On the Meaning of ‘Tax’

Classifying transactions as taxes can be problematic, particularly given the uncertainty surrounding the legal meaning of ‘tax’. While it is reasonably easy to identify a statutory tax, such as income tax, classifying other obligations that have the same effect on public finances is not so easy.

Traditionally, tax has been thought of as a compulsory payment, which is not a penalty, fine or user charge, imposed by a public body for a public purpose under the authority of the legislature. This is a long way from being an effective, exhaustive or universally applicable definition.

We argue for an alternative definition: a compulsory transfer of value imposed primarily for a redistributive purpose. Some of the advantages of this definition are as follows:

• by being an exhaustive definition, it helps the general population understand what a tax is and it increases transparency as to the real financial contribution that every person makes to public finances;
• that it distinguishes a tax from other payments to government rather than having to include negative criteria (it is a positive definition). For example, a penalty has punishment as its primary purpose, a fine has behaviour modification as its primary purpose, a service charge or fee has a quid pro quo rationale in relation to the provision of government goods, and interest on a debt to government has the time value of money as its primary purpose.
• by adopting “transfer of value” in place of “payment”, it makes it clearer both that a wider range of financial dealings are included and that a tax is unrequited (or one-sided); and
• by adopting “redistribution”, it gives insight into the appropriate aims of taxation (it is a purposive definition) and it provides more granularity than using the revenue-raising purpose.

In practice, a redistributive purpose means that either the intention or effect is to make net revenue available for redistribution. So, a redistributive purpose can be established ex ante or ex post and, if a payment has no clear purpose, it is a tax if there is revenue available for redistribution.

Procedural features

Imposition under the authority of the legislature and enforceability by law have traditionally been elements of the tax definition. One problem with them is that they relate to procedure, not substance. By relying on procedural features, we are told nothing more than it is a lawful or unlawful tax.

If a tax definition takes account of only substantive elements, a secondary (procedural) descriptor can be used to identify whether it is enforceable, lawfully imposed, or a legitimate exercise of state power. Separating procedural and substantive elements means not confusing procedural and substantive law. So, whether a payment is enforceable, lawful or legitimate becomes a separate consideration from whether the payment is a tax.

Imposed under the authority of the legislature

Notwithstanding its procedural nature, the idea that a tax must be imposed under the authority of the legislature raises at least two other considerations.

1. Does the need for legislation apply only to taxes or does it apply more generally to other transfers to government?

2. What level of detail is required in the enacting statute? Does the scope of the tax need to be detailed or is it enough simply to confer discretion on an official or to permit the use of secondary legislation?

Enforceable by law

Some courts have interpreted enforceability in a non-procedural sense and have equated it with the compulsory nature of a tax (that is, as a substitute for “compulsory”). For example, while a Canadian court chose not to refer to compulsion and only referred to enforceability, a United States court held that the specifics of the enforcement procedure meant that the payment was ultimately secured, thus making it compulsory.

Substantive features

Payment

Payment is generally thought of as a sum of money paid/payable in return for goods or discharge of a debt. While it would not be unreasonable to think of payment in terms of ‘money’s worth’, the temptation is to think only in terms of cash money. This is certainly not the case with “transfer of value”.

Payment also connotes a contractarian perspective; a bargain struck between taxpayer and state. However, the OECD defines a tax as an “unrequited payment”, which means either that benefits provided by government are not in proportion to the payment or that governments provide nothing in return for the payment. So, unrequited clearly signifies no direct bargain between taxpayer and government. It does not deny that taxpayers receive benefits, but it suggests that those they receive have no bearing on what they pay.

Transfer of value does the same job as unrequited.

Compulsory

Not only does compulsion describe the state’s dominance over the taxpayer, it also implies that the payment cannot be avoided. But when does the obligation that cannot be avoided arise? Is it before or after the establishment of liability?

Whether it arises before or after the establishment of liability is the difference between a moral and a legal obligation. Persons and property can be shifted out of the jurisdiction to avoid incurring a liability. To suggest compulsion is somehow present before liability is established is to suggest something akin to there being a moral duty to pay tax; that the taxpayer is under a moral obligation not to ‘shift’. On the other hand, to maintain that compulsion arises after the establishment of liability is to say nothing more than: the law can be enforced. So, a compulsory payment is one that can be forced rather than a payment that has an element of moral obligation attached to it.

That having been said, the compulsory element is more than just a legal obligation to pay. It also includes situations where there is no reasonable alternative but to pay or there is a lack of any real choice. This was described as “effectively compulsory” in AG (NSW) v Homebush Flour Mills Ltd.

Imposed

‘To impose’ denotes the exercise of some kind of power. Whether state or market power, it connotes a one-sidedness. Thus, imposed conveys well the idea that a tax is not by definition a consensual phenomenon and also supports the unrequited nature of tax.

Public authority

Must a tax be paid to a public authority? One could imagine a tax being paid to a charity in lieu of a payment to the tax gatherer as a mandated but permissible alternative, but nonetheless constituting a tax. Thus, there is, arguably, no real need for a transfer to be made to any particular body or institution for it to be a tax. The focus is on the compulsory and redistributive nature of the payment.

Must a tax be levied or imposed by a public authority? This idea is overshadowed by the fact that tax is imposed under statutory authority. It is also unclear as to the extent to which the requirement that a tax be imposed by government is distinguishable from the idea that it be imposed for a public purpose. This ambiguity has eroded the importance of public authority as a defining feature of a tax.

Public purpose

The link between taxation and public purpose is strong, particularly in the United States: that taxes may only be raised for public purposes. This understanding of public purpose puts us on the expenditure side. This means that in order to establish whether a particular contribution is a tax, we need to look at the underlying purpose of the imposition of that levy either ex ante or ex post.

Ex ante implies a discernible intention, which can be evidenced in the usual way: the documents, discussions and debates surrounding imposition. However, the original intent may be challengeable on the basis of the (ex post) effect of the payment. For example, if the intention of a toll is to cover operating and maintenance costs, but it is so successful that it results in net revenue that is available for other public works, the toll should be classified as a tax and not a user charge. Furthermore, this method of identifying the purpose of a payment is independent of the precise nature of the purpose behind a particular levy. This is all to the good, given that public purpose arguably has limited utility as a practicable definitional criteria. This is highlighted by the suggestions that there is no precise definition of public purpose and that it should not be construed in a narrow or restrictive sense.

We propose rejecting the idea of public purpose and replacing it with “redistributive purpose”. Redistribution is arguably the main function of government. Therefore, if the state chooses to take money from one individual and give it to another ‘in the public interest’ then, despite the fact that this is not undertaken for a public purpose (as it is made in relation to an individual), it is nonetheless a form of redistribution and a governmental purpose.

Conclusion

Having “redistributive purpose” at the heart of a tax definition renders redistribution taxation’s primary purpose. Not only does this help us distinguish taxes from other ‘payments’ to ‘government’ but it also helps people have a better handle on what being a taxpayer actually signifies.