussion in each chapter is illustrated with examples and
case studies from various countries.
Part III (Chapters 10 to 12) turns to the global and digital challenges to the
tax state. Chapter 10 discusses the concept of tax jurisdiction and the territor-
ial limits of the tax state. It explains the core principles of residence and source
for establishing jurisdictional nexus of individuals and applies these principles
to labour and capital income. Chapter 10 then introduces the terrain of
‘offshore’ tax havens and governmental responses to these, finishing with a
discussion of the trend towards transnational tax administration between tax
states. Chapter 11 considers tax competition and cooperation between states
in the global digital economy, with a focus on corporate taxation. It discusses
tax jurisdictional rules for corporations, and the inadequacies of these rules. It
then examines how tax states, through international forums, are seeking to
address the taxation of multinational enterprises in the global economy.
Chapter 11 discusses the Base Erosion and Profit Shifting (BEPS) project
and the recent developments in the Inclusive Framework Consensus on digital
taxation and explores their potential to transform international tax.
Chapter 12 considers the future tax state and the challenge of taxation for a
good democracy in the twenty-first century.

Disciplinary Approaches to Tax Law

Comparative and Sociological Approaches
Taxation can be approached from disciplines of law and legal theory, econom-
ics, political science, history, psychology, sociology, accounting and philoso-
phy. Approaching tax law through the lens of these different disciplines helps
to understand the design, operation and effects of tax law. This book refers to
sources from these various disciplines at different points and draws on the rich
tradition of comparative literature on the law, politics, economics and admin-
istration of different country tax systems.10
A discussion of challenges to tax states is meaningful despite the many
differences between tax systems of different countries. This is because tax laws

10
See, e.g. Cedric Sandford, Why Tax Systems Differ: A Comparative Study of the Political
Economy of Taxation (Bath: Fiscal Publications, 2000); Chris Evans, John Hasseldine, Andrew
Lymer, Robert Ricketts and Cedric Sandford, Comparative Taxation: Why Tax Systems Differ
(Bath: Fiscal Publications, 2017); Victor Thuronyi, Kim Brooks and Borbála Kolozs,
Comparative Tax Law, 2nd ed (Alphen aan den Rijn, Netherlands: Kluwer, 2016); Hugh J Ault,
Brian J Arnold and Graeme Cooper, Comparative Income Taxation, 4th ed (Alphen aan den
Rijn, Netherlands: Wolters Kluwer, 2020).

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 8 Introduction

in different countries evolved to address the same issues of legitimate and

stable finance for government in the context of capitalism. From the earliest
times in the evolution of the tax state, information was shared about the
design and administration of tax laws. Today, the epistemic community of
tax policy, law and administration is increasingly international. Tax ideas,
norms and experts travel across borders. Comparing tax issues of mature tax
states is often how tax policy and reform is done today. The OECD plays a
large role in sharing experiences, knowledge, statistics and new developments
in taxation between member states.
Taxation is fundamentally a social and political process. Early theorists of
taxation were political philosophers who saw taxes primarily as an exercise of
coercive state power.11 Historical analysis can give us the origins of detailed
tax statutory provisions and help explain the broad sweep of political com-
promises required for stable tax systems. Historians demonstrate the growth
and changes over time of the ‘tax state’ in the context of economic develop-
ment, drawing on long time series of data about tax and expenditure
systems.12 Joseph Schumpeter said a century ago that we can use a tax lens
to present a ‘view of the state, of its nature, its forms, its fate, as seen from the
fiscal side’.13 Rudolf Goldscheid invented the study of fiscal sociology, which
overlaps with political economy and political and economic history, and
explained that it helps to understand the role of tax in society and the
evolution of the tax state.14
Most successful tax states have developed democratic systems of govern-
ment that harness the returns from economic growth to deliver public goods
and redistribution.15 Governments that seek to raise substantial and stable
revenues without democratic governance must still respond to popular

11
For example, Thomas Hobbes, Leviathan (London: Pelican Classics [1651], 1968), Project
Gutenberg eBook, www.gutenberg.org/files/3207/3207-h/3207-h.htm.
12
José Luis Cardoso and Pedro Lains (eds.), Paying for the Liberal State: The Rise of Public
Finance in Nineteenth-Century Europe (Cambridge, UK: Cambridge University Press, 2010);
Martin Daunton, Trusting Leviathan: The Politics of Taxation in Britain, 1799–1914 (New
York: Cambridge University Press, 2001); Martin Daunton, Just Taxes: The Politics of Taxation
in Britain, 1914–1979 (New York: Cambridge University Press, 2002); Sven Steinmo, Taxation
and Democracy: Swedish, British and American Approaches to Financing the Modern State
(New Haven, CT: Yale University Press, 1993).
13
Schumpeter, ‘The Crisis of the Tax State’, 101 (see n 1).
14
Rudolf Goldscheid, ‘A Sociological Approach to Problems in Public Finance’ in Richard
A Musgrave and Alan T Peacock (eds.), Classics in the Theory of Public Finance (New York:
Palgrave Macmillan, 1918, trans. Elizabeth Henderson; 1958), 202–13; Marc Leroy, Taxation,
the State and Society: The Fiscal Sociology of Interventionist Democracy. Public Action: Vol 7
(Brussels: PIE Peter Lang, 2011; trans. from the French edition, 2010); Isaac W Martin, Ajay
Mehrotra and Monica Prasad, The New Fiscal Sociology: Taxation in Comparative and
Historical Perspective (New York: Cambridge University Press).
15
John L Campbell, ‘The State and Fiscal Sociology’ (1993) 19 Annual Review of Sociology
163–85; Andrew C Gould and Peter J Baker, ‘Democracy and Taxation’ (2002) 5 Annual
Review of Political Science 87–110.

