Tax Being just or Unjust: A Study of Taxation As an Institution of Justice

 

Preetika Sharma*

PhD , National Law University, Delhi

*Corresponding Author E-mail: preetika.2812@gmail.com

ABSTRACT:

In a modern society no individual can exist in isolation without amenities such as health, food, income, employment, education etc. Further corporations, companies and other similar units cannot co-exist peacefully unless governmental regulatory framework and administration of State governs them. Tax levies which are the major source of revenue generation, is the principal method by which this responsibility of State can be met. Along with this, taxes also serve a utilitarian welfare purpose which considers tax policy as an important instrument of social reform and social betterment. (Smith & Mill). John Rawls (1971) in Theory of Justice discusses that government through tax levies, plays a substantial role in maintaining and correcting the system of economic institutions and prevent unacceptable levels of inequalities and wide disparities of income and wealth. However, this has been strongly criticized by Robert Nozik (1974) who condemns the role of a nation state in distribution of income and wealth for the well-being of every-one. Nozick says that a tax on labor is equivalent to a forced labor and it would be unjust to force a person to work for the benefit of another. This calls for a theoretical justification as to whether taxes are just or unjust. This paper seeks to make an inquiry into to the philosophical justification of different types of taxes with special reference to recently implemented Goods and Services Tax in India.The paper would also give a reflection on the sharp contrast between the thoughts of John Rawls and Robert Nozick on the taxes serving as an institution of Justice.

 

KEYWORDS: Tax, justice, welfare state, distributive justice, inequality.

 

 


1. INTRODUCTION:

“We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.”

Winston S. Churchill

 

Tax plays a critical role in society and it is believed that it has the capacity to affect the lives of everyone within it whether in the capacity of tax payer or in the capacity of one who derives benefit from taxes paid by others. It is said, since all members of a state derive certain benefits from administration of Government, they owe some minimum amount of contribution for its maintenance1. There is no doubt that in modern society

no individual can exist in isolation without amenities such as health, food, income, employment, education etc. Further companies, corporations and other similar units cannot co-exist peacefully unless governmental regulatory framework and administration of State governs them.Tax levies are principal method by which this responsibility of State can be met.2 They are the major source of revenue generation and collection which are subsequently required to carry out vast variety of functions involving public service and national defense. In addition to these, tax policies of any nation has a direct relation to its public economic policies having effect on inflation, deflation, regulation and control of financial practices that may have a negative or positive impact on economy as a whole.Along with this, taxes also serve a utilitarian welfare purpose which considers tax policy as an important instrument of social reform and social betterment. (Smith & Mill). John Rawls in Theory of Justice, discusses that government plays a substantial role in maintaining and correcting the system of economic institutions in order to prevent unacceptable levels of inequalities and wide disparities of income and wealth on the basis of distributive justice what he calls as difference principle. He suggests that it is the obligation of nation state that it collects taxes which are sufficient enough to fund a social minimum for every citizen.However, despite above stated beneficial purposes, taxes bear a negative and unpleasant connotation from tax payer or Assessee is concerned.3 A part of earning as a contribution to government revenue inevitably somewhere brings down the economic satisfaction of a tax payer.

 

Robert Nozik strongly opposes the role of a nation state in distribution of income and wealthfor the well-being of every one. Nozick says that a tax on labor is equivalent to a forced labor and it would be unjust to force a person to work for the benefit of another.4 In such a scenario a balance must strike between depriving one, pleasure of satisfying his/her superfluous wants and depriving others of the necessities of life and this calls for a theoretical justification as to whether taxes are just or unjust.

 

Once it is clear whether any tax is just or unjust it is also important to identify what kind of tax is just? Kalven& Blum (1973) are of the view, that at any point of time, for a given society, a tax may be characterized in one of threeways.5 First is regressive nature of tax. Wherein property or income distribution is made less equal by operation of the tax in comparison to what it was before the tax by subjecting rich and poor to same amount or rate of taxes. The second is the tax that is progressive. Wherein, the distribution of property or income is made moreequal by operation of the tax. Meaning thereby it subjects the wealthier to more burden of taxes then poor. The third is that which is neither regressive nor progressive and may be designated"neutral" or "proportionate"; which would leave therelative shares of property and income unchangedbefore and after taxes.6

 

Yet another question arises, what shall be the basis of tax?7 In other words whether the tax should be imposed on an accretion basis or on a consumption basis.8 Hobbes argues that it is more just that a person be taxed on what he derives out of common pool (consumption basis) rather than on what he contributes to it (accretion basis). Rawls also under tax as an institution of distributive justice discussed whether it is just to tax on accretion basis or consumption basis that shall be dealt with in detail hereunder.

