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Published online by Cambridge University Press: 24 January 2025
The purpose of this paper is to pose one question — should the Australian income tax system of the twenty-first century belong to the descendants of Henry Simons or to those of Frank Ramsey? Put another way, my topic is whether future tax policy should continue to be framed according to notions of comprehensive income tax or, instead,should be directed towards the goal of an optimal income tax.
1 The use of this term springs from the work of Robert Haig as elaborated by Henry Simons. Haig’s definition of income as the money value of the net accretion to economic power between two points of time was later elaborated by Simons as the sum of the value of consumption plus net accretion to savings during a period. See R M Haig, “The Concept of Income” in R M Haig (ed), The Federal Income Tax (1921); H C Simons, Personal Income Taxation (1938). For a general discussion of the Haig-Simons tradition, seeH M Groves, Tax Philosophers (1974), ch 8; M Mclntyre, “Implications of US Tax Reform for Distributive Justice” (1988) 5 Australian Tax Forum 219 at 234-246.
2 A similar definition of the meaning of optimal tax analysis is difficult to construct. An approximation of adefinition will emerge in this paper froma discussion of the principal concerns of the style of analysis.
3 See Australia, Tax Expenditures Statement 1993 (1993) at 1 and 55-60.
4 The best example of this is seen in what is commonly referred to as default assessments where the administrator has to estimate the taxable income of a taxpayer without direct knowledge of the taxpayer’s income; the process occurs precisely because the administrator disbelieves the information provided by the taxpayer. See, for example, L’Estrange v Federal Commissioner of Taxation (hereafter FCT) (1978) 78 ATC 4744. The case concerned the calculation of the income of a taxpayer assessed under an “assets betterment assessment”. The calculation used by the Commissioner and approved by the judge was to reconstruct the taxpayer’s income from his estimated consumption increased by net changes in the value of his assets, reduced by realised capital gains and increased by realised capital losses. Thfe last two adjustments were necessary because of the overlay of the lawyers’ notion of income, and the structure of the Assessment Act at that time, which did not include capital gains. Now the similar calculation would require the elimination of fringe benefits and realised capital losses from the employee’s income and the inclusion of realised capital gains.
5 See Parsons, R W, “Income Taxation: An Institution in Decay” (1991) 13Google Scholar Sydney L Rev 435.
6 However, while the Australian income tax system may be based on the Haig-Simons concept, many important differences remain when the Haig-Simons net accretion concept of income and the notion of income actually legislated are contrasted. First, the tax base is different. The Haig-Simons definition clearly includes capital gains, gifts and windfalls, a proposition which has been excluded by the schedular approach to income, derived from the English system, at least as it has been interpreted by Australian judges. This approach need not have been taken and is quite contrary to our global income definition — a matter which the High Court acknowledged in State of South Australia v Commonwealth of Australia (1992) 92 ATC 4066, but decided was now too entrenched in Australian tax law to be capable of judicial rectification. See generally Krever, R E, “The Ironic Legacy of Eisner v Macomber” (1990) 7Google Scholar Australian Tax Forum 191. Secondly, the judicial income notion is also linked to a realisation requirement. In fact, so important is our realisation notion that the High Court in FCT v The Myer Emporium (1986) 163 CLR 199 managed to find income from the mere fact of realisation without either flow or gain to the taxpayer. With minor exceptions such as the trading stock valuation rules and depreciation rules, realisation was invariably required under the judicial notion of income, but, as our legislation becomes more sophisticated and Treasury exerts more direct influence over the direction of tax policy formation, realisation is seen as less important and more exceptions to the realisation requirement appear, for example, in the treatment of discounted bonds under Division 16E, the taxation of controlled foreign subsidiaries and portfolio offshore investments and the taxation of financial instruments. Realisation is a relic of the flow concept of income (which requires the severance of income from capital gain), not the accretion concept which is based on gain. Economists in the Haig-Simon tradition concede that it is necessary to have a realisation element in the definition in order for an income tax to be simple to administer, but as Parsons observed (above n 5), if one concedes the realisation requirement it means that the Haig-Simons net accretion tax as defined can never be implemented. Realisation is invariably required before income will be regarded as derived, arid although (unlike the position in the United States) a realisation event is not a constitutional requirement, it is still invariably required in Australia. Thirdly, in the treatment of outlays, losses and expenses, it is necessary to exclude net dissavings from the income tax base but to leave consumption expenditure within the base. This means rules are needed to distinguish consumption from dissaving: is a home office, travelling, entertainment, child minding or a business lunch consumption by the taxpayer or an expense of earning income? The treatment of expenses generally gives rise to problems for the judicial notion of income because almost any expense can be related in some way to the derivation of income. These issues are discussed further below at 423-428.
