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Auckland, December 19, 2020
Tax is fundamental to how a society operates and to the wellbeing of its citizens.
The only constant factor about the fiscal social contract of tax and democracy is that taxes will be levied and engagement of citizens in tax matters, and an involvement boosts the spirit of the fiscal social contract, says a study conducted by Dr Ranjana Gupta, Senior taxation lecturer, Auckland University of Technology.
Taxation and Democracy
The Research, “The Case for Tax in Democracies,” attempts to evaluate the concept of nexus between taxation and democracy, whether it could be held that the two form a fiscal social contract between the state and its subjects and its relevance today.
Examining the exercise of government, from the earliest Athenian and Roman times through to the present government, the Research shows that such a contract is struck and is relevant today.
The Study found that in these States, the voters agree to pay high taxes because they believe that they are receiving quality public goods.
The Study restates a former United States’ Supreme Court Justice Oliver Wendell Holmes’ observation without taxes, there could be no society or civilisation; however, without society or civilisation, there could be no economic activity which to tax.
Accessible and transparent
The Study shows that the existence of a fiscal contract in a democracy implies that the terms of that contract should be accessible and transparent for members of that political community to review and, at least theoretically, consent to.
Given that tax plays a crucial role in all manner of transactions, and that the revenue generated from the collection of taxes enables the majority of public services people enjoy, taxpayers must understand how the taxes they pay are used.
Further, it shows that democratic leaders are sensitive to public support and tend to fund social services at higher levels. In non-democracies, the political leadership and its sponsors are a small minority of taxpayers.
Non-democracies are isolated from popular pressures and tax is more, even while they would spend little on the poor.
Promoting mutual interest
Dr Gupta said that the taxpayer and the taxing authority have a mutual interest in the health and vibrancy of the socioeconomic system.
However, political institutions (political authority) have an indirect influence on taxpayers and legislators. The composition of the Party System and the relative strength of parties and worldviews profoundly shape the nature of state intervention and the resulting social and economic policies.
For instance, in response to the Tax Working Group’s Final Report published in February 2019 (which formed a positive view of New Zealand’s introduction of comprehensive Capital Gains Tax (CGT), the Labour-led Government met a concerted resistance from lobbyists as well as from its coalition partner, New Zealand First.
The government subsequently renounced any intention to pursue a comprehensive CGT.
This reversal can be viewed as an exception to democratic government action.
Consequently, governmental policy and in this instance taxation policy should strike that right balance.
Editor’s Note: Dr Ranjana Gupta’s Study, titled, ‘A case for Tax in Democracies’ is one of the most impressive and convincing documents on the subject. The 30-page Report outlines Taxation in various forms of political systems, carries a comparative analysis of the Tax system in Australia, the evolution of democracy in New Zealand.
The following is an extract from her introductory remarks:
Consensual Notation
The overwhelming role of the tax system is very important in a democracy as it assures state revenues to finance public goods and redistribution of wealth. Redistribution is mainly done via targeted government spending. In a liberal society, no person is asked to make any payment without consent.
The consensual notion of taxation is as old as Western Civilization – Article 12 of Magna Carta provides that no taxes may be levied without the ‘general consent’ of the populace.
Further iterations of this bold assertion appear in the English Bill of Rights 1688, and the American Declaration of Independence.
The idea that citizens have a right to approve taxation levies has enormous cachet, and this idea has had a profound effect on the development of human society.
While undoubtedly man existed cooperatively within clans and tribes pre-antiquity, it is recognised that Cleisthenes, an Athenian nobleman, introduced the first form of governmental democracy in 507-508 BC. For completeness, the literal meaning of democracy is Greek in origin and derived ‘demos’ meaning people and ‘kratos’ meaning rule.
Dr Ranjana Gupta is Senior Lecturer, Taxation (Faculty of Business and Law) at Auckland University of Technology. The above Report has been sponsored by
