Some Modern Principles of Taxation
Adam Smith Revisited

Ian T.G. Lambert

[A paper delivered at the Third Annual Convention of the Congress of Political Economists in Rio de Janeiro, Brazil, in January 1992. Ian Lambert is a graduate in Mathematics and Law from Trinity College, Cambridge. At the time of this paper, he practised law in the Cayman Islands]

INTRODUCTION

Is taxation just democratic theft? There is a modern tendency to think that it is and that any tax is just, provided it is levied by a democratically elected government and is impartially enforced. However, the mere fact that the rules are the same for everyone is no guarantee that they are just. We do not make murder and theft just, merely by allowing everyone to commit such acts on the same terms.

The search for justice in taxation has been virtually abandoned, except by those who seek to use the tax system as a means of redistributing wealth and promoting what they call "social justice", i.e., as an attack on property rights. It seems to be readily conceded by everyone that all taxation must be an attack on property, in the sense that the government (if democratic) is entitled to take without giving anything in return. We need a tax system that embodies the ideas of economic justice and genuinely respects property rights.

At the outset, I should emphasise that by "taxation" I mean the funding of government expenditure where that expenditure cannot properly be funded through any market mechanism, because it is for an essentially intangible service. There are many tangible services which the government provides and which can be put on a proper contractual basis. Typical examples include nationalised or state-owned industries, from telecommunications to coal and steel. These are tangible services and products, which the consumer directly receives and uses. Why, therefore, do governments make it hard for themselves? Surely it is easier to provide the consumer with a service or product for which he is charged a price, and is happy to pay it, than to take a tax begrudgingly handed over to pay for the same service, which is consequently not properly understood or valued by either the producer or the consumer. Throughout the world, such services and products are (rightly) the subject of privatisation programmes, where the consumer is once again made sovereign and dictates the product and its quality, through the market.

However, there are other services which government provides that are essentially intangible and from which the citizen indirectly benefits, such as defence, police, embassies in foreign countries, parliament etc. The provision of these cannot be put on the same market basis as for tangible services and products directly consumed. They must therefore be funded by a levy on the citizen which is necessarily compulsory, and is therefore properly termed "taxation".

This paper considers the principles according to which such taxation should be levied. It uses Adam Smith's four maxims of taxation (put forward over two hundred years ago) as a starting point for sixteen modern principles of taxation which will form the basis of a tax system which is simple, just and lasting.

These principles are founded on a philosophy which does not accept the theory of the "social contract" as the basis for society. Under that theory, every citizen is deemed to have contracted with the state to become a member of society and assume the benefits and burdens of such membership. Under that theory, the taxpayer is already deemed to have agreed to pay the taxes levied on him; and there are consequently no natural limits on the power of the state to tax him.

By contrast, Lambert's Modern Principles of Taxation are founded on the long hallowed principle of restitution -- the moral obligation to restore to another -- in the case of taxation it is the community -- the property or value conferred on him by that other (otherwise than by way of gift or contract). He who takes the benefit must take the burden, but only to the extent and measure of the bent it conferred. On this theory, taxation is not theft (democratic or otherwise); it is a means of restoring to the community, the value bestowed upon the taxpayer by the community.

ADAM SMITH'S FOUR MAXIMS

Adam Smith is generally considered (certainly in the English speaking world) to be the father of modern political economy. In "The Wealth of Nations" (1776)[1] he set forth four maxims, or canons, of taxation, saying that "the evident justice and utility of (these) maxims have recommended them more or less to the attention of all nations.[2] The maxims were as follows:-

I. The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.

II. The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person.

III. Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it.

IV. Every tax ought to be contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state.

These four maxims have been summarised in four words: Equity, Certainty, Convenience and Efficiency. If we measure our existing tax systems against these four maxims arid according to these criteria, we can see just how far they fall short of the ideal.

Maxim IV provides grounds alone for condemning our tax systems on the grounds of efficiency. Not only does the government have to employ armies of inspectors and assessors, investigators, prosecutors and other officials (including judges), the poor taxpayer is forced by economic circumstances -- to stay competitive he must take full advantage of the tax system -- to engage teams of tax managers, advisors, accountants and lawyers at his own expense. The costs of all these people mean that there is a large difference between the revenue to the government (net of administration expenses) and the total outlay by the taxpayer.