7 See, for example, Australia, Consultative Document, Taxation of Financial Arrangements (1993) at 5. The Document says: “The proposals in this document are directed towards a system for taxing financial arrangements that is more comprehensive …”
8 Royal Commission on Taxation, Report (1966) (the Carter Commission).
9 Taxation Review Committee, Full Report (1975) (the Asprey Committee).
10 United States Treasury, Blueprints for Basic Tax Reform (1977).
11 For example, the top marginal income tax rates declined in the United States (50 per cent to 33 per cent), United Kingdom (83 per cent to 40 per cent), Canada (34 per cent to 29 per cent) and Australia (60 per cent to 47 per cent). The trend to reduce income tax worldwide, whether by decreasing marginal rates, increasing exemptions or adjusting thresholds, is discussed in a large literature. See, for example, Bird, R M and Cnossen, S M, Personal Income Tax: Phoenix From the Ashes (1990)Google Scholar; M Boskin, “New Directions in Tax Policy” in Boskin, M J and McLure, C E (eds), World Tax Reform: Case Studies of Developed and Developing Countries (1990)Google Scholar; Tanzi, V, “Trends in Tax Policy as Revealed by Recent Developments and Research” (1988) 42Google Scholar Bulletin for International Fiscal Documentation 97; Mintz, J M and Whalley, J (eds), The Economic Impacts of Tax Reforms (1989)Google Scholar. For a general survey of developments in Europe, see Vanistendael, F, “Trends of Tax Reform in Europe” (1988) 5Google Scholar Australian Tax Forum 133.
12 See M Boskin, above n 11 at 3-4; C McLure, “Appraising Tax Reform” in M J Boskin and C E McLure, above n 11 at 282.
13 See Block, F et al, The Mean Season: The Attack on the Welfare State (1987)Google Scholar; McQuaig, L, Behind Closed Doors: How the Rich Won Control of Canada’s Tax System (1987)Google Scholar.
14 Hettich, W and Winer, S, “Blueprints and Pathways: The Shifting Foundations of Tax Reform” (1985)Google Scholar 38 National Tax Journal 423 at 423.
15 See, for example, Slemrod, J, “Do We Know How Progressive the Income Tax System Should Be?” (1983) 36Google Scholar National Tax Journal 361; Seade, J K, “On the Shape of Optimal Tax Schedules” (1977) 7Google Scholar Journal of Public Economics 203.
16 See, for example, P Apps, “The Tax Unit: An Australian Perspective” in J Head (ed), Taxation Issues of the 1980s (1983) 133.
17 See, for example, R Musgrave, “The Nature of Horizontal Equity and the Principle of Broad-based Taxation: A Friendly Critique” in J Head, above n 16 at 27-32; J Head, “Tax Fairness Principles: A Conceptual, Historical and Practical Review” (1992) 9 Australian Tax Forum 65 at 84-99.
18 Goode, R, “Changing Views of the Personal Income Tax” in L Eden (ed), Retrospectives on Public Finance (1991)Google Scholar at 104.
19 J Head, above n 17 at 97.
20 Compare W Hettich and S Winer, above n 14 at 423. They say: “Careful analysis reveals elements in each approach that are missing from the competing traditions, but that will have to be part of any successful synthesis to be developed in the future.”
21 Governments will often finance particular activities through methods such as user-fees or charges which, some would suggest, do not meet the common definition of a tax even though they are taxes in most senses of the word. See Gillette, C P and Hopkins, T D, “Federal User Fees: A Legal and Economic Analysis” (1987) 67Google Scholar Boston University L Rev 795 at 798 footnote 16. They say: “Fees may escape the rubric of taxes where they do not exceed the cost of providing the underlying service.” A Atkinson and J Stiglitz, Lectures on Public.
