“The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities.” (Adam Smith, 1776)

In two months, the 2017 CIAT General Assembly will be held in Asuncion, Paraguay. The theme for this year’s meeting will be “Advances of the tax administrations towards greater taxpayer equity by improving effectiveness and efficiency.”

While taxation has been around for a good number of centuries, the canons of taxation were first presented by Adam Smith in his famous book “The Wealth of Nations.” These canons of taxation define numerous rules and principles upon which a good taxation system should be built. Although these canons of taxation were presented a good while back, they are still used as the foundation of discussion on the principles of taxation.

Adam Smith presented 4 canons of taxation, which are also commonly referred to as the Main Canons of Taxation:

1. Canon of Equality
2. Canon of Certainty
3. Canon of Convenience
4. Canon of Economy

Interestingly enough, the first canon is “equality.” And that is somewhat the theme of the 51st CIAT General Assembly. But what do we mean by “equality” and “equity?” For sure Adam Smith’s concept was clear from an economist’s perspective. The word equality here does not mean that everyone should pay the exact, equal amount of tax. What equality really means here is that the rich people should pay more taxes and the poor pay less. This is because the amount of tax should be in proportion to the abilities of the taxpayer. It is one of the fundamental concepts to bring social equality in the country. The canon of equality states that there should be justice, in the form of equality, when it comes to paying taxes. Not only does it bring social justice, it is also one of the primary means for reaching the equal distribution of wealth in an economy.

Our first reaction here may be, and what about “equity?” Are we as tax administrators going to ensure that the rich pay more than the poor? Maybe. But not by imparting the tax law as we see it fit. In most states, a modern tax policy should ensure “equality” and “equity” through tax statutes. Certainly, there is merit for an argument here as to whether indirect taxation (e.g., Value-Added Taxes – VAT) versus direct taxation (e.g., Corporate and Personal Income Tax – CIT, PIT) benefit the rich in a greater proportion than the poor. (Whether you’re a low-, medium- or high-income family, there’s a limit to the number bowls of cereal you can eat for breakfast.) And when we look at the significant percentage of revenues generated from VAT in many countries, well, then the argument is even greater. However, in most jurisdictions those “regressive” and “equality” tax issues are addressed by exemptions of VAT on basic food items and medicines, as well as other social/entitlement programs.

The argument of unfairness can even be made with direct taxation. Let’s take for example individuals who annually file a Personal Income Tax declaration. If they’re married, chances are that they pay less taxes than single status taxpayers, even when both had the same gross income during a taxable year. When you’re married, and filing a joint tax return with your spouse, your individual deductions are greater than that for a single taxpayer. We can call this “unmarried equality.” Some argue that child-centered tax policies should be separated from marital status so that all taxpayers who care for children will be treated equally.

And what if you’re in a same-sex marriage? Well, some jurisdictions don’t recognize that as a legal status, and therefore, the benefit of filing a joint tax declaration with your spouse. However, these issues and norms are legislated and enacted in the tax laws for the greater social good, and each jurisdiction determines their “greater social good” and partially reflect it in their tax laws.

But let’s get back to the theme of our General Assembly, “Advances of the tax administrations towards greater taxpayer equity by improving effectiveness and efficiency”. Early on we addressed the issue of whether tax administrators are the ones that will ensure “equity” and make the rich pay more than the poor. And the answer to that is, “Maybe.” But this would not be done through a Robin Hood approach to impart social justice. This will be accomplished through greater effectiveness and efficiency of the tax administration. The argument can be made that one’s tax administration is already effective and efficient, thereby, creating greater tax equity for taxpayers. Sadly, this is not always the case. It is much more effortless to control taxpayers who are employees of a firm and who pay all or a good part of their taxes through a Pay-As-You-Earn (PAYE) system; versus a multinational enterprise with a myriad of complexities in their tax declaration due to preferential tax rates by treaty, transfer pricing issues, derivatives from financial instruments, and numerous other tax reduction opportunities.

Though not entirely analogous, a concept comes to mind: it’s much easier hunting at a zoo than out in the savannah. Picture the PAYE taxpayers as the zoo residents.

And that is precisely the issue. Are tax administrations at an effectiveness and efficiency level that would ensure “equity” in the complete and total application of the tax law, be it to the rich as well as the poor? Unfortunately, the answer often is, “No.” And that is for several reasons. The one most often heard is, “We don’t have the resources.” Resources here can be defined as: the general lack of human capital; personnel with adequate training to effectively complete audits at all levels of the taxpayer population, but in particular, control the complex entities previously mentioned; advanced technology to assist in the control process; and, transportation for physical review/inspection of taxpayer operations. And of course, we can add other reasons why tax administrations are not effective and efficient at all levels.

So, the question is, how do we as tax administrators ensure equity and fairness at all levels of our taxpayer population? As tax administrators, our mission is to enforce the tax laws, not auto-enact legislation by our individual actions and values that we believe to be fair and equitable, even when we accept the fact that particular parts of the tax law are extremely difficult to administer. In a complex economic and social environment, it may not be possible to design and administer a tax system that is fair and equitable in an absolute sense. However, a tax system that is generally perceived as fair and equitable is a desirable and achievable goal.

In a free and prosperous society, citizens will generally comply with tax levies as long as certain criteria are met: first, political processes provide citizens with input as to how and to what extent they are taxed; second, public officials serve as good stewards of the resources generated by the tax system; and finally, most citizens perceive that tax burdens and benefits are distributed in a fair and equitable manner. Then we, as tax administrators, need to ensure that the tax laws are applied and executed in a fair and equitable fashion at all levels of our taxpaying public.

The topics to be addressed at the 2017 General Assembly hope to address processes and other actions which some tax administrations have taken to provide equity, equality and fairness in the application of the tax laws to all taxpayers regardless of their economic status.

We look forward to our members’ active participation at this event and learn about good practices in order to reach a proper level of equity and equality in our tax administrations.

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