The Principles of Equity, Contributive Capacity and Equality – Brief Conceptual Synthesis.

Does the Administration Affect them?

  • Equity

It is a principle which stands for Justice and which is reached through the principle of contributive capacity, which in 1776 Adam Smith called the “capacity to pay”.

Equity in terms of contributive capacity is generally considered in two senses: vertical and horizontal.

The “horizontal” concept is that those who are in a similar situation, in terms of contributive capacity, should pay the same amount of tax. Hence the importance that the tax should be “personal” in the sense of taking into account the taxpayer capacity as a whole, for which it is required to be “global”.

The “Vertical” concept means that people who are at different levels in terms of contributive capacity, must be taxed differently. For this reason it is essential to use progressive rates, where the aliquot part increases more than proportionally with the increase in the tax base. This is the opposite of a regressive tax, where the fraction of income necessary to pay the tax decreases when the income increase. Progressivity is not only reached by the structure of the rates scale but also by the non-taxable minimums (minimum level of subsistence for the taxpayer).

All these concepts, obviously, do not apply to legal entities in general. However if the contributive capacity is measured exclusively in terms of income or capital, regardless of the remaining aspects outlined above for individuals, obviously one could think that this would extend the concept to legal entities, but in a partial manner and not avoiding inequities, if the economic unit is analyzed as a whole.

Logically, in this last position, we are moving away from those elements that allow measuring the “personal status”, either of an individual or a family, through measurable economic indicators.

There might be a tax that would tax the income without taking into account the personal situation of the taxpayer, but in this case it would become a tax of “non-personal” or “objective” nature, where wealth is considered in isolation, disregarding who gets the benefits.

 

  • Contributive capacity

Certain indicators allow determining in economic terms the personal situation of the taxpayer, which highlight the individuals’ contributive capacity. The most commonly used are basically: i) The “revenue” obtained, and ii) the “capital” or assets that are possessed.

Certainly the ideal would be to use both indicators, which constitute factors that demonstrate the financial and economic reality of the person. Both show a close relationship since it is assets are justified through the income and income is justified through assets, all of which facilitates the administration of the tax.

On the concept of “contributive capacity” there is an important bibliography, so we will try to present a brief summary including our opinion, without intending to exhaust the topic.

We could summarize the traditional or classical position by expressing that the contributive capacity represents the economic capacity available to face the tax obligations, taking into account the personal situation of the taxpayer.

The topic requires to determine the representative elements that constitute the objective indicators to be taken into consideration, which contain an intimate relationship with the taxable situation, and also allow its quantification.

In the global concept of the personal income tax, the traditional and generally predominant position consider that such “capacity” is referring to individuals, since it is possible to consider in them some indicators which include: those related to the minimum income needed to survive, health and education expenses, as well as the expenditures needed to keep people who are in charge of the taxpayer and who lack sufficient income. Therefore, individuals who do not have an income that allow covering these needs do not have contributive capacity or capacity of payment established by law, and therefore should not pay tax.

Those who instead have an income exceeding these requirements do have a contributive capacity, requiring them to pay taxes and the different capabilities of payment will be measured by another complementary element, which integrates the global and progressive income tax model that includes ”progressives” rates.

In other words, from the moment we consider the personal situation of the taxpayer, this would be indicating that we attend to the physical persons and therefore this would be leaving aside “entities” in general, whether they have legal status or not.

In taxes in which the taxation is integrated to the price, there would also be an economic manifestation related to a contributive capacity, expressed through the level of acquisitions and therefore it should be oriented to the final consumer or “taxpayer in fact”, since this is the one who is economically affected by the tax.

Certainly this kind of taxation presents serious complexities regarding the possibility that taxpayers pay such taxes according to a contributive capacity similar to the one analyzed previously with the so-called “direct” taxes. These are taxes that unlike the income tax and tax on assets listed above, are not personalized.