Maxim III is self-explanatory, but universally ignored. It is somehow presumed that inconvenience in payment is legitimised by the fact that the government is democratically accountable - as if this gives the government carte blanche to do what it likes.

Maxim II makes it clear that the requirement of certainty means certain to the man in the street -- to all of us, not just to the "tax profession". If any society is to cohere, its members must know and be capable of understanding their basic rights under the society's constitution. Likewise, a society's tax system must be known and understood by all its adult members; otherwise, they cannot play their part to the full, and we are all the worse for it.

Maxim I, I have deliberately left to the last. It is the most controversial. It appears to be justifying the "ability to pay" principle; but whoever heard of taxing people according to inability to pay? In fact the ability to pay principle gets us no further forward. Does it, for example, require a proportional income tax or a progressive income tax?

Levying a tax on existing riches according to their amount is not taxing someone according to his ability; it is merely expropriating existing wealth. To look at tax in these terms is, as Henry George pointed out, to fail to see that production and distribution are inseparable; they are two sides of the same coin. Taxation falls on and necessarily affects, future production and distribution, and distorts it. Taxing someone truly according to their "ability" requires taxing them according not to the income or wealth which they do in fact enjoy but according to the income or wealth which they have the capability of enjoying.

There is a danger in interpreting Smith outside the context of the society in which he lived and about which he wrote. Upon a more detailed consideration of Smith's maxims, in the context of their time, it is clear that he considered that under Maxim I taxation should be levied mainly on economic rent (the rental value of land in its unimproved state -- ground rent). In Smith's day, "Rent" and "Revenue" were virtually synonymous. Certainly, the term "Revenue" only covered income from an investment and did not include wages and salaries; and in eighteenth century Britain most investment was in landed property. So when Smith proposed in Maxim I a tax on the subjects of a state "in proportion to the revenue which they respectively enjoy under the protection of the stale", he was not advocating the modern proportional or progressive income tax, but really a tax on economic rent. This would be tax on private property in land according to its annual value, being the creation of and protected by the state. Most state expenditure at that time was on civil and national defence, which largely meant securing landowners in their privileged position. (A tax on economic rent is something to which I shall return later.)

It is time to revisit Smith's Maxims, for they were relevant to a simpler life, but their simplicity should be applied to the depressing complexities of modern taxation. Lambert's Modern Principles of Taxation serve as a foundation for a tax system which is simple, just and lasting.

LAMBERT'S MODERN PRINCIPLES OF TAXATION

1. Taxation must be simple.
2. Taxation must be certain, both now and for the future.
3. Taxation must be neutral to production, to consumer spending and to saving.
4. The costs of determination and collection of taxation should be the lowest possible.
5. Net tax beneficiaries should not pay tax; net taxpayers should not receive benefit payments from the government.
6. There must be no double taxation.
7. AH taxation should be levied at source.
8. Taxation should be legally levied on the persons by whom it is economically borne.
9. Continuous variations in circumstances should not result in discontinuous variations in the amounts of tax levied.
10. The points at which taxation ceases or starts to be payable should be drawn along borders of economic substance not legal form.
11. The action by reference to which taxation is levied must correspond with reality.
12. Taxation should be payable at times convenient to the taxpayers.
13. The taxpayer should be entitled to free and unlimited advice on his tax position from and at the expense of the government.
14. Since the government has neither the duty nor the power to be generous, no discretions should be vested in its revenue officials; likewise, taxation should be strictly enforced by the courts.
15. Since the government has neither the duty nor the power, through taxation, to destroy anything, taxation must be distinguished from criminal fines and penalties.
16. Since there is no contractual basis for taxation, taxation should be based on the principle of restitution, and should therefore restore to the taxing community the value bestowed on the taxpayer by that community.

In the rime allotted to me here, I can only very briefly outline each Principle, and must leave you to consider their practical applications and implications.

1. Taxation must be simple.

This means "simple" to you and me, not just to the tax profession. It should be noted that in his second maxim, Adam Smith specifically requires that "the time of payment, the manner of payment, the quantity to be paid, ought to be clear and plain to the contributor, and to every other person." If we take this principle seriously it requires the abolition of most of our tax legislation. There are some simple taxes (not many) -- for example, duties on the retail sale of gasoline or petrol, the UK. Community Charge (poll tax); perhaps best of all is the Cayman Islands departure tax (of CI$6 per person), collected at the airport.

