1
From Milan to Mumbai, Changing in Tel Aviv: Reflections on
Progressive Taxation and “Progressive” Politics
In a Globalized But Still Local World
Note: A slightly revised version of this paper appears 55
American Journal of Comparative Law 555 (2006). Copyright
American Society of Comparative Law, Inc. (2007)
By Michael A. Livingston1
Progressive taxation—the idea that people with higher
incomes should have to pay a higher proportion of that
income in taxes--continues to be on the defensive in many
quarters.
The reasons for this defensiveness range from
political changes, including the decline of Marxism and the
spread of a conservative political philosophy in the U.S.
and other countries; economic developments, including
increasingly sophisticated tax shelters and a growing
mismatch between tax evaders and national enforcement
bodies; and, perhaps, a sense that progressivity has failed
to meet its goals of promoting social welfare and achieving
Professor of Law, Rutgers-Camden School of Law. A. B. 1977 Cornell, J.D. 1981
Yale. I wish to thank Pete Raukar, Noah Burton, Brian Moss and Margaret Roberts for
outstanding research assistance together with friends too numerous to mention in the
countries in question. Additional thanks to Profs Dan Shaviro and the late David
Bradford together with the students at the NYU Law School Colloquium on Tax Policy
and Public Finance for their written and spoken comments on this project. This project
was made possible by a generous grant from the American Tax Policy Institute and
additional research support from the Rutgers-Camden School of Law.
1
2
at least some redistribution of income.2
Globalization is a
particular challenge, since high tax rates tend to be
imposed on precisely those people who have the greatest
capacity to shift all or part of their income to lower-tax
jurisdictions.
Although there is a great deal of scholarship on
progressivity--and much of it is very good indeed--it tends
to emphasize the experience of the United States and a few
other countries, such as the United Kingdom, Germany, and
Japan, that have rather similar economic and political
structures.
This focus makes it difficult to know if the
apparent limitations of progressivity are inherent in the
concept itself or are instead the products of a particular
time and place.
In particular the role of globalization is
difficult to pin down from the study of one country alone.
A comparative approach, which considers the fate of
progressivity in different nations and cultures, offers a
better chance to evaluate these issues.
By focusing on a
relatively specific problem, such a study might also offer
important insights into the intersection of tax and culture
and the broader globalization phenomenon.
See Michael A. Livingston, Blum and Kalven at 50: Progressive Taxation,
“Globalization,” and the New Millenium, 4 Florida Tax Review 731 (2000).
2
3
This article attempts such a study.
It considers
progressive taxation and its fate in three foreign
countries--Italy, Israel, and India--as well as the United
States, for a total of four case studies.
The countries
were chosen in part for my linguistic capabilities and, in
part, because of their distinctive features.
Italy is an
advanced industrial society and a member of the European
Union but with a highly idiosyncratic political system and
an unusual degree of regional differences in economic and
social indicators. Israel is a Middle Eastern nation with
First and Third World characteristics and a high degree of
inequality that is correlated with ethnic rather than
regional status; the country's shift from a collectivist to
an individualist economic philosophy at the same time as it
faces serious internal and external challenges makes it an
especially interesting test case.
India is a Third World
country which has similarly moved from a socialist to a
capitalist economic policy but which continues to face
enormous poverty and whose limited administrative resources
place a serious constraint on its tax policy choices.
All
of the three countries are thus advanced enough to have a
sophisticated tax policy discourse, but each has political
and cultural features that make its tax policy necessarily
4
different from that of the others and the United States.
By a happy coincidence, all three countries have recently
been involved in substantial tax reform projects, which have
as common features the substantial reduction of income tax
rates and at least some effort to broaden the corresponding
tax base. By comparing them to one another and to the United
States, something approaching a cross-section of
contemporary progressivity and its problems can be achieved.
In order to evaluate the progressivity of a particular
tax system, at least some technical issues must be
addressed. These include, inter alia, the nominal tax rate
structure; the tax base to which these rates are applied;
enforcement and compliance issues; and the scope of the
inquiry, i.e., is one concerned exclusively with income
taxation or must other taxes (wealth taxes, inheritance
taxes, excise taxes, etc.) also be taken into account.
The
article thus devotes some space to a description of each
individual country’s tax system and an evaluation of its
progressive or regressive nature.
The bulk of the article, however, is devoted to the
public tax debate in each country.
What is the attitude
toward progressive taxation of the country's principal
political movements, and of its professional tax elite?
Is
5
there a consensus in favor of progressivity, or is there a
strong movement for a flat or significantly flatter levy?
How, if at all, is the tax debate connected to the broader
debate about economic and social equality in the country,
and are there particular "cleavages" within the societyethnic, religious, regional--that affect the country's
perception of economic equality and (indirectly) of the
progressivity issue?
Is there a serious debate about tax
matters at all, or does it tend to be subservient to other,
arguably weightier issues?
Finally, the article asks how the debate is affected by
what might be called the tax culture or tax anthropology of
the country in question.
Among the factors considered are
the education and training of tax elites; the relationship
between lawyers, economists, and other tax professionals;
the nature of tax administration; attitudes toward tax
compliance and evasion; and the unwritten traditions that
govern the making and implementation of tax policy in the
country in question.
A recurring theme of the article is
the extent to which these relatively narrow, tax-specific
considerations may be as or more important than broader
political and social factors in determining the fate of
progressive taxation and of tax reform generally. A further,
6
related theme is the degree to which tax systems are or are
not converging with one another, on both a technical and a
political level, as reflected in progressive taxation and
other policy issues.