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 9 Disciplinary Approaches to Tax Law

demands for social provision and the rule of law in taxation. For example,
China is working to strengthen its welfare state, to reform its personal income
tax to make it more progressive and its business income taxes to more
accurately tax net business profits.16
Political science and public policy scholarship on expertise, policy change,
international relations and global governance help us understand tax policy
and reform processes and tax system adaptation in the global and digital
economy.17 Tax systems are dependent on administrative capacity of states
and the agency charged with responsibility for tax collection is usually one of
the largest and most efficient government agencies. Theories of public admin-
istration can inform us about the development and organisation of tax bur-
eaucracies and technologies and methods of administration that are of central
importance for the tax state. Theories of system adaptability and resilience can
help us to understand the many components of the tax and transfer system,
and how it may adapt so as to maintain its identity and equilibrium in the face
of external and internal shocks and changes.

Public Finance and Economics

The study of public finance (and public economics in general) examines the
relationship between government and the market, with the aim of designing
policy and regulation to achieve collective economic welfare. There is a wide
public economics literature from a range of different perspectives.18 This book,
as have so many in the field, takes inspiration from Richard and Peggy
Musgrave, leading public finance economists of the twentieth century, whose
careers spanned the most important decades of development of the tax state
and whose work addressed all aspects of the topic.19

16
Global Legal Monitor, ‘China: Individual Income Tax Law Revised’, Library of Congress
(24 September 2018), www.loc.gov/law/foreign-news/article/china-individual-income-tax-law-
revised-2/. However, note that the Chinese approach to tax administration tends to maintain
bureaucratic control of tax assessment, rather than shifting to self-assessment, which may lead
to calls for improved transparency and due process in tax administration: Wei Cui, The
Administrative Foundations of the Chinese Fiscal State (Cambridge, UK: Cambridge University
Press, 2022).
17
Thomas Rixen, The Political Economy of International Tax Governance (New York: Palgrave
Macmillan, 2008).
18
Accessible discussions that are relied on in this book include Joel Slemrod and Jon Bakija,
Taxing Ourselves: A Citizen’s Guide to the Debate over Taxes, 5th ed (Cambridge, MA: MIT
Press, 2017); Alan J Auerbach and Kent Smetters (eds.), The Economics of Tax Policy (New
York: Oxford University Press, 2017); Peter Abelson, Public Economics (Sydney: Applied
Economics, 2018, https://appliedeconomics.com.au/wp-content/uploads/2021/10/public-
economics-principles-and-practice-book-by-peter-abelson.pdf). For an accessible critical
approach, see June Sekerka, The Public Economy in Crisis: A Call for a New Public Economics
(Cham: Springer, 2016).
19
Richard A Musgrave, The Theory of Public Finance: A Study in Public Economy (New York:
McGraw-Hill, 1959); Richard A Musgrave and Peggy B Musgrave, Public Finance in Theory
and Practice, 5th ed (New York: McGraw-Hill, 1989); Richard Musgrave, Public Finance in a

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 10 Introduction

The economic analysis of taxes explores how to raise revenue with minimal
economic or welfare loss produced by distorting economic incentives in the
market. The classic welfare economics approach assumes that a certain level of
revenue is required by government and seeks to optimise taxes to raise that
revenue in the most efficient and equitable manner. Tax policy also aims to
respond to market failure. For example, tax laws may be devised to discourage
environmentally damaging activities, or to support innovation that is
insufficiently provided in the market. Tax laws create a multiplicity of plan-
ning margins that shape the behaviour of individuals and firms in tax systems;
the effects may be examined through theoretical and empirical economic
analysis.

Law and Accounting

Law is central to taxation in three main ways. First, taxation must be imposed
by legislation and not by executive fiat. The rule of law constrains the ability of
the sovereign to impose taxation by coercion. This constitutional principle of
the tax state ensures the legitimacy of tax rules and protects the legitimacy of
the state itself.
It is no mere metaphor to call the law and institutions of taxation and
spending the ‘fiscal constitution’.20 The revenue raised by taxation finances the
benefit of government through a negotiated political and legal framework.
This approach, which incorporates the level of taxes into the framing of the
political constitution, contrasts with the framing of the ‘problem’ of taxation
to achieve a given revenue level for a pre-existing state in welfare economics.
The taxation law itself – for example, the income tax – even though only a
statute, is so fundamental to the state that it may itself be considered quasi-
constitutional.
Second, we apply normative theories of law and justice to taxation.21 These
range from a simple matrix of horizontal equity (like should be treated
alike) and vertical equity (those with more should pay more), to nuanced
theories of distributive justice based on endowment or ability to pay. Scholars
of law and society examine how tax law enables or limits individual rights
in form and substance, for example by identifying the explicit and implicit

Democratic Society. The Foundations of Taxation and Expenditure: Vol III (Northampton, MA:
Edward Elgar, 2000); Peggy Musgrave, ‘Comments on Two Musgravian Concepts’ (2008) 32
Journal of Economics and Finance 340–7.
20
Geoffrey Brennan and James M Buchanan, The Power to Tax: Analytical Foundations of a
Fiscal Constitution (Cambridge, UK: Cambridge University Press, 1980).
21
There is a wide literature on justice and taxation; for example, Murphy and Nagel, The Myth of
Ownership: Taxes and Justice (see n 5); Martin O’Neill and Shepley Orr (eds.), Taxation:
Philosophical Perspectives (Oxford: Oxford University Press, 2018).