2. Taxation must be certain, both now and for the future.

This means what it says, and is one of the reasons why tax reform should be more of a constitutional issue, commanding cross-party support, than a party political football. The government must be prepared to commit itself more than a year in advance, it is, for example, grossly hyprocritical of the Chancellor in Britain to condemn "short-termism" in the investment markets when the British government never commits itself to a revenue budget (which is necessarily part of the private sector's expense budget) more than a year in advance. And what is true of Britain is true of America and other countries.

3. Taxation must be neutral to production, to consumer spending and to saying.

This may sound like an ideal, but nevertheless it is an ideal we must aspire towards. If we believe in a truly free market economy, we must get government out of the market and stop it disrupting and distorting the market. This principle probably require; the abolition of more tax legislation than any other. Even the (seemingly innocuous) Cayman Islands departure tax is a tax on tourism and therefore on international trade.

4. The costs of determination and collection of taxation should be the lowest possible.

This is a reiteration of Adam Smith's fourth maxim, which was even preceded by Jean Baptiste Colbert's famous maxim that "The art of taxation consists of so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing."

It should be noted, however, that included in the equation must be the taxpayer's private costs, of a whole army of tax managers, advisors, accountants and lawyers, whom he has to employ at his expense. The major costs of the tax system lie hidden here, not in the Inland Revenue's or IRS's operating budget. (Moreover, the demand for such private services necessarily takes talent away from other industries and professions.)

5. Net tax beneficiaries should not pay tax; net taxpayers should not receive benefit payments from the government.

This means abolishing the lunacy of paying taxes and then claiming refunds, and the taxation of grants, subsidies and benefits (such as the taxation of social security payments). But it also means such things as abolishing income tax on government employees' salaries. (When the British government purports to deduct PAYE income tax from its employees' wages, who does it pay it to?) It means combining the existing tax and welfare legislation.

6. There must be no double taxation.

Double taxation occurs where you pay (or bear) tax twice in respect of the same asset or sum of money. For example, if you own a house through a company, upon disposal of the house the company may pay tax on the capital gain; when you subsequently dispose of the shares in the company, you have to pay tax on the net capital gain, this time on the shares. Effectively, you pay tax twice on the same profit (the profit arising upon a sale of a house).

Similarly, you may be liable to pay two different governments (one local and one national, or two national). A US citizen working in the UK is liable to pay tax to the US and the UK governments. Such double taxation is alleviated (in part) by complex double tax treaties, but these only add to the bureaucracy and expense of international trade. Far better to have a tax which (if universally adopted) would preclude the possibility of double taxation.

7. AH taxation should be levied at source.

There are many reasons for this, but the most important is to enable the taxpayer to carry on the tranactions of daily life secure in the knowledge that the government has already been paid and therefore has no further claim and will not disrupt or distort the market. PAYE income tax deducted from wages, and taxation of interest at source are typical examples. If w. believe in taxing wages and interest, this is the way to tax them. Moreover, we now have sophisticated technology which enables us to deduct tax and issue tax invoices relatively painlessly, reducing deduction of tax to a mere by-product of the tranaction.

8. Taxation should be legally levied on the persons by whom it is economically borne.

Governments tend to prefer to put taxes on intermediaries, such as banks, employers or retailers. However, such taxes merely become hidden costs and the taxpayer is really misled about the tax he is bearing, if people really knew the true amount of the taxes they were suffering, they would be much more committed to tax reform and economy in public expenditure and would take a much greater interest in politics generally (surely a feature of a healthy democracy). The prime example in recent years has been the UK Community Charge, levied on each individual citizen. Everyone Lad to pay this personally, and it hurt all the more - provoking violent reaction. That is precisely why governments do not like taxing the persons who in the end have to suffer the tax. So they substitute indirect taxes (e.g. VAT) for direct taxes (such as the Community Charge). In the absence of knowledge and understanding by the taxpayer, direct taxation is often a vote loser. However, if indirect taxation is reversed and the reasons for it demonstrated, governments could win elections by demonstrating that direct taxes actually impose a lesser burden in real terms.