22 One may doubt whether, as a matter of history, taxes were ever viewed as mere devices for raising revenue. Certainly the tribute demanded by ancient Rome of its colonies served another function — the reinforcement of the subjugation already effected militarily. As Groves observes: “The taxes paid by the ancient Hebrews at the time of the birth of Christ were levied to take 40 per cent of the national income, most of which was for tribute to Rome. It was not without reason that the Hebrews dreamed of a Messiah who would free them from this load.” H Groves, Tax Philosophers: Two Hundred Years of Thought in Great Britain and the United States (1974) at 13. Montesquieu also noted the role of taxes in subjugating conquered peoples while simultaneously spawning resentment against the conquerors. He observed that”… the provinces were plundered by the knights, who were the framers of the public revenue … [making] their oppressive extortions.” Montesquieu, The Spirit of the Laws(T Nugent tr 1949) at 181 [Bk XI, ch 19]. He quoted from Mithridates who said: “All Asia … expects me as her deliverer; so great is the hatred which the rapaciousness of the proconsuls, the confiscations made by the officers of the revenue, and the quirks and cavils of judicial proceedings haveexcited against the Romans.” Ibid.
23 Indeed the similarity between taxation and confiscation is closer and more difficult to distinguish than most would care to admit. W Blum and H Kalven, The Anatomy of Justice in Taxation (1973) at 4 observe: “It is a fundamental proposition of our society, enshrined in constitutions, that private property cannot be taken for public purposes without just compensation; yet these same constitutions explicitly confer the power to tax. The similarity is obvious: there is a taking without just compensation in bothcases.” Others have also remarked upon the similarities between taxation and confiscation. G Brennan and J Buchanan, The Power to Tax: AnalyticalFoundations of a Fiscal Constitution (1980) at 8 say: “The power to ‘tax’ is simply the power to ‘take’. If government wishes to obtain a particular piece of property, it is of no account whether it does so by direct appropriation or by purchase together with a tax imposed upon the original owner amounting to the full purchase price.” However, see Epstein, R, “Taxation, Regulation, and Confiscation” (1982) 20Google Scholar Osgoode Hall L J 433 at 453 where he argues that “while all forms of regulation and taxation are subtle forms of taking of private property, they are not necessarily confiscatory in and of themselves.”
24 C Allen, The Theory of Taxation (1971) at 23 observes: “Most descriptions of the aims of taxation start by saying that taxation is required tofinance government spending. This is misleading. If that were all that was required of taxation, a benevolent government would abolish taxation and finance all its expenditure by printing money or borrowing it … The aim of taxation is to reduce private consumption and private investment so that the government can provide social goods and merit goods to subsidize the poor without causing inflation or balance-of-payment difficulties … The basic function of taxation, then, is to reduce the demands made by the private sector on the country’s productive capacity.” See also C Shoup, above n 21 at 452-454.
25 See generally, Pechman, J, Federal Tax Policy (4th ed 1983)Google Scholar at 836.
26 The encouragement of some activity or transaction can be seen in provisions granting special deductions for activities which are perceived to be socially desirable such as the deduction of gifts to certain charities to encourage philanthropy, or accelerating depreciation rates and giving investments credits to encourage capital expenditures. Discouraging certain activity is also sought through taxation. For example, in the 1970s during the so-called“energy crisis” the United States attempted to discourage the waste of fuel through the tax system. See Hyatt, S V, “Thermal Efficiency and Taxes: The Residential Energy Conservation Tax Credit” (1977) 14Google Scholar Harvard Journal of Legislation 281. More commonly, incentives are provided in connection with other policies such as the private provision of retirement income, environmental conservation, and encouraging private investment,to name a few.