The elements, objective and subjective, comprising the aforementioned contributive capacity are dynamic and will depend on the country and the time they apply, given their intimate relationship with the economic, social, political, and cultural aspects among others, all of which will affect their determination, which should contain features that allow the quantification of the mentioned concept.

With regard to the qualitative content of the elements used, these measurements can be considered partial. We need to add that if we wish to consider the full contributive capacity, a jurisdictional issue is that all the income should be computed, including revenues obtained abroad.

Therefore, the contributive capacity as the classical position conceives it, would indicate that it applies only in the case of the mentioned taxes (income and assets), traditionally considered by the doctrine as “direct” taxes.

As we know, there are other taxes, including taxes on consumption, either single-stage or multi-stage, levied on specific economic facts that alone would not be analyzed in a global economic context of the taxpayer.

This would lead us to conclude that the principle of “contributive capacity” in the global terms that we have exposed for the personal taxes on income and assets, cannot be applied to taxes of “non-personal” character.

If this is so, this create a doubt as to the actual implementation of the concept in important countries in which the “contributive capacity” has been included explicitly as a constitutional principle or as a guiding principle of the tax system. – Spain and Italy among others-.

Indeed, considering the features of tax systems in general, and particularly in Latin America, where different types of taxes are applied to consumption, which in the majority of countries constitute the main collection source of the tax system, we would reach the conclusion that for those countries in which the principle has constitutional rank, the tax system would be following unconstitutional rules.

For these reasons, the concept of “contributive capacity” and therefore of “equity” would apply only to individuals or family groups – household or family unit – in personal taxes such as income and assets taxes, however it would not apply to legal entities.

A different way of conceiving this principle in the case of levies that tax isolated and non-global manifestations such as the analyzed, would be to consider the contributive capacity as measured or revealed only through such acts and therefore regardless of the personal and global situation.

With this conception, every tax would respond to a different contributive capacity according to the economic fact that is taxed, expressed in the description of the taxable event, therefore in the case of consumption taxes, or “non-personal” taxes, specific aspects exclusively quantitative and objective would be taken into account, without personalizing them, they would remain isolated from a global contributive capacity, and only to the greater or lesser value of the goods or services purchased would be taken into account.

It is clear that the possibility of interpreting the contributive capacity in these terms would lack meaning and sustenance, therefore in these cases it could not become a taxation principle.

  • Equality before the law

Equality is a principle in which the determining factor is that individuals are equal before the law. It usually has been adopted by the constitutions of most countries. Therefore in the area of taxation, it would to mean equality before the tax burden, this means the prohibition of imposing a discriminatory or unequal treatment among those who are equals.

In doctrine the issue that arises is if the “Contributive capacity” integrates the principle of “equality”, i.e. if it can be considered as a sub-principle.

We share the position of Jorge Rossetto – the IUET magazine N ° 168 pag.379-, the referred author argues that the contributive capacity is a principle autonomous or independent from the principle of “equality before the law” which is at an equal legal level hierarchy than the remaining principles, such as the principle of “legality” among others.

Certainly, this can be demonstrated – when both principles are present in the Constitution – given that there may exist tax system in which the contributive capacity is unknown but the principle of equality before the law is not violated as long as equal situations are not taxed differently. Accordingly, the principle “equality before the law” is compatible with a taxation system that ignores the “contributive capacity” principle.

  • Incidence of the Administration

The principles we referred to belong to the field of tax policy and should be included in the Constitution or in the tax legislation that designs the technical structure of the tax models that make up a tax system.

This indicates that the tax administration is not responsible for the incorporation of the principles of reference into the tax system. Its role and responsibility is to manage and control the correct application of the rules that make up the tax system in accordance with the legal taxation technique, in a way such that the above-mentioned principles are respected by taxpayers.

As a result, the success in terms of the correct application of the principles of equality, contributive capacity and equity will depend on the efficiency or inefficiency of the Administration, which ultimately has a direct and significant responsibility via its management.

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