The paper is thus on one level a study
of tax progressivity, but on another level an inquiry into
the fate of national legal systems in a globalized world,and
the potential and limits of comparative law scholarship in
addressing this question.
Part I of the article discusses the concept of
progressive income taxation and the principal arguments for
and against it, using the American experience as a guide.
Parts II through IV consider the progressivity issue in
Italy, Israel, and India respectively, emphasizing the
impact of globalization and the relationship between the tax
debate and broader political discourse in the country
concerned.
Part V presents the author's conclusions
regarding the fate of progressivity in a globalized world,
the elusive concept of tax culture, and directions for
future research.
I.
Background: A Brief Primer on Progressive Taxation and
the American Experience With It
A.
Traditional arguments for and against progressivity
7
Progressive taxation has always been a phenomenon that
is easier to describe than to explain.
Although nearly all
advanced societies have some form of progressive income tax,
the justification for it is difficult to pin down, and
(perhaps for that reason) progressivity has frequently been
on the defensive although rarely if ever completely
eliminated from a tax system.
After two generations Blum
and Kalven's famous phrase, that the case for progressivity
was "stubborn, but uneasy," remains as true as ever.
I summarized the arguments for progressivity in a
previous article and need only briefly to recapitulate them
here.3
These arguments traditionally divide into two
categories.
The first are direct arguments for
redistribution of income, based upon the alleged injustice
of pretax income allocations or (more broadly) the notion
that resources should be allocated at least partially
according to the needs of individuals rather than their
3
See Michael A. Livingston, supra note 2, at 733-36. For a classic statement of
arguments for (and against) progressivity, see Walter Blum and Harry Kalven Jr., The
Uneasy Case for Progressive Taxation, 19 University of Chicago Law Review 417 (1952).
While Blum and Kalven’s article is unquestionably the principal source on this issue, many
of the arguments contained in their study were made by earlier European and American
scholars. See, e.g., E.R.A. Seligman, Progressive Taxation in Theory and Practice (1908);
Louis Suret, Theorie de l’Impot Progressif (1910). For an interesting exchange on
progressivity, taking place just under halfway between Blum and Kalven and the current era,
see Charles O. Galvin & Boris I. Bittker, The Income Tax: How Progressive Should It Be
(1969).
8
abilities.
The second is the notion of the diminishing
marginal utility of money, that is, the idea that wealthy
people derive less advantage from each additional dollar of
income so that--by taxing them at a higher percentage--we
may in fact be demanding an equal or lesser sacrifice from
them than from their poorer compatriots.
This argument has
the advantage of appearing scientific in nature and avoiding
some of the more overt politics of the redistribution issue;
the problem is that utility is difficult to measure and
nearly impossible to apply to tax system design.
A third
historical argument, the so-called benefit theory, suggests
that the wealthy derive more benefit from government
services and should therefore pay more to support them.
If the arguments for progressivity emphasize its
(alleged) social and political consequences, the arguments
against it focus on individual behavior.
The principal
argument relates to incentives, that is, the notion that
people will work less hard if they have to share more and
more income with the government.
Thus the metaphoric pie
representing national economy will become smaller while
people argue over who is to receive a larger slice.
A
further argument is more libertarian in nature, relating to
people’s inherent “right” to enjoy the fruit of their labors
9
and the strong burden that must allegedly be overcome before
they are required to share it.
These arguments are likewise
difficult to quantify, but--like the arguments in favor of
progressivity--maintain a strong hold on the popular
imagination, particularly in more conservative circles.
In my previous article I suggested that--while the
arguments for and against progressivity were largely
unchanged--there was a long-term erosion in the support for
progressivity, with the result that its opponents had
generally become more assertive with the passage of time and
its adherents had adopted an increasingly defensive posture.
I attributed this to three distinct but related processes.
First, the conservative direction of politics in the U.S.
and other countries weakened the support for progressivity
at a philosophical level.
Second, the identification of
poverty with women and minorities--while enhancing the moral
case for redistribution--tended to weaken it politically,
since other factions of society saw an interest in reduced
taxes and “progressive” forces were increasingly concerned
with specific women’s and minorities’ issues.
Finally, the
globalization process weakened the case for progressivity by
suggesting that a country which maintained highly
progressive taxes would simply lose business to countries
10
that were more forthcoming in this area.4
This last
argument was especially forceful, for it suggested that-even if a country wished to maintain progressive taxes--it
would be prevented by economic forces from doing so.
Whether I am right that there is a long-term trend
against progressive taxation remains to be seen, and indeed
progressivity has shown surprising resilience despite the
factors above.
Yet the very suggestion of a decline
suggests some interesting questions.
If progressivity is
indeed on the defensive in the United States, is this a
temporary or an ongoing phenomenon?
Does it result from
conditions specific to the United States--conservative
politics, individualism, a tradition of antitax rhetoric--or
from more universal factors?
Are other countries likely to
encounter the same resistance to progressive tax rates, or
will their tax systems remain more progressive even if the
U.S. goes in a flat or flatter direction?