 

The present paper is an attempt to find out philosophical justification of different types of taxes levied in contemporary economies around the world. The paper would draw a sharp contrast between the thoughts of John Rawls and Robert Nozick on the taxes serving as an institution of Justice. In the end author would establish if recently implemented Goods and Services Tax GST in India has a theoretical justification on the basis of arguments presented by various philosophers especially John Rawls and Robert Nozik.

 

2. ETHICAL JUSTIFICATION OF TAXATION

Besides fulfilling the purpose of raising funds for public expensese, taxes may be used to regulate citizens' conduct in order to promote public health, welfare, or moral conduct.9 For example, sin taxes dealing with the taxes on cigarettes, alcohol, and gambling have frequently been justified on these grounds of public health. Recently, heavier taxes on gasoline have been encouraged as a way of reducing consumption, promoting energy independence, and stimulating energy alternatives.10 Environmentalists have also appealed for the use of taxation, not simply to support public expenditures on behalf of the environment, but as a way of encouraging firms to internalize the costs of their polluting activities. As against this certain fiscal policies seeking to promote health and welfare may conflict with other values bearing on tax policy. For example, sometimes government find themselves in the position of promoting cigarette or alcohol sales in the effort to increase revenues from this relatively voluntary method of taxation. In this case, concern with the value of freedom has clashed with a concern for public health. This points up how conflict-ridden moral reasoning about tax policy can be.

 

3. JOHN RAWLS ON DISTRIBUTIVE JUSTICE: A PHILOSOPHICAL JUSTIFICATION TO TAXES:

John Rawls while rejecting the utilitarian idea of the greater good has considered justice as a principle based on fairness.11 He defines society in terms of a closed system of people whole enter into a general agreement with one another on the basis of set of rules that are framed for the benefit and betterment of the society itself through cooperative interaction. He assumes that individuals who enter into agreement of cooperation would primarily care for their self-interest, they would be rational, well informed of the human nature and functioning of society. He further emphasizes that such persons are placed at a point wherefrom all members of society are equal. This point he calls as ‘veil of ignorance’ or ‘the original position’and they do not know anything about those of their characteristics and circumstances that has the ability to influence impartiality of decision-making.12 Rawls posits that in order to formulate laws that are fair persons making laws shall be devoid of any knowledge of their individual characteristics. Thus each shall lack knowledge of his or her gender, race, age, intelligence, wealth, skills, education, and religion, etc.13

 

Rawls presents his ideas of justice as fairness in his two principles of justice:14

 

A. Liberty principle:

According to this, each person has an equal claim to basic liberties such as liberty of conscience and freedom of association, freedom of speech, rights to vote, to hold public office, to be treated in accordance with the rule of law and so on and so forth.

 

B. Difference Principle:

According to this, inequalities in social and economic goods are acceptable only if they satisfy two conditions:

a. They are to be attached to offices and positions open to all under conditions of fair equality of opportunity,

b. They are to be to the greatest benefit of the least-advantaged members of society (the difference principle).15

 

Rawl’sfirst principle pertaining to equal basic liberties is helpful in the designing of political constitution, whereas the second principle applies primarily to economic institutions. It is this second principle of justice that is a matter of concern here. The first part of this second principle with respect to fair equality of opportunity, requires every citizenhavingsame talent and willingness to use them along with same educational and economic opportunities regardless of being born rich or poor. The second partof second principle, regulates the distribution of wealth and income. This distribution is also termed as ‘difference principle’. According to this, economic inequalities are allowed but only if they benefit even the least advantaged individuals.16 He further propounds that actual distributive shares of rights, advantages, and duties in any society are determined by its major social institutions, including its system of taxation.17

 

While discussing distributive justice, Rawls says that any distributive process can be just only with an appropriate scheme of background institutions such as political and legal institutions. In order to preserve certain social and economic conditions while establishing these background institutions Rawls refers to four "branches" of fiscal and resource management activity.18 The allocation branch, the stabilization branch, the transfer branch and the distribution branch. As per Rawls, distribution branch is responsible topreserve an approximate justice in distributive shares by means of taxation and the necessary adjustments in the rights of property.19 This branch involves two aspects. Firstly, it imposes a number of inheritance and gift taxes and sets restrictions over the rights of bequest. The purpose of these levies and impositions is not to raise revenue but to correct the unequal distribution of wealth and to prevent concentrations of power which is detrimental to the fair value of political liberty and fair equality of opportunity. Second part of the distribution branch deals with the scheme of taxation for the purposes of raisingrevenues that justice requires in order to satisfy the difference principle.20

 

Similarly, Rawls while discussing "Economic Institutions" in Justice as Fairness, made following points of consideration on wealth and inheritance taxes:21

1.     The principle of progressive taxation can be applied to the one who is receiving bequest and inheritance in form of gifts and endowments in order to encourage a wide and far more equal dispersion of real property and productive assets.

