4.1 MAXIMS OF GOOD TAXATION
Adam Smith famously set out four ‘maxims’ of what constitutes good taxation.13
i. Equity: taxpayers should contribute proportionately based on their activities;
These can be summarised as follows:
7 For example, HMRC charges a £100 penalty for late payment of tax returns
<http://www.hmrc.gov.uk/sa/dead-pen.htm>, and interest on late payments
<http://www.hmrc.gov.uk/RATES/interest-late.htm> Accessed 16/6/2010.
8 McKnight (Inspector of Taxes) v Sheppard [1999] 1 WLR 1333.
9 See also ITTOIA, s.34.
10 Expenditure to be deducted must be ‘wholly and exclusively’ for the purposes of the trade, profession or vocation. The ruling in Commissioners of Inland Revenue v E.C. Warnes & Co Ltd [1919] TC 227 ruled that penalties were not losses connected with and arising out of a company's trade so therefore were not deductible.
11 Lord Hoffmann explained that penalties were non-deductible as the “purpose is to punish the taxpayer and…the legislative policy would be diluted if the taxpayer were allowed to share the burden with the rest of the community…” See n.8.
12 An assumption put forward in Smith A, An Enquiry into the Nature and Causes of The Wealth of Nations (London: W. Strahan and T Cadell, 1776).
13 Ibid, Book V, Chapter II Part II.
33
ii. Certainty: taxes must be certain and not arbitrary;
iii. Convenience: taxes must be payable at a time most convenient for the taxpayer.
iv. Economy: taxes must be economical to collect.
4.2 EQUITY
To achieve ‘equity’ in this sense, is generally a policy issue. The proportion of the contribution required from the taxpayer’s income will vary between different States depending upon what, if at all, they deem to be a necessary redistribution of wealth.
Applying this to environmental taxation, equity could arguably be achieved by taxing an amount to justifiably represent the quantity of environmental harm, such as on a taxpayer’s GhG (Greenhouse Gas) emissions.14 Klein and Bankman describe alternative understandings of ‘equity’ for the purpose of a tax; ‘vertical’ equity can be achieved by taking into account a taxpayer’s ability to pay when introducing a tax, while ‘horizontal’ equity can be achieved if taxpayers in similar circumstances are taxed similarly.15
4.3 DRAFTING CLARITY
In order to achieve all of these maxims, particularly in terms of the ‘certainty’ maxim, the way the tax legislation is drafted is crucial. Developing clear legislation creates both
14 This adopts the definition given by Article 1 of The United Nations Framework Convention on Climate Change (1994) (the ‘UNFCCC’) “‘Greenhouse gases’ means those gaseous constituents of the atmosphere, both natural and anthropogenic, that absorb and re-emit infrared radiation.” The ultimate objective of the UNFCCC is to achieve "... stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system.” (Article 2)
<http://unfccc.int/essential_background/convention/background/items/1349.php> Accessed 5/3/2010.
15 Klein WA & Bankman J, Federal Income Taxation 11 (New York: Wolters Kluwer Law & Business, 1997) 19.
34
certainty for the taxpayer, and makes revenue more economical to collect as there will be less litigation over unclear drafting. Clear drafting avoids differing interpretations so means it will be more straightforward to collect taxes. In the UK, HMRC (Her Majesty’s Revenue and Customs) are attempting to redraft primary direct tax legislation so that it is clearer and easier to use; such rewriting has already saved the Revenue millions of pounds and they have predicted this will continue.16 Sindico urges States when drafting climate taxes in particular to be “very clear and not leave any space for possible ambiguity.”17
Precision in the text will also prevent undesired consequences. This was highlighted in HM Treasury’s 1997 Statement of Intent, which set one ‘general test of good taxation’ to be “well designed, to meet objectives without undesirable side-effects”.18 An imprecise tax in this context could be too vague, broad or narrow,19 leading to the development of many exceptions, various different interpretations,20 or tax avoidance.21
4.4 NEUTRALITY, PURPOSE AND UNFORESEEN CONSEQUENCES
16 HMRC, ‘Tax Law Rewrite Report and Plans 2008 – 09’ (2008) <http://www.hmrc.gov.uk/rewrite/plans2008-09.htm> Accessed 16/6/2010.
17 Sindico F, ‘Climate Taxes and the WTO: Is the Multilateral Trade Regime a further obstacle for efficient domestic climate policies?’ (2006) 3 Economic Policy and Law, Journal of Trade & Environmental Studies 8.
18 HM Treasury news release, ‘Tax Measures to Help the Environment’, 2/7/1997
<http://archive.treasury.gov.uk/budget/1997/hmt4.html> Accessed 3/2/2010.
19 The availability of tax relief for constructors building on Brownfield sites has been criticised for being too narrow, British Property Federation, ‘Brownfield relief ‘too narrow’ says BPF’ 24/2/2008
<http://www.bpf.org.uk/newsroom/pressreleases/document/23328/brownfield-relief-too-narrow-says-bpf>
Accessed 4/2/2010.