Do the answers
vary between rich and poor countries, or between countries
4 For a more complete summary of these arguments, followed by suggestions for revised
arguments by progressivity advocates, see Michael A. Livingston, supra note 2, at 73766. For an effort to apply contemporary philosophy in support of progressive taxation,
see, e.g., Donna M. Byrne, Progressive Taxation Revisited, 37 Ariz. L. Rev. 739 (1995)
(citing Rawls, Nozick, Dworkin, and others on the issue of progressive tax rates); but see
Charles R. O’Kelley, Jr., Tax Policy for Post-Liberal Society: A Flat-Tax Inspired
Redefinition of the Purpose and Ideal Structure of a Progressive Income Tax, 58 S. Cal.
11
with a history of socialism and those with more conservative
or traditional governments?
While primarily interesting as
comparative tax issues, these questions are also important
for the U.S. itself: for if opposition to progressivity is
temporary or local in nature, it is likely to be overcome,
while if it is universal and permanent progressivity is
likely doomed.
B.
Progressivity and tax culture: distinctive features of
the American tax system
To answer these questions, it is necessary to consider
the American tax system from a comparative perspective,
i.e., to evaluate what might be called American tax culture
or tax anthropology.
Tax culture is an elusive concept, but
may be defined to refer to the body of beliefs and practices
that are shared by tax practitioners and policy-makers in a
given society and thus provide the background or context in
which substantive tax decisions are made.
Put differently,
tax culture may be thought of as the noneconomic or
nonquantifiable side of taxation, which varies between
different countries even as underlying economic principles
remain more or less the same.5
Tax culture is related to
L. Rev. 727 (1985) (applying some of the same authors in support of an argument for a
flat tax with a generous exemption amount).
5 The definitions are taken from Michael A. Livingston, Law, Culture, and
Anthropology: On the Hopes and Limits of Comparative Tax, 18 Can. J.L. &
12
but distinct from a country’s broader political and social
culture, so that (for example) a country might have a
political or social culture that favored a progressive
distribution of tax burdens, but a tax culture that somehow
or another impeded it; or conceivably the other way around.
As compared to most other countries, the United States
tax culture is distinct in several respects.6
The first is
our relatively sophisticated system of tax administration
and (by most accounts) the relatively high level of
compliance with income and other taxes.
For all the talk
about Americans evading or hating to pay taxes, voluntary
tax compliance appears to be as high or higher in the United
States as in most comparable countries, a situation that
Jurisprudence 121 (2005). My definition is broader if perhaps less systematic than that of
(e.g.) Ann Mumford, who approaches tax culture primarily in terms of tax compliance
and tax evasion phenomena, and similar authors. Ann Mumford, Taxing Culture (2002).
6 The ensuing analysis is based largely on personal observation of American tax culture
and its differences from other countries: since this “external perspective” differs from that
normally adopted by American tax scholars it is difficult to cite documentary support for
each individual assertion. For a comparative perspective on American tax law, see
generally James R. Repetti, The United States in Hugh J. Ault and Brian J. Arnold,
Comparative Income Taxation: A Structural Analysis 137-55 (2nd ed. 2004) (general
description of history, structure, and style of American tax law and administration);
Victor Thuronyi, Comparative Tax Law 28-29 (2003) (brief description of the
“American family” of tax systems). The Thuronyi book is arranged by themes rather than
geographic materials so that the material on the U.S. is distributed throughout different
parts of the book, but the material is no less and perhaps more effective for this reason.
See id. at 68-70 (describing U.S. approach toward taxes and constitutional law); 160-71
(U.S. approach to tax shelters and tax avoidance); and 206-30 (tax administration and
procedure in U.S. and other OECD countries).
13
highly publicized tax shelters and other techniques of
evasion only partially detract from. (One reason for the
publicity is that people are genuinely surprised by such
tactics.)
The relatively large administrative resources at
the disposal of the U.S. Government, and the large size and
power of the country generally, put it in a relatively
strong position to enforce its will on progressivity and
other tax-related matters, so that we generally think of tax
policy as a series of autonomous choices rather than
decisions forced upon us by outside actors.
This relative
independence of thought and action is something that we have
become so accustomed to as to take it more or less for
granted; but it distinguishes us from most countries and
even in a globalized world remains an important factor.
A second point concerns the structure of American tax
institutions and the nature of the taxwriting process.
These are characterized by a high degree of partisanship on
tax matters, but also by a surprising degree of consensus,
and a series of institutional arrangements, like the
congressional Joint Committee on Taxation and the Treasury
Department Office of Tax Legislative Counsel, that both
promote the interests of "nonpartisan" tax policy and tend
to insulate it from other policy areas.
For example, there
14
is a remarkable degree of consensus on the need for at least
some form of scaled rate income or quasi-income tax, and a
longstanding consensus against a federal sales or value
added tax, together with a similar consistency in tax
systems between the various states, the latter being
partially enforced by federal constitutional standards.
The
tax legislative process is further characterized by a
division of power between a large number of congressional
and other actors, and between state and federal governments,
with the effect that change tends to be slow and
incremental and it is difficult to ascribe any clear
ideological direction to it.
American tax policy also
ascribes an unusually large role to lawyers, many of them
rotating between government and private sector positions,
a
situation that tends to augment the pragmatic inclination of
tax policy and (arguably) militates against radical changes
in political direction.
Third there is the matter of political philosophy and
its impact on tax policy.
This matter I believe is more
complicated than generally realized.
Certainly there is a
strong strain of individualism in the United States and the
country is by and large more conservative than (say) the
Western European or other industrialized nations.
Yet there
15
is also a strong strain of egalitarianism and civic duty
which--in addition to arguing in favor of "fairness" in the
allocation of tax burdens--also makes it more likely than
Americans will actually pay those taxes that are imposed
upon them.