2.     Theprogressive principle of taxation shall not be applied to wealth and income for raising funds but in order to prevent accumulations of wealth which would have resulted into injustice if not imposed.

3.     Third, instead of income taxation, a proportional expenditure/ consumption tax shall be adopted which would tax people according to how much they use goods and services and not according to how much they contribute.22

 

On the basis of above stated argument, if taxes can be considered to be just, another important issue that arise as to the tax policy encircling the concern whether taxes shall be imposed on accretion basis or on consumption basis? As for example, if Mr. X earns a total income of Rupees 10 Lacs per annum and spends Rupees 6 Lacs on goods or services or transactions made over a period of accounting year. Mr. X here saves Rupees 4 Lacs which can be considered to be an increase in wealth. Under accretion basis tax would be impose on an amount which is sum total of i) Personal consumption and ii) net increases in wealth, i.e. on 10 Lacs. Accretion type income tax would not allow any deduction of savings. Wherein a consumption bases income tax would allow a deduction from gross income from net addition to savings meaning thereby it would impose tax on 6 Lac Rupees only for Mr. X. This choice between accretion basis or consumption basis greatly affects the relative tax burdens. Let us say for example, two individuals might have different level of earning but same level of consumption (total annual expenditure). In such a scenario, the one with higher level of earning would be benefited against one with lower level of income earning as both are subjected to same taxes resulting into difference in the relative burden of taxes. In this regard, Rawls poses proportional expenditure tax to be best suitable form of tax as it imposes a levy according to how much a person is deriving from the common store of goods or service and not on the basis of his contribution to the same.23 At the same time Rawls suggests that a proportional tax on total consumption can contain the usual exemptions for dependents.24

 

However, one may insist that the pre-tax distribution of income in our society is unjust. If this is so, then an income tax is not merely one of several possible revenue raising devices. Instead it is an essential part of the distributive mechanism of society. Its purpose must be to extract from each taxpayer the portion of gross income that would make his or her distributive share unjust if not extracted. If the purpose of an income tax is to correct an unjust initial distribution of income, then justice requires the use of an accretion type income tax.

 

4. ROBERT NOZICK: A LIBERTARIAN VIEW ON TAXATION

"Individuals have rights and there are things no person or group may do to them without violating their rights."

Robert Nozick25

 

Robert Nozick in his celebrated work, ‘Anarchy, State, and Utopia’, which is a libertarian response to Rawls argues that only ‘a minimal state’ can be morally justified. He is close to John Locke in that the government is legitimate only to the degree that it promotes greater security for life, liberty, and property than would exist in a chaotic, pre-political state of nature.26

 

As against two principles of justice given by Rawls, there is a deviation in Nozick’s view on Justice. He deliberates three sets of rules of justice, defining:

(1)  Acquisition of things that were not previously possessed by anyone;

(2)  Transfer of possession from one person to another; and

(3)  Rectification of injustices arising from violations of above two

 

In contrast to Rawls, who focuses on difference principle in regard to distributive justice, Nozick focused upon entitlement theory which is historical and un-patterned.27 Nozick suggests that any distribution, irrespective of any pattern is just provided it has an appropriate history in accordance with the rules of acquisition, transfer and rectification.28 However, Nozick never spells out the criteria of just acquisition. Further, Nozick absolutely rejects the idea of redistribution and maintains that it contradicts the idea of self-ownership.29 If a question arises as to whether it is the role of government of any state to take away some wealth from the rich in order to give it to the poor?’, then Nozick answers in negative and strongly believes that it is unjust for any nation state to engage in such kind of behavior.