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 11 Disciplinary Approaches to Tax Law

sexist or racist discriminatory effects of tax law. The rule of law in taxation
seeks to ensure certainty in taxation, procedural fairness, the right to appeal
and taxpayer rights.
Third, the tax law of any country is embedded in the wider matrix of the
legal system of that country. Tax laws often depend for their meaning on other
laws, for example, the laws of corporations, partnerships or trusts; property,
contract or family law. The relationship between tax laws and other laws
presents one of the largest difficulties in comparing tax systems of different
countries, as it requires analysis of the legal framework, culture and relations
in those countries.
However, tax law is distinct from the legal system in which it operates. In
most mature tax states, whether civil or common law, the tax law is a body of
statutory law, combined with judicial decision-making in cases at all levels of
the court system and administrative regulations and guidance, which together
are voluminous and often highly complex. Increasingly, tax law requires
knowledge of international tax treaties, cases and commentaries layered on
top of domestic rules and guidance. The interpretation and application of tax
rules have become a specialist area of legal practice.22 Different approaches,
for example, purposive or literalist in nature, may produce different results in
application of the tax law. One significant challenge for tax law in all countries
is how to approach abusive transactions and the application of anti-avoidance
rules. Tax avoidance is difficult to define and to distinguish from acceptable
tax planning. Courts, administrators, advisors and taxpayers must interpret
and apply specific and general anti-avoidance rules, which are on the rise in
tax laws around the world.
Tax practice also engages the discipline of accounting, both private and
public, and in this it differs from other areas of legal practice. Taxation
requires a metric of income, expenditure, profit and loss of the taxpayer.
Public accounting of revenues and expenditures, assets and liabilities is
necessary for government. Accounting principles may play an important role
in the tax law. In some civil law systems, such as Germany, financial account-
ing is the foundation for determination of taxable profit. In contrast, in
common law systems, tax law concepts of income and expenses sit alongside
accounting concepts and do not always have a direct relationship with them.23
Financial accounting principles are likely to dominate the new global
approach to taxation of multinational enterprises, which we discuss in
Part III of the book.

22
Robert F van Brederode and Richard Krever (eds.), Legal Interpretation of Tax Law, 2nd ed
(Alphen aan den Rijn, Netherlands: Wolters Kluwer, 2017).
23
A comparative discussion of tax accounting is in Ault et al, Comparative Income Taxation (see
n 10).

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 12 Introduction

Disciplines of law and accounting have played significant, and sometimes

competing, roles in the practice of tax law.24 The role of tax accounting grew
during the twentieth century; today, the accounting profession dominates the
global professional field of tax advising. The well-known global advisory firms
have developed a specialist practice of taxation advice and planning with
national and international dimensions, which is separate from other forms
of accounting practice. They are major players in providing tax advice for
businesses around the world. This has led to changes in the tax law profession,
as it too establishes global networks to keep up with changes in tax planning.
Domestically in many countries, individuals and small businesses rely pre-
dominantly on tax accountants and tax agents to manage their tax affairs.

Tax Statistics
The governments of most successful tax states compile and publish aggregate
tax data in budget and general statistical publications. Tax statistics are a
measure of knowledge of the state about its people, and can tell us a great deal
about government itself. Over thousands of years, the great skill of writing
was applied ‘to record payments of taxes and tributes to kings and rulers,
and to keep track of the numbers of tax-payers in censuses’.25 Piketty
observed that:
Taxation is . . . a way of requiring all citizens to contribute to the financing of
public expenditures and projects and to distribute the tax burden as fairly as
possible; it is also useful for establishing classifications and promoting
knowledge.26

Tax records of the last two centuries are among the best sources of infor-
mation about the income, assets and wealth of governments and of people.
They provide information about income and wealth distribution and inequal-
ity. The World Inequality Project relies on administrative tax statistics with
national income statistics and household surveys to map the income of the top
1 per cent in countries around the world.27

24
See, e.g. Charles Rembar, ‘The Practice of Taxes’ (1954) 54 Columbia Law Review 338–58
(discussing the role of law and accounting professions in the United States); Albert Lee and
Martin Rabenort, ‘The Changing Role of the Tax Professional’ (2009) 20(8) International Tax
Review 32–4.
25
British Museum, ‘Support Notes for Tutors. ESOL Workshop: Origins of Writing’, www
.britishmuseum.org/sites/default/files/2019-11/Origins-of-writing-support-notes-for-teachers_
final.pdf, 1, accessed 18 March 2022, observing that some of the earliest surviving written texts
from Mesopotamia and Egypt were tax records.
26
Thomas Piketty, Capital in the Twenty-First Century, trans. Arthur Goldhammer (Cambridge,
MA: Harvard University Press, 2014), 16.
27
World Inequality Database, https://wid.world, accessed 16 March 2022.

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 13 Tax Structure

The OECD collates national tax statistics from its member states and from a
growing number of other countries in online statistical databases.28 Other
international institutions including the International Monetary Fund (IMF)
collect revenue statistics; however, the OECD has made strenuous efforts to
occupy the field of tax statistics and it is pre-eminent in this regard.
The publication of tax statistics enables cross-country comparisons and
contributes to the transfer of concepts, ideas and metrics about taxation across
countries. Increasingly, governments are compiling and releasing administra-
tive tax data, including confidentialised unit record files about taxpayers to
researchers (an example is Denmark) or longitudinal tax data to support
research (an example is the Australian Taxation Office longitudinal database
of personal tax statistics).29 These data enable innovative economic research
into tax systems, incomes and economic behaviour of individuals and
businesses.
The quality of tax statistics has greatly improved in recent decades, but
caution is required in doing cross-national, and historical, comparisons. These
depend on standardised categories and definitions and on the continued
delivery of high-quality data by governments. Even applying standardised
definitions, countries or institutions sometimes take different approaches
and there are always gaps in tax data. With these cautions in mind, this book
draws on tax statistics from the OECD to illustrate and compare some aspects
of tax systems between countries and over time.

Tax Structure
Definition of a Tax
This part presents key concepts necessary for understanding tax statistics and
debates. These are the definition of a tax, the tax level of a country and its tax
mix or tax structure.
A commonly accepted definition of a tax is a ‘compulsory and unrequited
payment to general government’.30 This definition is used for statistical
purposes and includes payments to all levels of government (including central,
provincial and local government). A tax is ‘unrequited’ in the sense of not
being paid directly for a specific good or service of similar value. A fee or
charge, even if paid to a public agency, is not included in this definition of tax.