This contradictory situation was described by
Louis Eisenstein in his book, "The Ideologies of Taxation,"
which noted that the argument for fairness ("the creed of
ability") and that of efficiency ("the ideology of barriers
and deterrents") were always present in tax arguments and-depending as they did upon differing assumptions about human
behavior--had the additional advantage that neither was
readily susceptible to disproof.7
There is also some
question whether the supposed antitax sentiment is really
based on taxes or upon the uses to which the tax revenues
are put.
Many of the same Americans who oppose federal
income taxes willingly pay high social security as well as
local school and property taxes, because they believe the
money is either for their own benefit (social security) or
for the benefit of their own community.
7 See Louis Eisenstein, The Ideologies of Taxation 16-33 (the troubled creed of ability)
and 57-88 (the ideology of barriers and deterrents (1962). Eisenstein is also noteworthy
for his observation that, although people’s tax ideologies may be consistent with their or
their client’s self-interests, this does not necessarily mean that they do not sincerely
believe them. Id. at 13-15.
16
Finally there must be added the particular way that
Americans think about equity and fairness as applied to tax
matters.
This thinking is characterized by an emphasis on
measurable economic data--e.g., what percentage of tax is
paid by each "quintile" of the population, as described
above--and a rather rigid distinction between horizontal
equity (similarly situated taxpayers should be taxed
similarly) and vertical equity (the allocation of tax burden
between rich and poor).
While a few scholars have
considered the differential effects of taxation on female
taxpayers or members of minority groups, this work has until
recently been relegated to the margins of the field, with
the emphasis (when vertical equity is considered altogether)
on income or wealth statistics and a benign neglect of these
supposedly extraneous factors.
This is consistent with the
prevailing national mythology under which there is equal
opportunity for everyone and race or gender differences, if
not wholly eliminated, are at least in the process of being
so.
The perception of equity thus differs from other
societies which are perhaps more cognizant of regional or
ethnic differences and which tend to see these as
inseparable from class differences or other more purely
17
economic phenomena, as will be described further in the
following, country-specific discussions.8
The result of all this is that Americans talk a lot
about flat taxes but in practice tolerate a surprisingly
progressive tax system, certainly when the income tax is
considered alone and to some degree even when the entire
system is considered together.
Although conservative
legislators have succeeded in enacting enormous tax cuts, a
strikingly large percentage of individual taxes continues to
be paid by the top 10 or even 1 percent of taxpayers. These
figures change significantly when nonincome (notably social
security) taxes are included in the mix, but the system
remains at lease somewhat progressive even in this broader
analysis.
Although necessarily brief, the survey above suggests
that U.S. tax culture is characterized by several factors
that are unusual or even outliers as compared to most other
8 In recent years a number of scholars have challenged this consensus, producing
scholarship that considers the effect of taxation on women, minorities, and other distinct
groups within the broader society; but they have also been subjected to withering
criticism in doing so. See Lawrence Zelenak, Taking Critical Tax Seriously, 76 N.C.L.
Rev. 1521 (1998) (taking a generally skeptical stance toward efforts to apply the methods
of critical legal scholarship in the tax area); Michael A. Livingston, Radical Scholars,
Conservative Field: Putting “Critical Tax Scholarship” in Perspective, 76 N.C. L. Rev.
1791 (1998) (defending critical scholars but calling for integration of their work into the
mainstream of tax scholarship). See generally Symposium, Critical Tax Theory:
Criticism and Response, 76 N.C.L. Rev. 1519 (1998).
18
nations: what happens accordingly may, or more often may
not, be a good guide to what happens elsewhere.
Understanding the future of progressivity thus requires that
we consider the experience of other countries. It is to this
effort that we now turn.
II.
Italy: Resistance, Regionalism, And The Weight (If Any)
of Constitutional Tax Provisions
The first "foreign" country that I studied, Italy, is
on the surface probably most similar to the United States.9
An advanced industrial country, Italy has (depending on the
source that you consult) either the sixth or seventh largest
economy in the world, and is a founding member of the
European Union.
Popular stereotypes notwithstanding, the
country has a thriving, hard-working capitalist economy with
a per capita gross national product (GNP) approaching
9 The discussion of Italy is based on interviews with important figures in the Italian
Government, private legal or accounting practice, and various Italian universities; on
several years of following the tax debate in Corriere della Sera, La Repubblica, and
similar publications; and (for facts and historical background) on a variety of Italian
published and web sources. Individual published and web sources are cited where
relevant to specific arguments. By contrast the anonymity of personal interviews is for
the most part protected. For an overview of the Italian tax system, see Enrico De Mita,
Principi di Diritto Tributario (4th ed. 2004); Pasquale Russo, Manuale di Diritto
Tributario (2002). For an English-language summary see International Business
Publications USA, Italy Tax Guide (4th ed. 2002); for a (briefer) on-line summary see
the Worldwide-Tax website www.worldwide-tax.com/italy/italy_tax.asp .
19
$30,000 per year.10
Italy also has a progressive income
tax, not entirely dissimilar from our own, and a very highly
sophisticated debate on tax issues; indeed the country the
source for many interesting and provocative developments in
tax theory.
Yet Italy has political and cultural
tendencies that distinguish it from the United States, and
cause it to approach progressivity in a particular, Italian
way.
The country’s tax system also has various features
that both limit its ability to achieve progressivity and its
capacity to undertake significant tax reform.