 

With regard to imposition of taxes, Nozick espouses the priority of individual rights.30 He says, if someone acquired a holding justly, any interference with his holdings i.e. via imposition of tax, would violate his rights. Nozick equated tax with forced labor.31 Libertarian approach of Nozick which has been influenced by Locke has been widely criticized by other philosophers on the ground of being absurd. Locke, suggests that taxes should be levied in proportion to the property protected by the state. Further Adam Smith is of the view that “the subjects of every state ought to contribute towards the support of the government in proportion to the revenue which they subjectively enjoy under protection of the state”.32 Epstein, who also happens to be yet another libertarian, endorses the idea of broad-based income tax on the basis that everything of value protected by government is subject to taxation. In consequence, it appears that libertarian principlescan be very well relied upon to support all major taxes applicable around the world. However, Nozick keeps a different view from his fellow libertarians.

 

5. CONCLUSION:

One cannot ignore the fact that primary purpose of imposing tax is to raise the revenue for public expenditure by the government of any given society or economy. Given that situation certain economies around the world can challenge the same as there is no levy and collection of taxes in such economies such as Bermuda, Monaco, the Bahamas, Andorra and the United Arab Emirates (UAE) as their source of revenue generation is tourism, offshore industry, international trade, etc. However, one may strongly suggest that taxes can be used as a tool to render economic and social justice by way of equal distribution or redistribution removing wide disparities between rich and poor. This distributive justice on the basis of difference principle has been strongly contended by John Rawls and criticized by Robert Nozick. Having discussed at length theoretical justification of tax as proposed by John Rawls and its libertarian critical response by Robert Nozick, it is worthwhile to discuss the need, presence and justification of taxes in current scenario.

 

Most of the economies around the world identify taxes in the nature of direct and indirect types of taxes. A direct tax is a tax which is imposed directly on the taxpayer and it is paid directly to the government by the tax payer on whom it is imposed. For example, income tax, corporation tax, property tax, inheritance tax, gift tax, etc. An indirect tax on other hand is a tax collected by an intermediary from the person who ultimately bears the burden of the tax. For example, custom duty, excise duty, VAT, service tax, sales tax, Goods and Services Tax (GST).

 

 

Direct Taxes are imposed on accretion basis as it takes into consideration the entire amount that is being contributed by the person in form of his/her earning. Wherein indirect taxes are proportional expenditure/ consumption based taxes as they are levied on goods or services or transactions that are consumed or carried out by a person. Further, it is strongly argued that direct taxes are progressive in nature since they pose greater burden of tax incidence of wealthier class and less burden on poor and hence they are just. Similarly, indirect taxes are considered to be regressive in nature as they treat rich and poor at par and subjects them both to equal burden of taxes and hence are unjust. Nevertheless, progressive and regressive nature of tax depend on various other factors such as manner of its redistribution, scope of its applicability, etc.

 

India recently has brought major economic reform by bringing Goods and Services Tax (GST) which has subsumed over 17 types of taxes of indirect nature. Prior to GST ratio of direct and indirect taxes in India was 30:70 approximately. Taxes being the biggest source of revenue in India, this ratio clearly indicates the huge reliance on indirect taxes for revenue generation through taxes in India. India being a nation with huge economic and social disparities amongst its citizens calls for a need of economic policy of government which serves a role of more than a mere minimal state as suggested by Robert Nozick. This disparity coupled with need of reducing inequalities, increasing social welfare, resource mobilization, regional development, control of inflation, foreign exchange and other variety functions of a welfare state makes out a case for need of taxes in India. However, fundamental question remains what shall be subjected to tax in order to be just?

 

As suggested by John Rawls proportional expenditure/ consumption tax is most appropriate form of tax as it will tax people on the basis of how much they make use of the goods and services produced and not according to how much they contribute i.e. (income). However, proportionate expenditure tax or consumption based tax may prove to be highly regressive if applied to goods or services of necessity which might be consumed equally by every citizenirrespective of being rich or poor and thus may prove to be detrimental to the common good especially for those who are advantaged least.

 

Here it is worthwhile to mention that Goods and Services Tax (GST) in India which is a consumption-based tax has resorted to adopt multiple rate structured GST in order to prevent its regressive nature being detrimental to the poor. Further goods and services of necessity such as basic edibles, handlooms, certain fabrics, basic public transport services, school education, canteen stores, health services, etc have been specifically exempted from the imposition of GST.33 However, regressive nature would still continue to exist as benefit of exemption or reduces rates are extended to everyone irrespective of the economic background of person who consumes goods or services. Besides this Direct Taxes in India which are accretion based are mostly progressive in nature keeping into consideration interest of the least advantaged. Let us say for example income tax in India follows progressive slab rates that are revised every financial year.