28
OECD, OECD.Stat, https://stats.oecd.org/, accessed 16 March 2022. Open access charts and
data on a wide range of historical and contemporary tax issues are available from Esteban
Ortiz-Ospina and Max Roser, ‘Taxation’, OurWorldInData.org/taxation.
29
Australian Taxation Office, ‘A-Life (ATO Longitudinal Information Files)’ (2020), https://alife-
research.app/info/overview, accessed 16 March 2022.
30
OECD, ‘Revenue Statistics – Tax Structures’, www.oecd.org/ctp/tax-policy/revenue-statistics-
tax-structures.htm, box 1.1, accessed 16 March 2022.

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 14 Introduction

A tax is not a fine or penalty that, although compulsory, is levied as punish-

ment for a specific act. This statistical definition of a ‘tax’ therefore
implicitly incorporates the central element of legality of taxation: its impos-
ition by a valid taxation law and its enforceability by the government under
that law.

Tax Level
The tax level of a government is total tax revenue as a share of gross domestic
product (GDP). Total tax revenue includes taxes paid to all levels of govern-
ment. This annual statistical measure is sometimes called a measure of the ‘tax
burden’ in a country.31 The tax level is measured on a nominal basis, in respect
of both revenue and GDP. A country’s GDP measures the market value of
goods and services produced using prices determined from standardised
national accounts and income surveys. This measure has many limitations
that are well documented.32 Most importantly, it ignores the ‘non-market’ or
household economy and the environmental impact of economic activity.
Bearing in mind its limitations, the tax level provides information about
the size of the state in the economy and enables comparisons over time and
with other countries. The full size of the state is indicated by its expenditures
as a share of GDP, financed by a combination of taxes, debt and other
revenue sources.
The tax and expenditures levels of OECD member countries are shown
in Figure 1.1. Expenditures range from 24 per cent of GDP in Ireland to
55 per cent of GDP in France. Taxes range from 16 per cent of GDP in
Mexico to 45 per cent of GDP in France. While taxes provide most
government finance in successful tax states, the difference is made up by
other revenues (in most OECD countries, non-tax revenues raise from 5 to
10 per cent of GDP) and by government debt. Norway is exceptional in
raising nearly one fifth of GDP from non-tax revenues: this is the return to
the budget from the Government Pension Fund, established in the 1990s
with revenues from North Sea oil and now the largest sovereign wealth
fund in the world.33

31
Evans et al, Comparative Taxation (see n 10), 9.
32
The indicator and measurement of GDP ignores non-market household production such as
infant breastfeeding, childcare, or food preparation; misses many activities in the digital
economy, such as social media; and fails to measure economic costs arising from destruction of
infrastructure, environmental degradation and depletion of natural resources. See, e.g. Joseph
E Stiglitz, Amartya Sen and Jean-Paul Fitoussi, The Measurement of Economic Performance and
Social Progress Revisited: Reflections and Overview (Paris: French Observatory of Economic
Conditions, Economics Research Center, 2009), http://spire.sciencespo.fr/hdl:/2441/
5l6uh8ogmqildh09h4687h53k/resources/wp2009-33.pdf.
33
Norges Bank Investment Management, http://nbim.no/en/, accessed 16 March 2022.

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 15 Tax Structure

France

Finland

Belgium
Norway

Sweden

Denmark

Italy
Austria
Greece

Columbia

Hungary

Germany
Iceland

Slovenia

Slovakia

Portugal
Luxembourg

Spain

Netherlands

Poland
Canada

Czech Rep

Australia

Great Britain
OECD Average

New Zealand

Israel
Estonia
Japan

Latvia

United States

Turkey
Lithuania
Korea

Switzerland

Mexico

Ireland

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60%

Expenditures Tax

Figure 1.1 Tax and expenditure as a share of GDP, OECD countries, 2019
Sources: OECD Data, Tax Revenue, https://data.oecd.org/tax/tax-revenue.htm; OECD, ‘Government at a
Glance’ (2019) StatLink https://doi.org/10.1787/888934257033.

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 16 Introduction

A government’s tax level will fluctuate with the business cycle, policy
changes and economic factors such as commodity prices or unemployment.
It will change more slowly in response to long-term economic growth
and demographic trends. If GDP grows strongly but tax revenues do not
grow as fast, the tax level will decline, even though tax revenues may
have increased.
A tax that grows with, or faster than, the economy is called a growth or
buoyant tax, which is understandably attractive to governments seeking a
stable revenue stream.34 For example, a tax on the sale of goods and
services may grow rapidly if consumption is rising; or a tax on wages will
grow if wages are increasing faster than economic growth. This is some-
times described as improved ‘tax effort’. If tax revenues grow more rapidly
than the economy, the tax level will rise. Because tax laws are applied
to nominal income or consumption, tax revenues also increase with
inflation.
The COVID-19 pandemic had a significant negative effect on tax revenues
in 2020 and 2021, due to the sharp contraction in economic activity. Business
losses and the consequential tax impact are likely to be felt for some years after
economic responses to the pandemic are lifted.

Tax Mix
The tax mix or tax structure of a government is the combination of different
taxes and their relative importance as a share of tax revenue. The OECD
measures a country’s tax structure by the share of major taxes in GDP and in
total taxes.35 This reveals the main types of taxation in successful tax states to
be personal and corporate income tax, social security tax, a broad-based
consumption tax and excises on fuel, alcohol, tobacco and some other specific
goods, and property taxes. Some tax states also levy inheritance or wealth
taxes. The tax mix of successful tax states has been relatively stable over the
past few decades. There are also significant, and stable, differences between
country tax structures.
To illustrate, the tax mix of selected OECD countries is shown in Figure 1.2,
presenting the major taxes as a share of GDP, and Figure 1.3, presenting the
major taxes as a share of total tax revenues. The income tax and social security
tax together comprise more than half of the tax revenues of most OECD
countries, with the next largest category being consumption taxes on goods

34
Vincent Belinga, Dora Benedek, Ruud A de Mooij and John Norregaard, Tax Buoyancy in
OECD Countries, IMF Working Paper No 14/110 (Washington, DC: International Monetary
Fund, 2014).
35
OECD, ‘Revenue Statistics – Tax Structures’ (see n 30).

