The only constant 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.

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. The fiscal social contract suggests that taxes are the rent we pay for our civil amenities: peace, order, and good government. We pay taxes because we get something in return. The roads and bridges and electricity purchased by taxation provide the necessary means for commerce to function. Taxes and transfers are an efficient method of redistributing income and expenditure over one’s lifetime.

Tax is fundamental to how society operates and to the wellbeing of its citizens. The state collects taxes because citizens give them that right to fulfil the three key functions: allocation, distribution, and stabilisation. The right of a country to tax imposes significant duties upon individual taxpayers and the failure to discharge this duty may carry tremendous legal consequences. 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 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. By framing taxation as an existential prerequisite, we can see its real gravamen. Without money or the ability to raise money, a functioning state is impossible. Tax money is necessary to build the branches of government and its institutional apparatus.

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. Political processes give taxpayers an opportunity to influence how and to what extent they are taxed. By agreeing to be taxed by forming a representative, democratic government, taxpayers are more likely to feel a “natural moral duty” to pay their taxes. This is because taxpayers will feel they have an adequate voice in how tax burdens and benefits are distributed and will perceive that the tax system and its administration are fair and just. 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.

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 issued in February 2019 (which formed a positive view of New Zealand’s introduction of comprehensive 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

-Content contributed by Dr. Ranjana Gupta, CPA Senior Lecturer, Taxation Faculty of Business and Law Auckland University of Technology, Director at Tax Professionals. Contact the Tax Professionals team at: 09 213 7315 or online at www.taxprofessionals.co.nz