20 See Vasconcellos RP, ‘Vague Concepts and Uncertainty in Tax Law’ (2007)
<http://works.bepress.com/roberto_vasconcellos/1> Accessed 17/6/2010.
21 In 2006-7, almost a third of large businesses paid no corporation tax, National Audit Office, Management of Large Business Corporation Tax (London: TSO, 2007).
35
Tax may also be judged by how well it meets its given purpose. If a tax affects behaviour of the market or society, then generally it will be ‘non-neutral’. The success of a tax may be judged by a policymaker according to the extent to which it has encouraged or discouraged an activity the policymaker intended.22 Taxes which do not affect behaviour are ‘neutral’
taxes, and as such will be judged only by the extent to which they have succeeded in collecting the types of revenue the tax was intended to collect.23 Davies explains that “the aim of those designing taxes is to create neutral taxes, unless policy requires a tax to be non-neutral.”24
Furthermore both neutral and non-neutral taxes can be critiqued by the extent of their
undesirable consequences.25 Should a tax cause considerable problems that it did not set out to do, such as in altering human activity in a way which causes negative behaviour
unforeseen by the legislature, then it will be deemed a failure. An example of this is the Landfill Tax,26 which deliberately attempts to affect behaviour,27 by encouraging businesses in particular to invest in waste treatment routes other than landfill sites. The unintended consequence of this has been an increase in fly-tipping28 as people seek to avoid paying the costs of the landfill tax, which in turn has led to an increase in prosecutions for fly-tipping.29
22 It is of course extremely difficult to express certainty about the intention of Parliament.
Consequently this tax has indirectly led to a range of the population becoming criminals, who otherwise would not have been. Hence a well-designed tax will minimise unintended
consequences.
23 Neutral taxes are often sought in order to achieve economic efficiency; see Surrey SS and McDaniel PR, Tax Expenditures (Harvard, USA: Harvard University Press, 1985).
24 Morse G and Williams D, Davies: Principles of Tax Law 6 (London: Sweet & Maxwell, 2008) at 6.
25 Discussed in context of the introduction of Stamp Duty Land Tax in Cannon P, ‘More is Less’ (2003) 6 BTR.
438-442.
26 Introduced under FA 1996 s.40(1).
27 Hansard HC vol 475: Col 1337W (12/5/2008).
28 Hansard HC vol 475: Col 1337W (12/5/2008) shows Parliament’s concerns over fly-tipping due to the imposition of the Landfill Tax.
29 DEFRA, see chapter 1, n.11.
36
In some circumstances the entire function of the tax can be questioned as its operation may fail to meet the requirements of the policy. For example, the Landfill Tax operates by imposing an additional cost for use of landfill, in order to encourage recycling.30 Recycling is economically feasible when there is a demand for recycled goods, but during the recession of 2009 demand for recycled goods collapsed. This led to large stockpiles31 of waste goods that were unable to be recycled or sent to landfill32 resulting in taxpayers having to fund storage until demand returned.33 Hence such taxes are very much dependant on the market remaining buoyant and it is important to foresee such consequences when designing a tax.
The theme of the thesis can be emphasised herein, as taxes and incentives may be able to create a market environment where positive environmental gains are financially beneficial, such as a tax which encourages recycling of waste paper and reliefs to encourage a recycling paper mill.
4.5 COMPLIANCE COSTS AND DISTRIBUTION
The maxims and their contemporary counterparts are reflected in the 1997 Statement of Intent which set out principles of how green taxes should be designed, saying that “environmental taxation must meet the general tests of good taxation.”34
30 Cabinet Office Strategy Unit, ‘Waste not, Want not’ (2002) at 5.
These tests involved designing
31 Marzouk L, ‘Brighton and Hove's Recycling left in Storage after Waste Paper Market Collapse’ The Argus 12/1/2009
<http://www.theargus.co.uk/news/4039014.Recycling_mountain_stored_in_warehouse/?action=complain&cid=
744207> Accessed 20/1/2010.
32 Hope C & Gammell C, ‘Mountains of Recycled Rubbish spring up across UK as Market for Waste Collapses’
The Telegraph 29 Dec 2008 <http://www.telegraph.co.uk/earth/environment/4015775/Mountains-of-recycled-rubbish-spring-up-across-UK-as-market-for-waste-collapses.html> Accessed 10/3/2010.
33 Townsend M, ‘Recycled waste could be stored on MoD bases’ The Observer 16/11/2008
<http://www.guardian.co.uk/environment/2008/nov/16/recycling-waste-military> Accessed 6/5/2010.
34 See n.18.
37
legislation to minimise undesirable side-effects, minimising compliance costs, having an acceptable distributional impact and ensuring that taxation did not hinder international competitiveness.