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 17 Tax Structure

50%

45%

40%

35%

30%

25%

20%

15%

10%

5%

0%
Turkey United States Korea Australia Japan New Zealand United Canada OECD Germany Denmark France
Kingdom average

1000 2000 3000 4000 5000

Income & profits Social security Payroll Property Goods and services

Figure 1.2 Tax mix of selected OECD countries, share of GDP, 2018
Source: OECD, Revenue Statistics 2020, Table 3.3, www.oecd-ilibrary.org/taxation/revenue-statistics-2020_
8625f8e5-en.

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%
Turkey France Japan Germany Korea OECD United United Canada New Zealand Australia Denmark
average Kingdom States

1000 2000 3000 4000 5000

Income & profits Social security Payroll Property Goods and services

Figure 1.3 Tax mix of selected OECD countries, share of total taxation, 2018
Source: Author Chart from OECD, Revenue Statistics 2020, Table 3.4, www.oecd-ilibrary.org/taxation/
revenue-statistics-2020_8625f8e5-en.

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 18 Introduction

and services. Property taxes make up a much smaller proportion of tax

collected, although they are important in the United States, UK, France and
Canada.

Tax Concepts
Elements of a Tax System
This section introduces the concept of the tax base and tax incidence, direct
and indirect taxes, the tax unit and tax rates.
The tax base refers to the underlying economic factors or uses that are
subject to taxation. Economists define the tax base by reference to factors of
production in the economy: labour, capital and land, or by uses of income or
consumption. The tax base may also refer to the population of taxpayers who
are registered or identified in the system. The classification of types of taxation
refers to concepts of income, consumption and wealth or specific transactions
or activities that are subject to tax. The statistics presented here show that
successful tax states do not rely only on one kind of taxation but on a mix of
taxes. This likely increases the complexity of tax systems, but it also enables
improved enforcement and better coverage of the economic transactions that
make up the tax base.
There is a wide literature on tax policy and reform that advocates an ideal
tax system and suggests that there is a ‘right’ answer to the question of the tax
base that may be arrived at scientifically. For example, there may be a view that
the ideal tax base comprises income, consumption or land. Contemporary tax
theory accepts that no system is ideal and instead aims to optimise tax systems
in a ‘second-best’ world for efficiency and equity (as explained in Chapter 4).
Yet even this theoretical ‘optimising’ exercise may be insufficiently pragmatic
as an approach to tax reform, which is fundamentally political and legal
in nature.
From a legal perspective, Paul McDaniel observed that the designer of a tax
must have the answers to six fundamental questions in order to establish the
elements of the tax system enacted in law:36

1. Tax base: What is the tax base that the statute is to embody and how is it
defined?
2. Tax rate: What rates of tax are to be applied to that base?
3. Timing: How often is the tax to be imposed (what is the tax period)?
4. Tax unit: What is the taxable unit (e.g. individual, family)?

36
Paul McDaniel, ‘Comments’ in Joseph Pechman (ed.), What Should Be Taxed: Income or
Expenditure? (Washington, DC: Brookings Institution, 1980), 282–3.

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 19 Tax Concepts

5. Intermediaries: How are firms, or legal intermediary entities such as cor-

porations, trusts, pension funds, mutual associations or partnerships, to be
treated?
6. Jurisdiction: What are the rules of jurisdiction? How is the tax to be applied
to taxpayers who engage in activities across national borders?
In relation to these fundamental elements, McDaniel explained:
There is little or nothing in tax law theory as such – nor, I should add, in tax
economics or accounting – that provides the correct answers to these questions.
They must be answered by political leaders drawing upon the broad social,
philosophical, economic, jurisprudential, and historical perspectives of the soci-
ety. What the tax expert can do is supply the policymaker with a variety of
possible solutions to each problem and an analysis for the equity, economic, and
administrative implications of each solution. Although it is sometimes implied
to the contrary, the selection of a particular tax base (question 1) does not
dictate the answers to the remaining questions; in fact, that selection may make
it more difficult to solve some of them.37

Tax reform is an outcome of negotiation of political interests, layered with

the development and transfer of tax policy ideas between tax experts and
bureaucrats in a dynamic and iterative process of law making.38 Modern
tax reform processes usually engage in substantial public consultation, in
contrast to earlier decades when ‘the making of tax policy was often
shrouded in secrecy’.39 For a mass tax, such as the personal income tax,
value added tax (VAT) or goods and services tax (GST), the politics of tax
reform are manifest in widespread and heated public debate. For more
specialised tax reforms, tax consultation takes place through relatively
closed networks of tax professionals, corporate or niche taxpayers and
administrative experts.

Tax Incidence
A fundamental question for tax policy is who bears the economic incidence or
burden of taxation. Ultimately, individuals – real people – must bear the
burden of taxation.
The legal incidence of a tax is on the defined tax unit or legal taxpayer who
is liable to pay the tax to the government. The legal taxpayer may differ from

37
Ibid., 283.
38
Sven Steinmo, ‘The Evolution of Policy Ideas: Tax Policy in the 20th Century’ (2003) 5(2)
British Journal of Politics and International Relations 206–36; Holger Nehring and Florian
Schui (eds.), Global Debates about Taxation (London: Palgrave Macmillan, 2007). For analysis
of pathways of influence beyond developed tax states, see Miranda Stewart, ‘Global Trajectories
of Tax Reform: The Discourse of Tax Reform in Developing and Transition Countries’ (2003)
Harvard International Law Journal 44(1) 139.
39
Brian J Arnold, ‘The Process of Tax Policy Formulation in Australia, Canada and New Zealand’
(1990) 7 Australian Tax Forum 379–94, 393.