27 See, for example, W Klein, Policy Analysis of the Federal Income Tax (1976) at 8. He says: “A strong case can be made for the use of the income tax for purposes of redistribution of income or, if you will, without regard to independent revenue needs.” There is nothing particularly new in this use of the income tax. This was the contention of Adolf Wagner who argued that taxation could properly be viewed as an instrument for redistributing wealth within society, but the openness with which he acknowledged this was shocking to many nineteenth century theorists. He wrote: “Taxation can become a regulating factor in the distribution of national income and wealth, generally by modifying the distribution brought about by free competition. I stand firmly by this conception against all polemics. I should even go further now and say that this second, regulatory purpose leads to interference with the uses of individual incomes and wealth. The statement of this second purpose leads to an extended, or if preferred, a second conception of taxation. This is a’social welfare’ concept besides the ‘purely financial’ one.” See Wagner, A, “Three Extracts on Public Finance” in R Musgrave and A Peacock (eds), Classics in the Theory of Public Finance (1958)CrossRefGoogle Scholar at 89. See generally, ERA Seligman, Progressive Taxation in Theory and Practice (2nd ed 1908) at 131-32; Musgrave, R A, The Theory of Public Finance (1959) at 91–94Google Scholar. Deliberate redistributionalgoals are now arguably permanently enshrined in the form of the progressive rate structures common in the income tax laws of most western democracies. It should, however, be noted that there is, strictly speaking, usually no redistribution achieved by the income tax at least in so far as a lawyer’s definition of “distribution” would require — the only exceptions being in the special cases of a negative income tax or a system of refundable tax credits. The closest that the income tax comes to establishing a distribution or redistribution of wealth is, first, in the way that tax expenditures can reinforce existing wealth distributions by not collecting as much as would otherwise be due from a taxpayer, and, second, in the way thatpreferential tax treatment afforded to some activities will encourage resources to be used in those activities and will benefit those individuals who undertake them. While it may be appropriate for economists to treat taxation as effecting the equivalent of redistribution of wealth and income, there isclearly a sense in which taxes do not do so. To make too much of the equivalence serves to obscure the fact that by far the more important redistribution occurs through the uses of funds collected through taxes.
28 C Webber and A Wildavsky, A History of Taxation and Expenditure in the Western World (1986) at 31. See also I Head, above n 17 at 65 who says that “the tax system has long been recognised by political scientists as one of the most important economic and political institutions in a liberal democracy. It has a quasi-constitutional character in the sense that it remains in force, usually with only minor changes over a sequence of budgetary decisionmaking periods.” See also G Brennan and ] Buchanan, above n 23, ch 1.
29 In Australia these manner and form conditions restrict, by procedural rules, the ability of government to enact tax laws which discriminate between States, to introduce tax legislation through the Senate, to impose more than one tax in any taxing Bill, or to impose taxes on subordinate levels of government. They are found in ss 51, 53, 55 and 99 of the Constitution.
30 See, for example, Smith, A, An Enquiry into the Nature and Causes of the Wealth of Nations (R Campbell and A Skinner, eds) (1981) Vol 2 at 825-827Google Scholar [BkV, ch 2, pt 2]. Smith’s formulation of his maxims of taxation (which were not original) has been followed subsequently by many others concerned with devising proper principles for tax imposition and administration. See generally, Asprey Committee, above n 9; Carter Commission, above n 8. A somewhat different formulation, offered by Sneed, differs from its predecessors by including obviously political concerns, such as reducing economic inequality, compatibility with free market systems, and maintaining the existing political order. See generally, Sneed, J, “The Criteria of Federal Income Tax Policy” (1965) 17Google Scholar Stanford L Rev 567. See also A Wagner, above n 27 at 11-12.
31 The concepts underlying this criterion are two: first, that taxpayers who are in an identical position ought to be treated equally (horizontal equity) and, for those who are not in an identical position, the tax burden should differ, a heavier burden falling on those who meet some second order criterion, such as being better able to bear it (vertical equity). Some attempts have also been made to identify a temporal aspect of equitable tax treatment. See, eg, Bravman, M F, “Equalization of Tax on All Individuals with the Same Aggregate Income Over the Same Number of Years” (1950) 50Google Scholar Columbia L Rev 1; Vickrey, W, Agenda for Progressive Taxation (1972) at 172-195Google Scholar; Bale, G, “Temporal Equity in Taxation” (1977) 55Google Scholar Canadian Bar Review 1.
32 The criterion of economic efficiency requires that the base upon which the tax is levied should, unless otherwise intended, be economically neutral so that it does not distort the operation of markets in the private economy by influencing matters such as choices about goods and services to be produced, methods of trading, forms of investment and type of financing. Taxes may affect both allocative and productive efficiency. See A Smith, above n 30 at 825-828.