 

One might argue that despite regressive nature of indirect taxes why Indian tax system targets indirect taxes more in comparison to direct taxes as it would be unjust to subject everyone to same level of tax rates, exemptions or reduced rates. The justification lies in the fact that India being developing nation gets a wider coverage or tax base as compared to direct taxes. So, even though both rich and poor pay indirect taxes in form of commodity price but its regressivity gets marginalized on revenue generated being utilize more in favor of least advantages such as free health care facilities, free education, rural development programs, rural employment schemes and so on and so forth.

 

Besides this high rate of taxes on luxury goods will take away resources from the rich which can subsequently be re-distributed among the poor in the form of subsidies. Further, taxes on product like alcohol, cigarettes can have beneficial effect on consumption pattern which serve yet another social purpose. Thus it can be concluded that both direct and indirect taxes are essential to reduce unacceptable levels of inequalities of income and wealth. And it is only through a well oriented system of taxation having combination of direct & indirect taxes in different proportions that a society may justly apportion the burden of paying for collective expenditure.

 

6. REFERENCES:

1.      Mark J. Fitzgerald, Justice in Taxation, 15(2) Review of Social Economy (1957) 138.

2.      Ibid.

3.      Ibid.

4.      ROBERT NOZICK, ANARCHY, STATE, AND UTOPIA, 169 (1974).

5.      Harry Kalven, Jr. & Walter J. Blum, The Anatomy of Justice in Taxation, 7 University of Chicago Law Occasional (1973) 9-10.

6.      Ibid.

7.      The Brookings Institution, What Should Be Taxed: Income or Expenditure? (Joseph A. Pechman Ed. 1980).

8.      Charles O'Kelley, Rawls, Justice, and the Income Tax, Seattle University School of Law Digital Commons (1981).

9.      Ronald M. Green, Ethics and Taxation: A Theoretical Framework, 12(2) The Journal of Religious Ethics, (1984) 150, 146-161.

10.   Id. 151

11.   John Rawls, A Theory Of Justice (Revised Edition), Harvard University Press, (1999) Pp. 243

12.   Id. Pp.11

13.   Sampurnaa Dutta, Rawls’ Theory of Justice: An Analysis, 22(4) JHSS (April. 2017) 41, 40-43.

14.   John Rawls (Pp. 52-53).

15.   John Rawls (Pp. 52-53).

16.   Charles O'Kelley, Rawls, Justice, and the Income Tax, Seattle University School of Law Digital Commons (1981).

17.   J. S. Mill, Principles of Political Economy 258, 259 (5th London Ed. 1883).

18.   John Rawls (Pp. 275).

19.   John Rawls (Pp. 245).

20.   John Rawls (Pp. 246).

21.   John Rawls, Justice as Fairness: Political not Metaphysical, 14 (3) Philosophy and Public Affairs (1985) 223–51.

22.   John Rawls (Pp. 161).

23.   John Rawls (Pp. 246).

24.   Ibid.

25.   R. NOZICK, (p. ix)

26.   Id. (Pp. 25-27).

27.   Salahuddin A, Robert Nozick’s Entitlement Theory of Justice, Libertarian Rights and the Minimal State: A Critical Evaluation, 7 (1) J. Civil Legal Sci (2018) 2.

28.   M. Lacewing, Rawls and Nozick on Justice, Routledge, available at: http://cw.routledge.com/textbooks/alevelphilosophy/data/A2/Politcal/JusticeRawlsNozick.pdf (Last assessed on March 30, 2018)

29.   Salahuddin A, Robert Nozick’s Entitlement Theory of Justice, Libertarian Rights and the Minimal State: A Critical Evaluation, 7 (1) J. Civil Legal Sci (2018)1.

30.   Philip Green, Equality Since Rawls: Objective Philosophers, Subjective Citizens, and Rational Choice, 47 (3) The Journal of Politics (Aug., 1985), 973, 970-997.

31.   Ronald M. Green, Ethics and Taxation: A Theoretical Framework, 12 (2) The Journal of Religious Ethics (1984) 148, 146-161,

32.   Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, (5th ed. 1904).

33.   Section 11, Central Goods and Services Act, 2017

 

 

 

Received on 17.05.2019            Modified on 24.05.2019

Accepted on 30.05.2019            © A&V Publications All right reserved

nt. J. Rev. and Res. Social Sci. 2019; 7(2):359-364.

DOI: 10.5958/2454-2687.2019.00027.3