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 20 Introduction

the person who bears the economic incidence of the tax paid. The incidence
of a tax may be shifted from one person to another, or by changing market
behaviour, the burden may be shifted more broadly in the market. The extent
of shifting of tax incidence depends on the elasticity of economic response to
the tax; we return to this concept in Chapter 4.
A direct tax is assumed to levy both the legal and economic burden directly
on the ultimate taxpayer, the most obvious example being the personal income
tax. Even direct taxes are very often collected and remitted by an intermediary,
such as by wage withholding from an employer. Nonetheless, it is generally
accepted that the economic burden is borne by the individual. A land tax is
usually considered to be borne by the landowner. A tax on the transfer of
property is paid by one party, usually the buyer, but may have quite unclear
incidence as between the seller and buyer of property.
A direct tax imposed on a tax unit that is a legal construct cannot be borne
directly by that tax unit. For example, income tax levied on a joint unit
defined as a married ‘couple’ must be borne, in some ratio, by each individual
member of the couple. It may commonly be the case that the individuals in a
‘couple’ bear the tax levied on the joint unit equally; but this is unlikely to be
true in all, or even most, cases. This is because the tax burden on a couple unit
is shifted between the individuals in the couple through intra-household
bargaining. We discuss the equity and efficiency implications of a joint unit
in Chapter 5.
The legal incidence of the corporate income tax falls on the taxpayer
defined as the corporation, but a corporation is a legal fiction, not a real
person. Ultimately, the burden of corporate tax must be shifted to individuals
by reducing the return to the owners of capital, or through wages or prices in
the economy. Who bears the corporate tax is one of the most debated issues in
tax policy; we return to this question in Chapter 7.
An indirect tax, such as a tariff, excise or broad-based VAT, is always paid
by an intermediary (the vendor, or supplier in a business supply chain). The
economic burden of this indirect tax is assumed to be shifted in the price to
the ultimate consumer of the goods or services. For example, VAT on a
restaurant meal is paid to the tax authority by the restaurant owner but it is
assumed to be borne by the customer in the price they pay for the meal.
Whether the shifting occurs will depend on the price charged by the restaurant
owner to the customer. The behaviour of both restaurant owner and customer
may also be responsive to other factors, such as local competition or the
opportunity for fraud.
Public economists seek to analyse the incidence of taxation and expend-
iture to understand where the burdens and benefits are distributed in soci-
ety.40 An even broader way to conceive of the tax burden might require us to

40
See, e.g. Musgrave and Musgrave, Public Finance (1989), chapter 14 (see n 19).

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 21 Types of Taxation

examine who benefits from government as a whole. Successful tax states

embed governments with markets, so that an individual’s pre-tax income is
a function of the entire complex of regulatory processes and institutions of
the state. Viewed in this way, the tax law performs a fundamental role in
demarcating what may be privately owned or consumed by an individual (net
of taxation) and what is shared in the collective, through the state (by taxation
and expenditure).41 We return to the implications of this approach for tax
justice in Chapter 4.

Types of Taxation
Income Tax
The modern income tax levied on individuals and corporations was instituted
in successful tax states in the early twentieth century, although it is based on
antecedents dating back centuries. Today the income tax remains of central
importance, albeit with wide variation as shown in Figures 1.2 and 1.3. For
example, in 2018 the income tax raised about 6 per cent of GDP (24 per cent
of total taxes) in Turkey, 18 per cent of GDP (56 per cent of total taxes) in
New Zealand and 27 per cent of GDP (62 per cent of total taxes) in Denmark.
Many governments with a lower reliance on income tax are newer OECD
member states. France is an exception, being a state with a high tax level that
relies more heavily on social security tax and consumption taxes, primarily the
VAT, than on the income tax.
There is debate about whether reliance on income tax by tax states is
growing or declining. In the 50 years from 1965 to 2017, 13 OECD member
states increased the share of personal income tax in total taxation, while
10 decreased the share of personal income tax.42 Each of Sweden, Norway
and the Netherlands saw a dramatic change in share of the income tax in total
taxes during this period. In Sweden, personal income tax revenue declined
from 48.7 per cent of total taxes in 1965 to 28 per cent of total taxes in 2017.
However, these trends need to be interpreted with caution. A closer look at the
data shows that the Swedish tax system expanded dramatically during this
period and in fact, income tax revenues remained steady. Revenues from other
taxes, especially VAT, grew significantly and this funded the growth in
government from 1965 onwards.
The economic concept of income as a tax base is usually called compre-
hensive income.43 Comprehensive income is equal to all consumption plus

41
Murphy and Nagel, The Myth of Ownership (see n 5).
42
OECD, ‘OECD Tax Statistics – Comparative Tables 1965–2018’, https://doi.org/10.1787/data-
00262-en.
43
Henry C Simons, Personal Income Taxation: The Definition of Income as a Problem of Fiscal
Policy (Chicago: University of Chicago Press, 1938). Sometimes known as the Schanz-Haig-
Simons concept of income.

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 22 Introduction

(or minus) the change in net wealth of the taxpayer, so the comprehensive
income tax applies to net economic gain that accrues to a taxpayer in a period
(such as one year), regardless of source or cause. This uses concept of income
reflects what an individual can buy through consumption or additions to
wealth.44
The economic concept of income is commonly expressed in the following
relation:
Y ¼ C þ ΔW

where: Y = income, C = consumption and ΔW = the change in net wealth

(positive or negative).
The income tax in the real world has many differences from the ideal
comprehensive income tax.45 Some of the differences are summarised in
Box 1.1 and we return to these issues later in the book.