33 According to Adam Smith, two distinct ideas are involved in the criterion of simplicity.One is that the liability to submit to the tax burden and the amount on which the tax is to be assessed should not be difficult to determine (certainty). The other is that the administrative costs associated with raising each dollar of revenue should be as low as possible. This includes both the taxpayer’s compliance costs of providing the information necessary for the assessment to be made as well as the bureaucracy’s costs of making the assessment and collecting the revenue. The more modern rend is to treat the problem of administration costs as an issue of efficiency: A Smith, above n 30 at 825-828.
34 Financial stabilisation is often seen as a goal of the tax system, as is maintenance of the dominant political order. See generally, J Sneed, above n30; C Webber and A Wildavsky, above n 28, ch 1.
35 There has been much recent debate about the precise meaning of the principle of horizontal equity: whether it implies equality in the outcome of the taxing process or, instead, simply in providing rules which offer equal opportunities (or threaten equal costs) to all judged to be equal ex ante. The divergence between equality of opportunity and equality of outcome as a philosophic issue has never been resolved in the tax context. See, eg, G Brennan,“Horizontal Equity: An Extension of an Extension” (1971) 26 Public Finance 437; M Feldstein, “On the Theory of Tax Reform” (1976) 6 Journal of Public Economics 77; A B Atkinson, “Horizontal Equity and the Distribution of the Tax Burden” in H Aaron and M Boskin (eds), The Economics of Taxation (1980) 3; I Stiglitz, “Utilitarianism and Horizontal Equity: the Case for Random Taxation” (1982) 18 Journal of Public Economics 1; L Kaplow, “Horizontal Equity: Measures in Search of a Principle” (1989) 42 National Tax Journal 139; I Head, above n 17.
36 This is termed a fundamental question because writers from Hobbes to Rawls have considered it one of the first that must be answered after the transition from the state of nature (either actual or mythical) to some form of society. Thus Henry Simons (above n 1) at 3 observed: “So long as poverty and insecurity compel the sovereign to employ every available fiscal device in order to maintain sovereignty, questions of justice are naturally subordinate. Once stable government, and a measure of economic freedom appear, however, considerations of equity are forced to the front. More revenue devices are available than are required. To what extent shall each kind of levy be employed?” It is important to note that the question can also be understood as an absolute or marginal question: how should the total burden of taxation be spread (perhaps including the deadweight loss of the tax), or how should the cost of this additional tax be allocated? See M Feldstein, above n 35 at 90-98 (stressing the distinction in tax analysis between tax policy made in the presence of existing rules as compared to designing a tax system ab initio).
37 Some have argued that absolute principles of distributing tax burdens can never be formulated — the best that can be expected is that a set of principles be formulated which has “relative validity” which would be most likely to dictate different solutions according to whether economic or equity considerations were to be paramount. See A Wagner, above n 27 at 10-14. Edwin Seligman observed: “Our ideals of justice in taxation change with the alteration in social conditions. Not only the actual forms of taxation, but the theories of taxation as well, vary with the economic basis of society.” E Seligman, Essays in Taxation (4th ed 1903) at 1. But the recurrence of the same themes in tax policy literature may suggest that the range of solutions which could have even relative validity is not open-ended. Compare D Bradford, Untangling the Income Tax (1986) at 148 where he says: “Identifying an improvement in tax equity is difficult because there is no single measure of fairness … But there is room for reasoned argument on the subject.”
38 H Simons, above n 1.
39 Other possible definitions of income are considered in R Goode, “The Economic Definition of Income” in IA Pechman (ed), Comprehensive Income Taxation (1977) 3 at 10.
40 N Kaldor, An Expenditure Tax (1955) at 70.
41 See for example, J Stiglitz, “Pareto-Efficient and Optimal Taxation and the New New Welfare Economics” in A Auerbach and M Feldsten (eds), Handbook of Public Economics, Vol 2(1988) at 1021.
42 R A Musgrave, “In Defense of an Income Concept” (1967) 81 Harvard L Rev 44 at 47.
43 This notion of the “tax expenditure” was elaborated in S Surrey, Pathways to Reform (1973) and S Surrey and P McDaniel, Tax Expenditures (1985). See also Thuronyi, V, “Tax Expenditures: A Reassessment” (1988) 55Google Scholar Duke L J 1155; M Mclntyre, “A Solution to the Problem of Defining a Tax Expenditure” (1980) 14 University of California Davis L Rev 79.