All these
aspects are on display in the current tax reform process,
which began on an avowedly American model but has diverged
sharply in both technical content and political fate.
The following discussion considers these issues in
greater detail.
The Italian tax system: a general outline
Italy’s tax system is similar those of its principal
European neighbors, including a progressive individual
10 See Organization for Economic Cooperation and Development, OECD in Figures:
Statistics on the Member Countries (2005), at 13 (citing 2004 Gross Domestic Product
per capita of $28,800 at current dollar exchange rates and $27, 700 using the method of
Purchasing Power Parities (PPP)); The Economist: The World in 2005 at 92 (citing 1995
figure of $31, 410). The equivalent OECD figure for the United States was $39,700
according to both methods. PPPs are intended to correct for price differentials by
estimating the value of GDP in terms of a “basket” of equivalent goods and services in
each country; the difference tends to be more pronounced in Third World countries.
20
income tax imposed at rates of 23, 33, 39, and 43 percent,
the maximum rate being reached at an income of 100,000 Euros
(currently about $120,000), and interest and dividend
income, for residents of Italy, being taxed in most cases at
a flat 12.5 percent rate.
There is also a corporate income
tax (33 percent rate), a value added tax (VAT) with a
standard 20 percent rate, and various additional local and
nonincome taxes.
Consistent with a holding by the
Constitutional Court, the income tax is imposed upon
individuals rather than family units (i.e., no joint returns
or similar aggregation of income).
Following a more modest reform in 2003, the Italian
Government, headed by Premier Silvio Berlusconi, proposed an
extensive overhaul of the Italian tax system in 2004 which
was loosely modeled on the 1986 U.S. tax reform and
including a reduction to three tax rates (aliquote) with the
maximum rate falling to a level below 40 percent.
Following
intensive debate and popular protest (see below), a version
of the reform was approved in late 2004, providing for a
three-rate system (23, 33, and 39 percent); the substitution
of tax deductions, some phased out at higher incomes, for
many of the previous tax credits; and additional changes.
There is also a (nominally temporary) “solidarity” surcharge
21
which results in a 43 percent tax rate for incomes over
100,000 Euros.
A significant aspect of the reform was the
expansion of the 23 percent bracket from a ceiling of 15,000
to 26,000 Euro, as well as a parallel increase in the
untaxed (zero bracket) amount, which arguably make the
reform less regressive than recent U.S. tax legislation;
nonetheless it has been calculated that 60 percent of the
benefit of the reform will go to the wealthiest sixth of
Italian taxpayers.
More recent discussions have concerned
primarily the struggle against tax evasion (see below) and
proposals for new taxes on financial transactions.
Resistance, regionalism, and reaction: the Italian
perspective on progressive taxation
In evaluating Italian tax policy, and specifically the
matter of progressivity, one must consider the country’s
somewhat unusual history and political culture.
Italy was
unified in the 1860s over the fierce opposition of the Roman
Catholic Church, although church-state issues were at least
nominally resolved by the Lateran Treaties of 1929.
Following the defeat of fascism and the rejection of the
monarchy in a postwar plebiscite the country became a
Republic, the prevailing mythology of which concerned the
Resistance struggle against the “Nazi-fascist” occupation of
22
1943-45 and whose Constitution reflected the influence of
the two principal groups (Communists and Christian
Democrats) that participated in the Resistance and inherited
power in the postwar Republic.
The so-called Prima
Repubblica (first republic), which was governed by the
Christian Democrats in an endless series of coalitions and
characterized by an uneasy mix of political polarization and
personal corruption, collapsed in the early 1990s under the
weight of the tangentopoli bribery scandals and was replaced
by a new party structure which, although following the same
nominal constitutional arrangements, effectively amounted to
a new political system.
Following a series of left-wing
Governments—the first in modern Italian history—the
industrialist Silvio Berlusconi was elected Prime Minister
in 1999 at the head of a rather unstable coalition held
together by his personal charisma and, some would say, by a
continuation of the old corruption in newer, less obvious
garb (Berlusconi himself has been indicted more than forty
times although he has yet to be convicted of any crime).
Berlusconi’s Government has achieved numerous successes
including accession to the Euro currency and various
additional reforms although a substantial amount of its
energy has been devoted to the Prime Minister’s legal
23
problems; a left-leaning coalition headed by former Prime
Minister Romano Prodi, an economics professor, is widely
favored to retire it in the coming elections.
It must be
noted that, while both the Communists and Christian
Democrats essentially collapsed in the 1990s, many or most
current politicians (although not Berlusconi himself) were
previously members of one or another of these parties and
the issues as well as flavor of the Prima Repubblica
continue to set the tone for much of Italian politics.11
The chronic instability of Italian politics, and the
uneasy heritage of the Resistance and the Prima Repubblica,
affect Italian tax policy in various ways.
One obvious
result is that there tends to be a high degree of
polarization surrounding tax (and other) issues and
relatively little middle ground on which to construct a
compromise position.
For example, the Berlusconi
Government’s 2004-05 tax rate reductions and accompanying
spending cuts were met with large street demonstrations—a
historically rare demonstration in favor of high taxes—as
well as a sit-in by several thousand forest workers in
11 For a political history of post-unification Italy, see Denis Mack Smith, Modern Italy:
A Political History (1997). For a classic work on Italy generally, now dated but with an
incomparable perspective on the Anglo-American understanding and misunderstanding of
the country, see Luigi Barzini, The Italians (1964). For an up-to-date popular perspective
(in Italian), see Bruno Vespa, Storia d’Italia da Mussolini a Berlusconi (2004).