At first sight, it may be thought that this principle conflicts with Principle 7, for much taxation paid or deducted at source is not legally levied on the persons by whom it is economically borne. The challenge lies in devising taxes that cannot be "shifted" by the persons on whom they are legally levied; and I believe there are such taxes.

9. Continuous variations in circumstances should not result in discontinuous variations in the amount of tax levied.

The great majority of all tax cases (certainly in the UK) involve a dispute between the Revenue and the taxpayer about some borderline transaction. If the government puts a different tax on red wine from that on white, inevitably someone will end up in court arguing about whether or not a bottle of rose or blush wine is for these purposes "red" or "white". Such cases involve all sorts of mental contortions by our judges in an effort to make sense of what is intrinsically nonsensical. The problem can only be solved by the government arbitrarily drawing the line, by legislation. But, while this provides certainty, it also interferes with the natural operation of the laws of supply and demand, and distorts the market.

Moreover, it is precisely these sorts of case which spawn the myriad anti-avoidance legislation which gives the Revenue draconian powers to tax the taxpayer according to a transaction which he never actually carried out. (For example", m the UK a contractual provision by a company to pay interest variably according to profits can be treated by the Inland Revenue as a dividend, even though it clearly is not).

This apparently quite innocuous principle has some devastating effects. For one thing, it means the abolition of all taxes levied according to residence or domicile in the taxing jurisdiction (i.e. how long you spend in the country). It also means abolishing any differences between the taxation of investment income and the taxation of capital gains. In economic terms, all income from capital is a capital gain.

10. The points at which taxation ceases or starts to be payable should be drawn along borders of economic substance (not legal form).

This is similar to Principle 9, above, but not quite the same. It certainly requires not levying different taxes on wines according to their colour. But it also requires, for example, the abolition of all taxes on employment as such. In economics there is no intrinsic difference between the labour that is applied through services, employment or self-employment. Accordingly, a proper tax system should not levy taxes differently according to such distinctions of form. (A vast number of legal cases in the UK have originated from a dispute about whether or not someone was employed or technically engaged on a contract for services.)

11. The action by reference to which taxation is levied must correspond with reality.

This should be enshrined in any country's constitution. It requires the abolition and prohibition of all anti-avoidance legislation that seeks to levy tax on the taxpayer according to a transaction which never took place. (Imagine how you would feel if you were prosecuted for murder on the basis that, although everyone knew you had not killed someone, nevertheless you would be deemed to have done so.)

12. Taxation should be payable at times convenient to the taxpayer.

This is a reiteration of Adam Smith's third maxim. It is almost universally breached. Far from trying to accommodate the taxpayer's business concerns better, governments tend to be very inflexible about payment. Other creditors of businesses are prepared to extend credit or vary payments; not so the government. A prime example is the British VAT system, which now has harsh financial penalties for late payers. Not only is the government rarely prepared to require payments of tax at times which accord with the taxpayer's actual cashflow, and where appropriate extend credit to the taxpayer, in many cases the government borrows from the taxpayer on an interest-free basis (for example where lax is deducted at source from interest and must be reclaimed by the non-taxpayer at the end of the year).

It is only the government's monopoly of the tax system that enables it to abuse its consumers in tins way. We must move to a position, where as with other services, the consumer (i.e., the taxpayer) conies first.

13. The taxpayer should be entitled to free and unlimited advice on his tax position from and at the expense of the government

If the taxpayer owes money to the government, absolutely or contingently in the future, he must surely be entitled to be fully informed of the amount and how it can be reduced. If new businesses are to thrive, they must be allowed to compete on equal terms with existing ones. It is large businesses that can afford lo indulge m expensive but highly rewarding tax planning, much of it wholly artificial. We need to move to a system where everyone has equal access to proper legal advice on taxation and where there are no loopholes to be ruthlessly exploited by the better off. After all, there are many other areas of law in which the government funds free legal advice and assistance (in the UK under Legal Aid). Moreover, if the government were to provide the taxpayer with free and unlimited tax advice, it would receive vital feedback from the private sector about the economy; for it would rapidly realise just how much time, money and talent is dissipated in the economy by the whole tax industry, which could be put to more productive use by making the tax system simpler.

14. Since the govcnmient has neither the duty nor the power to be generous, no discretions should be vested in its revenue officials; likewise, taxation should be strictly enforced by the courts.