44 See, for example, Kelman, M, “Personal Deductions Revisited: Why They Fit Poorly in an ‘Ideal’ Income Tax and Why They Fit Worse in a Far From Ideal World” (1970) 31Google Scholar Stanford L Rev 831.
45 Probably the most vocal opponent of the comprehensive tax base tradition was Boris Bittker. See, for example, Bittker, B, “A ‘Comprehensive Tax Base’ as a Goal of Income Tax Reform” (1967) 80Google Scholar Harvard L Rev 925; Bittker, B, “Comprehensive Income Taxation: A Response” (1968) 81Google Scholar Harvard L Rev 1033.
46 Boris Bittker’s original argument was advanced in B Bittker (1967), above n 45. Replies followed from Richard Musgrave, Joseph Pechman and others. See R A Musgrave, above n 42; J Pechman, “Comprehensive Income Taxation: A Comment” (1967) 81 Harvard L Rev 63; C O Galvin, “More on Boris Bittker and the Comprehensive Tax Base” (1968) 81 Harvard L Rev 1016. Bittker’s rejoinder was published as B Bittker (1968), above n 45.
47 As Head puts it: “[Simons provides] a detailed conceptual and practical discussion of the income concept which has had a truly remarkable influence on practical tax policy analysis over the following half century. At the conceptual level, his net accretions or comprehensive income concept … has long become accepted as the benchmark in the design of an income tax base.” J Head, above n 17 at 75.
48 See Institute for Fiscal Studies, The Structure and Reform of Direct Taxation (1978) (the Meade Committee) at 127-128.
49 See the Meade Committee, above n 48 at 32-33.
50 This definition was the notion underlying the definition of income adopted for the purposes of the United States income tax system by the United States Supreme Court in Eisner v hAacomber (1920) 252 US 189. Pitney J at 207 referred to income as “the gain derived from capital, from labor, or from both combined.” This definition was subsequently rejected in the 1950s by the Supreme Court as being too narrow in Commissioner v Glenshaw Glass (1955) 348 US 426. That Court decided (at 430) that the earlier definition “was not meant to provide a touchstone to all future gross income questions” and they replaced it with the definition of income as “an undeniable accession to wealth, clearly realised, and over which the taxpayers have full dominion.” Despite these prevarications, the United States experience still compares tolerably well with the position in Australia where the first attempted definition expressed by the judiciary was that an amount was income if it was common to call it income. See Scott v Commissioner of Taxation (NSW) (1935) 35 SR (NSW) 215 at 219 where the Court said: “The word ‘income’ is not a term of art, and what receipts are comprehended within it … must be determined in accordance with the ordinary concepts and usages of mankind.”
51 Warren, A, “Would a Consumption Tax be Fairer Than an Income Tax?” (1979) 89Google Scholar Yale LJ 1081 at 1084-1085.
52 H Simons, above n 1 at 51.
53 Ibid.
54 Ibid at 52.
55 Ibid at 111-12 and 206-208.
56 Ibid at 206-207.
57 Ibid at 113. Emphasis in original.
58 Compare B Bittker (1967), above n 45 at 948-949 who argues that the size of the exemption for imputed income in kind from personal property could be as substantial as other special exemptions which would have to be eliminated if a truly comprehensive tax base were to be implemented.
59 H Simons, above n 1 at 54 and 74.
60 See for example, Andrews, W D, “Personal Deductions in an Ideal Income Tax” (1972) 86Google Scholar Harvard L Rev 309.
61 H Simons, above n 1 at 17.
62 He comes to this conclusion because: “[Sacrifice denotes something psychical, something psychological. A tax takes away commodities which are something material, something tangible. To ascertain the actual relations between something psychical and something material is impossible. No calculus of pain and pleasure can suffice, for no attempt to reduce the heterogeneous to the homogeneous can ever succeed.” E Seligman, above n 37 at 222.
63 His subsequent revisiting of the issues in the 1950s was again largely concerned with practical and administrative issues. See H C Simons, Federal Tax Reform (1950).