Box 1.1 Comprehensive income compared to the ‘real’ income tax

1. Comprehensive income includes economic income adjusted for inflation.
In contrast, real income taxes apply to nominal income and are rarely,
and only partially, adjusted for inflation. If inflation is low, this is not of
major policy importance, but even a small ‘fiscal drag’ or ‘bracket creep’
produced by inflation enables automatic buoyancy of tax revenues and
increases the tax take (see further Chapter 5). If inflation is high, nominal
income may be much higher than real income. This can lead to signifi-
cant unfairness and instability in the income tax system.
2. A comprehensive income tax applies to net economic gain whether or
not it is converted to monetary form. This is sometimes called an
‘accrual’ tax system. Real income taxes generally operate on a ‘realisa-
tion’ basis, taxing a gain or recognising a loss only when it is derived in a
transaction such as the sale of the asset.
3. A comprehensive income tax applies to imputed or in-kind benefits, such as
the benefit derived from living in a home you own, or from household-
provided or non-market services such as childcare, housework or home-
grown food. Real income taxes usually do not tax these ‘imputed’ benefits,
although historically, imputed rent from home ownership was included in
the tax base.
4. A comprehensive income tax applies the same marginal tax rate struc-
ture to income of all sources and kinds. Real income taxes often tax
different kinds of income or gain at different rates. It is common for real

44
David Bradford, Untangling the Income Tax (Cambridge, MA: Harvard University Press,
1986), 15.
45
The same applies, of course, to all taxes, as eloquently demonstrated for the VAT by Kathryn
A James, The Rise of the Value-Added Tax (New York: Oxford University Press, 2015).

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 23 Types of Taxation

income taxes to apply a lower tax rate to capital income than to labour
income. This has the effect of shifting the income tax base towards a
consumption tax by reducing taxation on the change in net wealth.
5. In a comprehensive income tax, expenses in gaining assessable income
are deductible but expenses for personal consumption are not deductible.
This important distinction also applies in real income taxes but the line
between a personal expense and an expense incurred for deriving income
may be difficult to draw. For example, is the cost of childcare or com-
muting a work or a personal expense? Real income tax laws often respond
to this challenge by drawing somewhat arbitrary lines or placing limits on
deductible expenses.
6. A comprehensive income tax requires a deduction for the decline in
value of capital assets such as plant and equipment over their economic
life. This also applies in real income taxes; however, identifying a
depreciable asset, measuring its economic life and calculating how
rapidly its cost should be depreciated is difficult. The depreciation
deduction in real income taxes is often modified to make it more
generous, permitting write-off faster than the life of the asset, or ‘expen-
sing’ or immediate deduction of the cost of business assets. This shifts
the base towards a consumption tax by lowering the tax on investment.

Social Security Tax

Social security tax or social insurance contributions fund large portions of the
welfare state in some countries, especially unemployment benefits and old age
pensions. Social security taxes are usually contributed by both the employer
and the employee based on a fraction of the employee wage, collected from the
employer by withholding from wages. In many countries, social security taxes
are paid into a fund that is directly hypothecated to social security benefits.
This may help ‘to make the programs (and the taxes) more palatable to
citizens who might object to receiving (or paying for) welfare’.46
The economic incidence of social security taxes is usually assumed to be on the
employee, although this may not always be the case. From the employee’s
perspective, social security taxes are similar to income tax on wages, but are
usually levied on a ‘gross’ not a ‘net’ basis, with no deductions allowed and at a flat
rate. In some countries, social security taxes are applied on wages up to a ceiling.
Figure 1.3 shows that social security taxes in many OECD member states
comprise as much as 40 per cent of tax revenues. In Germany, France and
Japan, social security taxes raise more revenue than the income tax. In
contrast, Australia, Denmark and New Zealand do not levy social security

46
B Guy Peters, The Politics of Taxation: A Comparative Perspective (Cambridge, MA: Blackwell,
1991), 32.

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 24 Introduction

taxes. These countries rely more heavily on the income tax and also provide a
regulated system of private saving for retirement.
Social security contributions to government funds are included as a tax
in OECD statistics. However, contributions to private funds, which occur in
many countries, are excluded. For example, Australia has a policy of compul-
sory private superannuation instead of a social security tax. As superannuation
contributions do not go into a government fund, they are not treated as a tax
in OECD statistics.47

Consumption Tax
A consumption tax is an indirect tax that is levied on the sale, or supply, of
goods or services but is intended to be borne by the ultimate consumer of the
good or service. Specific taxes on consumption, such as excises on specific
goods like salt, or trade taxes such as import and export duties or tariffs, have
existed for thousands of years. Historic sumptuary taxes on luxury goods are a
form of consumption tax.
Schumpeter suggested in 1917 that the era of income tax was over; he argued
that it had been suited to the ‘liberal’ nineteenth century but that it should be
replaced in the twentieth century by a consumption tax that would support
growing industrialised economies based on mass consumption.48 During the
twentieth century, governments did indeed begin to levy broad-based consump-
tion taxes. With hindsight, Schumpeter was wrong about the demise of the
income tax but he was right in predicting the rise of consumption taxes in
successful tax states. However, Figure 1.3 reveals significant diversity between
countries. Consumption tax revenues range from a low of 17 per cent of taxes in
the United States to a high of 40 per cent of taxes in Turkey.
The most striking policy development since the mid-twentieth century has
been the widespread adoption of a specific type of broad-based consumption
tax, the VAT (or GST). These broad-based consumption taxes supported the
expansion of the tax state (and its revenues). The VAT is applied in all
member countries of the European Union and has spread to most countries
worldwide. The United States remains the only OECD member that does not
impose a VAT at the national or state level.
The VAT is a multistage tax applied to the supply of goods and services by
business enterprises at each stage of the chain from original producer to
ultimate consumer. The consumers themselves have no obligation to pay the
tax, which is remitted by the enterprises through the supply chain. For each

47
OECD, ‘Revenue Statistics’ (see n 30), box 1.1. The International Monetary Fund excludes
social security contributions from its statistical definition of a ‘tax’, producing significantly
lower measures of total taxation: see data.imf.org.
48
Schumpeter, ‘The Crisis of the Tax State’ (see n 1).