This means the abolition of all "extra -statutory concessions", which are the Revenue's method of making a tax system which is inherently nonsensical and unfair at least a little more sensible and fair, thereby doing parliament's job for it. It also means overruling a large body of case law in which judges have taken upon themselves the responsibility for ending artificial tax avoidance schemes.

15. Since the government has neither the duty nor the power, through taxation, to destroy anything, taxation must be distinguished from criminal fines and penalties.

This means, for example, that the Chancellor in Britain must make up his mind whether he is raising revenue through taxing the sale of leaded petrol or fining it. It also means rejecting the US Supreme Court maxim that "the power to tax is the power to destroy". No government has the right to destroy using the tax system; that is the province of the criminal justice system.

16. Since there is no contractual basis for taxation, taxation should be based on the principle of restitution, and should therefore restore to the community the value bestowed on the taxpayer by the community.

The equitable principles of restitution are embedded in the law of most common jurisdictions. Restitution is the remedy awarded to someone who claims that another has been unjustly enriched. For example, a person may not profit from his crime; and property or money paid over under a contract which is void cannot (lawfully) be retained. In the context of taxation, which ipso facto cannot be levied on a contractual basis, the application of this principle means that the taxpayer cannot take the benefits of government expenditure without taking their burden. He must must restore to the taxing community the value which it has bestowed upon him.

This principle forms the basis of a whole political economy, indeed a whole political philosophy. It rejects the fiction of the "social contract". It restores equality to the dealings between the taxpayer and the slate. It places limits on the state. It makes justice a central feature of a proper system of taxation. It translates into action the Christian principle that we should render unto Caesar the things which are due to Caesar.

Whatever one's personal philosophy or religion may be, fairness and justice are international objectives, understood in every language of mankind. Justice must be a paramount objective in devising a system of taxation, and such justice lies in the application of the principles of restitution.

I have left Principle 16 to the last, although it is the most important of all the Principles; for Principles 1-15 outline how not to tax; they indicate the problem, whereas Principle 16 tells us how to tax, and gives us the solution.

ARE THERE ANY ALTERNATIVE EQUITABLE TAXES?

If we use these Principles as a critique of our existing tax system, it will be readily seen that most of our taxes ought to be repealed forthwith. After reflecting on the scope of these Principles, one might doubt whether there is any tax that would satisfy all these criteria, and be attempted to agree with Winston Churchill when he said "There is no such thing as a good tax".[3]

However, there is one tax which does meet all these criteria: a tax charged on the annual rental value of every piece of land within the taxing authority's jurisdiction, levied on the value of land without improvements (or in its unimproved state) at a rate of up to 100%.

Such a tax (a "site value tax") would be simple (Principle 1).

It would be certain both now and for the future (2).

It would be neutral to production, to consumer spending and to saving (3), for most political economists agree with Ricardo that "a tax on rent would affect rent only; it would fall wholly on landlords, and could not be shifted to any class of consumers".[4]

The costs of determination and collection ought to be quite low (4) -- you cannot hide land!

There would be no question of taxing benefits or giving benefits to taxpayers (5), assuming the site value tax was accompanied by a commitment to free trade.

There would be no scope for double taxation (6), since the tax would be levied once only, at source, and only levied on land within the taxing authority's jurisdiction-It would be the ultimate tax levied at source (7), for all taxation must ultimately be paid out of production, and all production takes place on land.

It would be legally levied on the persons by whom it was economically borne (8).

Continuous variations in circumstances should not result in discontinuous variations in the amount of tax levied (9). The tax would not be charged according to residence or domicile, but according to land ownership.

The points at which taxation would start to be payable would be drawn along borders of economic substance (10) -- the distinction between land, labour and capital.

The action by reference to which taxation was levied would correspond with reality (11) -- land ownership.

The tax could be made payable at times convenient to the taxpayers (12) by making it payable in arrears (annually or quarterly).

The taxpayer could quite easily be given free and unlimited advice on his tax position from and at the expense of the government (13), precisely because of the simplicity of the site value tax.

No discretions need to be vested in the government's revenue officials, and the tax could be strictly enforced by the courts (14).

Such a tax would be clearly distinguishable from criminal fines and penalties; (15).