24
Calabria (southern Italy) who succeeded in blocking a major
rail line for a period of several days.12
A second, more subtle effect is that the concept of
income redistribution, which was in theory favored by both
Communist and Christian Democrat (i.e., Catholic) thinkers,
tends to be seen as a quasi-constitutional provision rather
than a mere public policy choice.
This is literally true,
in that the Constitution includes a requirement that the tax
system be based on the twin concepts of progressivity and
capacita’ contributiva (ability to pay or taxpaying
capacity), although these provisions have only rarely been
applied to void a specific provision of law.13
But it has
12 See generally Il Giorno, Oct. 28, 2004, http://ilgiorno.quotidiano.net/art/2004/10/28/5361280
(describing strikes and street protests against proposed fiscal reform which allegedly
“rewards the rich” and results in unfair spending reductions).
13 The language of these provisions has been translated as follows:
Art. 53
1. Everyone has to contribute to public expenditure in proportion to their capacity.
2. The tax system has to conform to the principle of progression.
See Italy-Constitution, International Constitutional Law series, at website of the
Universitat Bern, Institut fur Offentliches Recht, www.oefre.unibe.ch/law/icl/it00000_.html
“Capacita’ contributiva’” has been alternately translated as “taxpaying capacity” or,
somewhat more poetically, “ability to pay.” The effect of these provisions has been
somewhat muted by the courts’ position that they apply to the overall tax system rather
than any specific part of it; it has accordingly been fairly rare for a specific tax rule to be
struck down for violation of these provisions. Nevertheless they state a clear policy of
progressivity and respect for taxpaying capacity and as such retain at least an inspirational
role in the Italian tax system. See generally Enrico de Mita, supra note 9, at 83-104;
25
a symbolic significance that goes well beyond the written
language.
Put simply, progressive taxation is one of a
number of Italian laws and institutions, including generous
welfare and retirement benefits, aid to depressed (primarily
southern) regions, the effective ban on firing anyone who
works for a company that has fifteen or more employees
(Article 18), and other similar provisions, that are viewed
as essential elements of the postwar structure and without
which, many Italians fear, the country would slip back into
the fear and insecurity that made fascism possible.
The
philosophy of redistribution (and hence progressive
taxation) is buttressed by the concept of solidarieta’, a
rather vague notion of civic duty which has the advantage of
finding support among both Catholic and Marxist thinkers and
tends to emphasize the moral rather than the utilitarian
side of the progressivity equation.14
It should be added
that Italy also has a large and vocal class of imprenditori
Pasquale Russo, supra note 9, Parte Generale at 48-50, 60-61; Francesco Moschetti (ed.),
La Capacita’ Contributiva’ (1993). One noteworthy application of the taxpaying capacity
rule was the constitutional court’s decision banning the use of joint married returns, on
the grounds that they failed to base income taxes on the taxpaying ability of an individual
rather than his or her spouse. This decision notably complicated tax progressivity since
two-earner couples tend to be concentrated at the high end of the Italian income scale.
Corte Costituzionale n. 179 (1976); see Enrico DeMita, supra note 9, at 90.
14 On the concept of solidarieta’ and tax policy relevance, see generally Serio Galeotti,
Il valore della solidarieta’, Rivisto di Diritto Sociale (1996); Universita’ di Bergamo,
26
(entrepreneurs) as well as increasingly vocal economists and
public finance experts who see the postwar consensus as the
source of Italy’s problems rather than their solution: the
effect is not so much to turn the debate in favor of
progressivity as to increase the stakes for the
participants, and give the tax discussion a moral and
political significance that might be less formidable in
other societies.
A third effect of Italian political culture relates to
the impact of regionalism and the continuing inequality
between north and south.
This issue is considered further
in the following section.
Avoidance, amnesties, and life in the European Union: the
peculiarities of Italian tax culture
Fondazione Antonio Uckmar, Giornate Europee di diritto costituzionale tributario, 5th ed.:
Il Dovere di Solidarieta’ (conference proceedings Nov. 14-15 2003).
27
If Italian political life is distinctive, the country’s
tax culture is no less so.
Three factors are especially
important here: a high degree of perceived and probably real
tax avoidance, sometimes with effective governmental
complicity; a particular difficulty in the taxation of
income from capital; and membership in the EU (European
Union) and European currency (Euro), which provide
significant advantages to Italy but also restrict its
flexibility in tax and spending matters.
Together these
items have an equal or perhaps greater impact than the
“deeper” differences discussed, above.15
Tax evasion is sometimes exaggerated and is probably
greater for property, inheritance, and similar levies than
for the income tax a very large portion of which is withheld
at the source.
But it remains an important factor
particularly with respect to business taxes.
Tax evasion is
exacerbated by Italy’s tradition of “family capitalism”
which makes it difficult to measure income and to police the
boundary between business and personal expenses.
A series
of extraordinarily generous tax amnesties, some of which
have allowed taxpayers to get off the hook by paying only a
small fraction of tax liability, amount to a tacit
15 For an overview of Italian tax administration and taxpaying culture, see generally E.
28
recognition if not acceptance of this phenomenon.16
The tax
amnesties have also had a negative effect on taxpayer morale
suggesting that it is somewhat foolish to pay tax honestly
and (for opponents of Berlusconi) confirming what they see
as the essentially corrupt nature of the overall fiscal
system.