64 The vast literature on optimal taxation was summarised in A Sandmo, “Optimal Taxation — An Introduction to the Literature” (1976) 6 Journal of Public Economics 37. For a more recent survey, see J Stiglitz, above n 41 and above n 21, ch 20.
65 J Stiglitz, above n 21 at 480 says: “The optimal tax structure is the one that maximizes society’s welfare, in which the choice betweenequity and efficiency best reflects society’s attitudes towards these competing goals.”
66 F Ramsey, “A Contribution to the Theory of Taxation” (1927) 37 Economics Journal 47.
67 See A Sandmo, above n 64 at 38-39; Baumol, W and Bradford, D, “Optimal Departures from Marginal-Cost Pricing” (1970) 60Google Scholar American Economic Review 265; Auerbach, A, “The Theory of Excess Burden and Optimal Taxation” in Auerbach, A and Feldstein, M (eds), Handbook of Public Economics (1988) Vol 1, 61 at 61-62Google Scholar; Musgrave, R, “A Brief History of Fiscal Doctrine” in Auerbach, A and Feldstein, M eds, Handbook of Public Economics (1988) Vol 1 at 28Google Scholar.
68 F Ramsey, above n 66 at 47.
69 He does, however, offer some comments on the proper treatment of taxing the return to savings under an income tax. See F Ramsey, above n 66 at 58.
70 Ibid at 58.
71 Ibid at 54.
72 It is interesting to observe that, in some quarters, the conventional wisdom has survived largely intact. The policies adopted by the Coalition parties at the 1993 election, described in their policy documents Fightback! (Liberal and National Parties, 1991) and Fightback! Fairness and Jobs (Liberal and National Parties, 1992) focused on a single flat rate VAT-style consumption tax levied at a rate of 15 per cent — precisely the kind of rate structure that Ramsey had criticised.
73 The precise circumstances under which the Ramsey result holds are those in which other strict conditions are met (such as that there are no income effects and that cross-price elasticities are zero). See generally, A Atkinson and I Stiglitz, above n 21 at 366-93; IA Mirrlees, “Optimal Commodity Taxation in a Two-Class Economy” (1975) 4 J Public Economics 27; P A Diamond, “A Many-Person Ramsey Tax Rule” (1975) 4 J Public Economics 335.
74 Compare A Atkinson and I Stiglitz, “The Structure of Indirect Taxation and Economic Efficiency” (1972) 1 J Public Economics 97 at 117 where they say that “the conclusion that goods with a low income elasticity should be taxed heavily brings out very sharply the conflict between equity and efficiency considerations. The recognition of equity objectives would be expected to lead to important modifications of the conclusion.” Diamond, P A and Mirrlees, J A, “Optimal Taxation and Public Production I: Production Efficiency” (1971) 61Google Scholar American Economic Review 8;
75 Diamond, P A and Mirrlees, I A, “Optimal Taxation and Public Production II: Tax Rules” (1971) 61Google Scholar American Economic Review 261. The seminal paper on optimal taxation of income is J A Mirrlees, “An Exploration in the Theory of Optimum Taxation of Income” (1971) 38 Review of Economic Studies 175.
76 P A Diamond and J A Mirrlees, above n 75 at 9.
77 It is curious to remark in passing the almost universal assumption that any tax that changes behaviour is inefficient and, therefore, to be avoided. Of course, in other contexts such as Pigovian carbon taxes to reduce pollution, taxes are advocated precisely because they change behaviour and increaseefficiency.
78 See A Sandmo, above n 64 at 38: ‘Although lump sum taxes can be envisaged in the context of a once-and-for-all levy, it is much more difficult to imagine such taxes as a permanent system.”
79 See J Stiglitz, above n 41 at 1006. Emphasis in original.
80 Dodge, J M, The Logic of Tax (1989) at 288–289Google Scholar says: “An income tax simply can’t exist in a Pareto-optimal world. Even the broadest-basedincome tax will distort some economic decisions such as that between working for wages and leisure or self-provided services.”
81 J Stiglitz, above n 41 at 1021.
82 A Atkinson and J Stiglitz, “The Design of Tax Structure: Direct Versus Indirect Taxation”(1976) 6 J Public Economics 55 at 56-58.