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 25 Types of Taxation

registered supplier, a tax credit is allowed for VAT paid on business inputs.
This means that the net value added is taxable for enterprises that are in the
business of supplying the goods or services. The final consumer is not an
enterprise and is not eligible for an input credit. Assuming the tax is passed on
in the price of the good or service, the final consumer bears the tax. The VAT
is applied to a wide range of goods and services at a single flat rate,
although variable rates and exemptions also apply in most countries. There
is substantial variation in base, rates and revenues of VATs in different
countries.49
The ideal consumption tax base has a close relationship to the comprehen-
sive income tax. It can be expressed by modifying the definition of compre-
hensive income as follows:
C ¼ Y  ΔW

where: C = consumption, Y = income and ΔW = the change in net wealth

(positive or negative).
The VAT is equivalent to an ideal consumption tax only if rather strict
conditions are satisfied: it must tax all goods and services consumed and the
incidence of this indirect tax must be ultimately borne by the consumer
through price shifting through the supply chain.50 The first condition is not
satisfied in any tax state, although New Zealand comes close. The second may
often be true but depends on the elasticity of demand for the good or service
that is supplied.
The equation defining comprehensive income shows that in theory, a
consumption tax could be achieved by deducting savings and investment from
the comprehensive income tax base. If a single flat tax rate is imposed, the
ideal consumption tax is economically equivalent to an income tax levied on
wages where the wages are consumed (not saved). Imagine an individual who
earns a wage and spends it all immediately on rent, food and living costs. For
this individual, a 20 per cent income tax levied on their wage is equivalent to a
20 per cent consumption tax levied on their consumption. On the other hand,
if an individual earns a wage and then saves all of it, the wage and the return to
saving would be subject to income taxation but not to consumption taxation
(until consumed in future). A reduced tax rate on the return to saving and
expensing of the cost of business assets also shifts the income tax towards a
consumption tax, as explained in Box 1.1. We return to these issues concern-
ing the tax base in Chapters 6 and 7.

49
OECD, Consumption Tax Trends 2020 (Paris: OECD, 2020), www.oecd-ilibrary.org/taxation/
consumption-tax-trends-2020_152def2d-en; Rita de la Feria (ed.), VAT Exemptions:
Consequences and Design Alternatives (Alphen aan den Rijn, Netherlands: Wolters Kluwer,
2013).
50
Similarly to the income tax, numerous differences exist between the ‘real world’ VAT or GST
and the ideal consumption tax: James, The Rise of the Value-Added Tax (see n 45).

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 26 Introduction

Wealth, Property and Land Taxes

Wealth, property and land taxes apply to the stock of wealth or assets, defined
and valued at a point in time, in contrast to income or consumption, which are
flows. Taxes on wealth or assets have a long history in tax systems but today
they comprise a relatively small share of tax collected in successful tax states.
The most important component by share of tax is property taxation, as shown
in Figure 1.3. A wealth transfer tax such as estate, inheritance or gift tax may
be levied at the time of a transfer of assets – for example, a bequest on death or
the transfer of land. There is renewed interest today in wealth as a tax base, in
the context of increasing wealth and income inequality in many countries. We
return to this in Chapter 6.

Tax Rates
The tax rate is the proportion of the measured tax base that must be remitted
as taxation (for example, 10 per cent of the purchase price of a good or
service). A tax could be designed as a lump-sum tax, which requires each
taxpayer to pay an identical amount (for example, $100 per head). This is
known as a poll or head tax. Fees or charges for some services, such as vehicle
registration or garbage collection, may be designed in this way. Usually, a tax
will have a single rate or multiple rates based on thresholds or levels of income
or consumption.
Tax rates may be proportional, progressive or regressive. In general, we
describe a tax as progressive or regressive by comparing the tax paid by an
individual with the income of the individual. Alternatively, we could compare
the tax paid to the consumption or wealth of the individual.51
Figure 1.4 shows a stylised representation of progressive, proportional and
regressive tax rates. A proportional or flat tax collects a constant percentage
of income in tax for all taxpayers. As income rises, the quantum of tax paid
rises, but the proportion of income paid in tax does not.
A progressive tax is a tax where the average tax rate increases as the
taxpayer’s income increases. The average tax rate measures the total amount
of tax paid as a percentage of income. A tax may be progressive if people with
higher incomes pay a higher tax rate (e.g. the personal income tax).
A regressive tax is the opposite, where the average tax rate, or amount of
tax paid as a percentage of income, decreases as income increases. While a
lump-sum tax is equal in the sense that each taxpayer pays exactly the same
amount, it is regressive because the amount of tax paid as a percentage of
income decreases as income increases.

51
See further Peter Varela, What Are Progressive and Regressive Taxes? TTPI Policy Brief 3/2016
(Canberra: Tax and Transfer Policy Institute, Australian National University, 2016).

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 27 Tax Rates

Figure 1.4 Progressive, proportional and regressive tax rates

Source: Peter Varela, ‘What Are Progressive and Regressive Taxes?’ TTPI Policy Brief 3/2016 (Canberra: Tax
and Transfer Policy Institute, Australian National University, 2016), Figure 1.

The marginal tax rate in a progressive income tax is the rate on the ‘next’
dollar of income. In most income tax laws, progressivity is achieved by stepped
increases in the tax rate structure, where the marginal tax rate increases as
income reaches each threshold. An example of progressive income tax rate
structures is in Chapter 5, Figure 5.1.
A tax may be progressive where it is levied on a base that is unequally
distributed between rich and poor, even if it applies a flat (proportional) rate.
This is because the tax by its nature falls on those who have income or assets,
compared to those who do not. For example, a land tax falls on the owner
of land.
A broad-based consumption tax such as a VAT, levied at a proportional
rate on all consumption, is regressive with respect to income. The reason is
that higher income individuals save more, and consume less, of their income
and savings are not taxed in a consumption tax.

https://doi.org/10.1017/9781316160701.002 Published online by Cambridge University Press