Italy faces a particular difficulty in the taxation of
income from capital owing to the presence of easily
accessible tax haven countries (notably Switzerland and
Luxembourg) and a more general fear of capital flight if
taxes are strictly enforced.
Switzerland in particular is
closer to Milan, the principal financial center, than are
most other Italian cities and has a reputation for financial
stability as well as secrecy that may attract capital away
from Italy even beyond the tax consequences.
Partly for
these reasons the Italian tax system provides a flat 12.5
percent rate on capital income which severely compromises
the progressivity concept and increases the pressure for
higher tax rates on remaining forms of income.
DeMita, supra note 9, at 31-79; Price Waterhouse & Co., Doing Business in Italy (2006).
16 Perhaps the best single evidence of the role of condoni (amnesties) in Italian life is the
existence of an entire commercial web address devoted exclusively to the subject. See
IPSOAit: A Walters Kluwer Company, Speciale Condoni & Concordato 2004
www.ipsoa.it/condono/modulistica_0.asp (providing information on tax, building code, and
other amnesties of interest to Italian business and professional readers).
29
Together with these items must be mentioned the role of
the EU and of Italy’s participation in the Maastricht
agreement which adopted the joint European currency or Euro.
As part of Maastricht the participating nations agreed to
keep their budget deficits below 3 percent of GNP which for
Italy has historically been more difficult than for other
countries.
Tax reductions must accordingly be met by equal
and offsetting reductions in spending and thus have an
immediate and visible political impact greater than that in
the U.S. where deficits may avoid or (more likely) postpone
the more difficult fiscal choices.
The EU itself has a
lesser role in income taxation although there is increased
pressure for harmonization at least of corporate taxes, and
reduced tax rates for economically underdeveloped regions
(i.e., the South) have been held to constitute impermissible
subsidies under prevailing EU doctrine.
In this sense the
EU restricts tax competition, although by reducing the
ability to fix separate national policy in other areas
(tariffs, licensing, etc.) it may in a relative sense
actually encourage it.
Also relevant is the ban imposed by the Italian
constitutional court on the aggregation of income of married
couples and the corresponding reliance on an exclusively
30
individual basis.17
This is significant because it makes
progressivity between married couples more difficult to
achieve, and may tend to exacerbate the inequity between two
career couples and single earner families in which are
concentrated the majority of Italy’s poor.
Theory and practice: do the differences matter?
Italy thus faces a situation in which its political
culture encourages a relatively high level of at least
nominal progressivity, while its tax culture and the
realities of its economic situation make real progressivity
difficult to achieve.
This is particularly true given the
effective exclusion of capital income from the progressive
tax base which means that the impact of redistribution will
be limited to wage earners.
Both the forces encouraging and
discouraging progressivity are thus exaggerated in the
Italian case as compared to most First World countries.
Do these differences matter?
It is striking that,
notwithstanding its special features, Italy recently adopted
a tax reform program that has many features in common with
earlier U.S. legislation: a reduction in marginal tax rates
and in the number of tax brackets although perhaps with a
greater effort than in the U.S. at softening the resulting
17 See supra note 13.
31
inequity with respect to poorer taxpayers.
Yet the response
to this legislation differed from that in the U.S. and the
other countries studies.
While the U.S. and (to a degree)
Israel and India appear to have accepted tax changes rather
quietly, in Italy the response has been highly polarized,
with the Government and arguing that the changes are
necessary to promote competition (and that progressivity is
in any case illusory given the persistent failure to include
capital income) while much of the public appears to remain
attached to a more steeply progressive system.
The debate
in Italy is also more tied to general political trends, with
Berlusconi’s admirers tending to support tax reform and his
opponents tending to oppose it; the temptation to leave tax
policy to the “experts,” so prevalent in some countries,
appears to have made fewer inroads here.
Italy thus presents a case in which both general and
tax culture have an important impact on progressivity, but
it is as yet unclear which will be decisive, or if either
will be able to resist the impact of raw economic forces.
The notion of a fiscal “life cycle,” in which steeply
progressive tax rates become attractive at a certain phase
of political and economic development but come to be seen
(at least by the elites) as an unaffordable luxury at a
32
later stage, is an intriguing aspect of the Italian
situation: the Berlusconi Government has indeed made a
forceful effort to portray matters in this way.
But it is
not clear that a majority of Italians do or will soon accept
this analysis, or how exactly they would behave if they did.
III.
Israel: Zionism, Socialism, and the Politics of Ethno-
Religious Communities: Does “Distributive Justice” Have a
Future?
The second country, Israel, is the smallest and
arguably the most Americanized of the three countries
studied, but has many unique features that distinguish it
from both the United States and the Italian example above.18
The discussion of Israel is based on similar sources to that of Italy, i.e., interviews
conducted during recent trips to Israel as well as by telephone, e-mail, etc.; several years
of following the issue though the on-line English edition of Ha’aretz, the most influential
Israeli newspaper, together with numerous forays into the mass circulation Hebrewlanguage press; and a somewhat smaller but not insignificant number of written sources.
For a brief general overview, in English, of the Israeli tax system, see Ariel Bin –Nun,
The Law of the State of Israel 97-103 (2nd ed. 1992); for a more complete introduction, in
Hebrew, see Amnon Raphael, Dine Mas Hachnasa (Income Tax Law) (2nd ed. 2005).