83 J A Mirrlees, above n 75 at 178.
84 J Stiglitz, above n 21 at 480. Compare A Sandmo, above n 64 at 37, who says that “the optimal tax system is the one which minimises the aggregate deadweight loss for any given tax revenue or level of public expenditure.” Stiglitz’ definition is a more comprehensive formulation ofoptimality incorporating equity considerations, while Sandmo’s earlier formulation was directed toward the single issue of efficiency.
85 It is also assumed that consumption and leisure have declining marginal utility, that they are both greater than zero and that the U curve is strictly concave. Making the observation that individuals differ in endowments and tastes then creates other problems for the models and welfare functions which are proposed on an assumption that all individuals are identical. The point is often made in the literature that if it is simply assumed that all individuals are identical and have the same welfare function, a government could simply impose uniform lump-sum taxes on individuals with no loss of welfare. The problems arising from the assumption that individuals have the same utility function — that they have identical tastes and preferences — has been remarked upon in the literature. See generally, I A Mirrlees, above n 75 at 176.
86 Although, of course, if more factors were admitted into the definition, the individual might prefer more of something else in preference to either.
87 See Bankman, J and Griffith, T, “Social Welfare and the Rate Structure: A New Look at Progressive Taxation” (1987) 75Google Scholar California L Rev 1905 at 1948-1949; Dworkin, R, “Is Wealth a Value?” (1980) 9Google Scholar J Legal Studies 191.
88 See generally, I Stiglitz, above n 21 at 405-409; A Atkinson and J Stiglitz, above n 21 at 339-343 and 394-397.
89 See H Simons, above n 1 at 41-42.
90 Ibid at 1.
91 Ibid at 18-19.
92 Compare W Hettich and S Winer, above n 14 at 424.
93 See M Feldstein, above n 35 at 83. Compare D Bradford, above n 37 at 148. Bradford says:”Those with better opportunities than others should beexpected to bear relatively more of the tax burden.” The resolution of this dilemma between basing taxes on opportunities or outcomes is seen in the optimal tax literature in the emphasis given to trying to tax endowments such as earning potential rather than the outcome of earning in reported wages. See generally, D Bradford, above n 37 at 154-57 and 167-69.
94 H Simons, above n 1 at 19, quoted more fully three paragraphs above.
95 L Kaplow, above n 35.
96 J Head, above n 17 at 87.
97 H Simons, above n 1 at 19.
98 ibid.
99 Carter Commission, above n 8, Vol 1 at 4.
100 A Atkinson and I Stiglitz, above n 82 at 74.’
101 Ibid at 57.
102 It is also not self-evident why tastes should be considered relevant to the determination of relative tax shares. Compare B Bradford, above n 37 at 148 (admitting only endowments, or “opportunities” as he puts it, as relevant to determining the individual’s tax share).
103 See, eg, I Stiglitz, above n 41 at 1011. Stiglitz says: “There is no agreement about how to define the set of admissible tax structures.” Interestingly, Stiglitz goes on to define the constraints on admissibility as coming from technological and administrative limitations, not from notions of social equality.
104 I Head, above n 17 at 97.
105 H Simons, above n 1 at 205.
106 Ibid at 49.
107 I Head, above n 17 at 88.
108 Carter Commission, above n 8.
109 Sen, A, “The Impossibility of a Paretian Liberal” (1970) 78Google Scholar J Political Economics 152.
110 See, for example, J Stiglitz, above n 41 at 1038: “Popular views of fairness seem inconsistent with these results produced by the utilitariancalculus.” A Atkinson and J Stiglitz, above n 74 at 117 say that “the conclusion that goods with a low income elasticity should be taxed heavily brings out very sharply the conflict between equity and efficiency considerations. The recognition of equity objectives would be expected to leadto important modifications of the conclusion.”
111 This is taken to an extreme in a suggestion that, in certain circumstances, taxation should be designed to be random. See J Stiglitz, above n 35 and above n 41 at 1011-1014.
112 G Brennan and I Buchanan, above n 23.
113 A Warren, above n 51 at 1114-1115.
114 J Head, above n 17 at 89.
115 why she might prefer this position is rarely a serious matter for analysis in economics. It falls into the “black hole” for analysis called values, tastes and preferences.