Finally, and most importantly, the site value tax would be based on the principle of restitution (16), for as Henry George said:

"The tax upon land values is the most just and equal of all taxes. It falls only upon those who receive from society a peculiar and valuable benefit, and upon them in proportion to the benefit they receive. It is the taking by the community, for the use of the community, of that value which is the creation of (he community. It is the application of the common property to common uses. When all rent is taken by taxation for the needs of the community, then will the equality ordained by nature be attained."

Such a tax would be nigh impossible to avoid. Its introduction would see the rapid decline of complex and artificial tax avoidance schemes. Any country that introduced it would become its own tax haven, overnight, and gain a significant edge over its competitors.

Such a tax would also abolish the need for complex double tax treaties (6). Each state would tax the land within its jurisdiction, and the tax would be levied on both citizens and aliens. Likewise, each state would not tax its citizens in respect of foreign land ownership, the economic rent thereof and thereon being due to the state where the land was located.

The tax would therefore promote economic justice within a nation state and between nation states. If universally adopted it could form the basis for lasting harmony and give great encouragement to international trade.

CONCLUS1ON

We need a tax system that is simple and just. Contrary to the belief of many politicians, these are not incompatible objectives. If we are to create a tax system that meets these objectives, then before we consider the fine detail of the legal drafting we must first consider the basic principles according to which such a system should be devised. Lambert's Modern Principles of Taxation provide such a basis.

A site value tax would comply with all of these Principles, and could be used gradually to replace all our existing taxes, without reducing the total revenue to government. Of course, a land value tax raises other questions. Could such a tax raise sufficient revenue to enable all other taxes to be abolished? Would such a tax be fair, given that it discriminates against the person who invests in land rather than in capital? Is such a tax really compatible with property rights? These are important questions. Many political economists, including myself, have no hesitation in answering all these questions in the affirmative; but the arguements are beyond the scope of this particular paper.

Lambert's Modern Principles of Taxation constitute the bedrock of a system of taxation which is simple, just and lasting, for it should command the support of everyone, all parties and all nations. The adoption of such a system of taxation on an international scale is essential to the promotion of economic justice and harmony across the globe.

FOOTNOTES

1. More correctly, "An Enquiry Into The Nature And Causes Of The Wealth Of Nations".
2. P.P. 206-308 of J.M. Dent & Sons ltd., "Everymans Library" Edition 1975.
3. Observer Sayings of the Week, 1937.
4. The Principles of Political Economy and Taxation

APPENDIX I

EIGHT WAYS TO FAIL TO MAKE TAX LAW

How often have you known people in Britain or America say that their tax system is basically pretty fair? "Fair" by reference to what? Unless you have some standard to measure it against, how can you assess it at all? The fact that the tax rules are internally coherent (i.e. not self-contradictory) is no guarantee, for example, that they are fair -- or even that they are a system of law at all.

In his famous work "The Morality of Law" (1964), Professor Lon Fuller described eight ways to fail to make law, saying that "a total failure in one of these eight directions does not simply result in a bad system of law; it results in something that is not properly called a legal system at all, except perhaps in the Pickwickian sense in which a void contract can still be said to be one kind of contract." These eight ways to fail to make law provide interesting criteria for the critical analysis of our present tax systems. They are as follows:-

Eight ways to fail to make law:

1. Failure to achieve rules at all -- so that every issue must be decided on an ad hoc basis.
2. Failure to publicise, or at least to make available 'o the affected party, the rules he is expected to observe.
3. The abuse of retroactive legislation, which not only cannot itself guide action, but undercuts the integrity of rules prospective in effect, since it puts them under the threat of retrospective change.
4. Failure to make rules understandable.
5. The enactment of contradictory rules.
6. Rules that require conduct beyond the powers of the affected party.
7. Introducing such frequent changes in the rules that the subject cannot orient his action by them.
8. Failure of congruence between the rules as announced and their actual administration.

Fuller maintained that a failure on any one of these grounds would totally undermine a legal system. Yet our systems of tax law tend to fail on every one of these grounds.

Take the UK as an example:-

1. Failure to achieve rules at all.

In certain areas, such as the distinction between "income" and "capital", or between "trading" or "dealing" and "investment", it is arguable that there are almost no rules and that decisions are made on an ad hoc basis.

