CORPORATE TAXATION

Corporate Taxation

Corporate Taxation

How has the meaning and importance of equity (fairness) in taxation changed since Adam Smith included it as one of the Canons of Taxation?

Income tax is an emotive issue in every country, and Ireland is no exception. It involves states using coercion to appropriate a fraction of people's earnings in order to finance government spending. This implies a huge responsibility on taxing authorities to carry out the operation in a manner that is fair, or at least acceptable to the majority of taxpayers. The purpose of this essay is to examine whether or not the Irish income tax system is a good system. Thus, the issue of fairness is crucial and will be the central theme.

Adam Smith's canons of taxation of 1776 provide certain criteria by which a tax system can be assessed, and this essay discusses them. In doing so it will examine definitional problems associated with the term 'good tax system' and ask whether such a system is possible in practice. Turning to the income tax system in Ireland, this essay will look at issues such as the size of the tax base and proposed reforms. It will conclude that the system is flawed and resistant to change. Far from being fair, the best the government can hope for is that the tax regime is accepted. (Melville 2009: 600-626)

Smith's canons of taxation can be considered under the headings of equity, efficiency, and ease and cost of administration. The principle of equity raises the most fundamental problems in terms of the vagueness and contestability of the concept of fairness. According to Smith, horizontal equity and vertical equity respectively require the equal treatment of similar incomes and an appropriate degree of inequality in the treatment of different incomes.

The most obvious problem arises in interpreting and applying the latter. An appropriate degree of inequality can have very subjective interpretations. However, even the seemingly innocuous concept of horizontal equity is not uncontested. For instance, as Allen (1971) points out, one could plausibly hold the view that equity is best served by "making tax payment proportional to the degree of benefit derived from government expenditure" (Allen 1971:47). In this case a person's income is not considered directly relevant and horizontal and vertical equity are of no consideration.

Although there is an attractive simplicity to this notion, its unpopularity would doubtless make it unworkable, but it does serve to highlight the ambiguities surrounding the concept of fairness. According to Ruane and O'Toole, equity suggests a progressive tax structure, which considers an individual's ability to pay and applies higher rates of tax to higher incomes and this is generally accepted. (Melville 2009: 600-626)

In Ireland, the system of taxation nominally embodies the principle of progressivity, although it can be more accurately described as a crude approximation of the concept. Income is taxed at two incremental rates, but only after a series of allowances, exemptions, reliefs and exclusions, which greatly reduce the sum of taxable income in the economy, have been ...