2. Failure to publicise.

Certainly, the government makes the legislation available, eventually; but in practice the taxpayer needs a whole army of advisors to keep him informed as to developments. Further, certain changes introduced in the Budget (typically March/April) are often not clarified for months until the Finance Act is passed (in August) and made publicly available (in the Autumn), by which time the current tax year is well under way.

3. The abuse of retroactive legislation.

Retroactive finance legislation is not unknown. In 1974 the Chancellor Denis Healey introduced a tax on capital transfers in March, but it was not until the Autumn that the legislation was produced, even in draft form. During the intervening period, the taxpayer was subject to an unknown tax. In the nineteen twenties the Conservative government abolished Lloyd George's land value lax retrospectively (and refunded taxes already paid!).

4. Failure to make rules understandable.

This hardly bears comment. There are parts of the UK tax code which even the most emminent tax counsel do not understand, let alone the poor taxpayer.

5. Contradictory rules.

The UK tax code is full of provisions which seem to contradict each other, and which have to be reconciled by ingenious legal reasoning and extra-statutory concessions or practice directions.

6. Conduct beyond the powers of the taxpayer.

While the UK tax code does not require any action which in theory is beyond the powers of the affected party, nevertheless strict adherence to them is in practice almost impossible (a good example is the extremely onerous VAT regime). Breaches (deliberate or inadvertent) are almost a daily occurrence - from failure to declare benefits-in-kind on your income tax return to ommissions to charge VAT on certain minor transactions. In practice, the taxpayer has to rely heavily on the mercy of the Revenue, its concessions, discretions and occasional waivers.

7. Disorientating frequency of changes.

The tax rules in the UK are up for review every year and the Treasury and the Inland Revenue continuously review the existing legislation. Add to this the weekly, if not daily, barrage of tax cases, Revenue concessions and press releases, and VAT directives, and it is almost true to say that our tax law changes on a daily basis. How the taxpayer can ever orient his action by our tax law is a miracle. He is often reduced to a business philosophy of "hit and hope".

8. Failure of congruence between the law and practice.

In the UK, there is a whole book, about three inches thick, of Inland Revenue Extra-Statutory Concessions and Practice Directions. The Revenue has no constitutional power to issue these and it has been clarified that the taxpayer has no right to rely on these in any litigation before the courts. This is not to criticise the Revenue, but Parliament; for these Concessions and Directions attempt to harmonise a motley collection of ill-fitting and most disharmonious rules enacted by Parliament. In practice, the Revenue is doing Parliament's job for it, and there is in the UK a great deal of taxation without representation, by the executive branch of government.

The UK is just one example. There are few countries that fare any better. The United States is a tax minefield, with city, state and federal taxes that often impose double if not triple taxation.

APPENDIX II

ADAM SMITH'S FOUR MAXIMS OF TAXATION

I. The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.

II. The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person.

III. Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it.

IV. Every tax ought to be contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state.

APPENDIX III

LAMBERT'S MODERN PRINCIPLES OF TAXATION

1. Taxation must be simple.
2. Taxation must be certain, both now and in the future.
3. Taxation must be neutral to production, to consumer spending and to saving.
4. The costs of determination and collection of taxation should be the lowest possible.
5. Net tax beneficiaries should not pay tax; net taxpayers should not receive benefit payments from the government.
6. There must be no double taxation.
7. All taxation should be levied at source.
8. Taxation should be legally levied on the persons by whom it is economically borne.
9. Continuous variations in circumstances should not result in discontinuous variations in the amounts of tax levied.
10. The points at which taxation ceases or starts to be payable should be drawn along borders of economic substance not legal form.
11. The action by reference to which taxation is levied must correspond with reality.
12. Taxation should be payable at times convenient to the taxpayers.
13. The taxpayer should be entitled to free and unlimited advice on his tax position from and at the expense of the government.
14. Since the government has neither the duty nor the power to be generous, no discretions should be vested in its revenue officials; likewise, taxation should be strictly enforced by the courts.
15. Since the government has neither the duty nor the power, through taxation, to destroy anything, taxation must be distinguished from criminal fines and penalties.
16. Since there is no contractual basis for taxation, taxation should be based on the principle of restitution, and should therefore restore to the taxing community the value bestowed on the taxpayer by that community.