For a more comprehensive survey of the nature and history of Israeli tax administration,
now about a generation old, see Harold C. Wilkenfeld, Taxes and People in Israel (1973).
An excellent collection of articles on the allocative effects of contemporary Israeli tax,
spending, and other economic/social policy, in Hebrew, is Tzedek Khalukati Be’Yisrael
(Distributive Justice in Israel) (Menachem Mautner ed.) (2000); the introduction by Prof.
Mautner and articles by Yechezkiel Lein on the politics of stock market taxation, Tsilly
Dagan on the “hidden” distributive implications of the Israeli tax code, and Yoram
Margaliot on the concept of a negative income tax in an Israeli context are of particular
interest. See also Adva Center, The Social Implications of Fiscal Policy: Looking at
Israel’s 2005 Budget Proposal (presentation for Knesset (Parliament) Members, Nov. 16,
2004, available at www.adva.org .
18
33
These differences concern partially political and social
characteristics—the socialist tradition, ethnic conflict,
and the prevalence of security concerns—for which the
country is famous, but also more tax-specific features such
as an unusual system of tax administration and a history of
large, arguably illogical tax exemptions that make the
achieving of real as opposed to nominal progressivity more
difficult than it might otherwise be. As in the Italian
case, the latter factors often threaten to overwhelm their
former, better known counterparts; although both the nature
of the factors and the balance between them is different
here.
The combination of these factors ensures both that
tax reform in Israel will be a messy process, and that it
will never be entirely separate from other, more prominent
issues facing the country.
The Israeli tax system: a general outline
Israel is a parliamentary democracy with a per capita
income of approximately $18,000-$20,000 per year.19
The
country has a progressive income tax with six tax rates
ranging from 10 to 49 percent on incomes exceeding IS
424,441 (approximately $100,000).
There is also a
19 See The Economist: The World in 2005 at 92 (citing 1995 figure of $17,540). These
figures include both Jewish and Arab citizens but not the populations of the West Bank
and Gaza Strip nominally under control of the Palestinian Authority.
34
corporate income tax at a flat 31 percent rate; a flat 20
percent tax rate on capital gain in excess of inflation
(although subject to various exceptions); and a 16.5 percent
national VAT.
The effective tax bite has traditionally been
higher than income tax rates might indicate both because of
the effect of social insurance and health charges and the
fact that a rate of 30-40 percent is reached at a relatively
modest level of income.
When phase-ins adopted in the 2005
tax reform are fully effective the maximum combined rate of
income and social insurance taxes will be 44 percent as
compared to more than 60 percent when the current wave of
reforms began, along with further reductions in corporate
and value added taxes.
The present tax system reflects a rather extensive
series of reforms, the most recent of which was undertaken
in 2005 and included significant tax rate reductions (as
described above) together with reform in interest and
dividend taxation, taxation of trusts, and the treatment of
foreign taxpayers.20 A previous reform, in 2003-04, was
20 A convenient English-language summary of the 2005 amendments may be found at
www.pwcglobal.com/il/eng . Israeli tax reforms typically initiate with a report by a blueribbon commission, chaired by a well-known economist or other expert; depending upon
political factors all or part of the commission’s proposals are then enacted into law.
Given Israel’s small size and the well-traveled nature of its academic establishment, the
reports often pay extensive attention to the treatment of similar issues in other countries,
35
still broader and contained provisions including the
taxation of capital gains which were previously exempt from
tax; taxation of Israelis on worldwide rather than solely on
Israeli income; and a reduction from still higher tax rates
previously imposed.
The general pattern has thus been one
of reduced tax rates with a corresponding effort to expand
and level the tax base, having the goal if not necessarily
the result of revenue neutrality.
Several additional
changes have been proposed in recent years, with the goal of
further reducing the aggregate tax burden and/or increasing
tax equity, although not has yet been adopted.
Zionism, socialism, tribalism: an Israeli perspective on
distributive justice and progressive taxation
The starting place for any discussion of Israeli
taxation or fiscal policy is the country’s Zionist heritage,
a rather unique ideology which mixed nationalism, socialism,
and the “return to the land” of Israel in an effort to build
a new nation and overcome what was perceived as the
decadence or at very least the loss of physical vitality
among Jews after almost 2,000 years of exile.
Although
there are numerous contradictions within this ideology,
giving its tax policy arguably the most “international” character of the countries studied.
See, e.g., Riforma B’Mas Hachnasa: Hamlatzot Hava’adah L’Riforma B’mas
36
including an inevitable clash between socialism and
nationalism and the uncomfortable coincidence between the
Zionist critique and European antisemitic stereotypes, and
although some observers have derided the entire ideology as
lacking in intellectual or moral substance, it was central
to the formation of the state and continues to exercise an
important influence sixty years later.
Without question the
structure of the Israeli economy in the first forty years of
statehood, which featured high taxes, an enormous state
sector, and a relatively even distribution of incomes for an
industrialized country, reflected this dominant ideology.21
In recent years the socialist ideology has been in
headlong decline, resulting partly from its own internal
failures as represented most noticeably by the relative
decline of the Kibbutz (collective farm) movement, but also
from pressure by economic reformers and ordinary Israelis
(Rabinowitz Commission Report) (2002); Duach Hava’adah Hatziborit L’Riforma B’Mas
Hachnasa (Ben Bassat Commission Report) (2000).
21 Whether and to what extent Israel ever constituted a “socialist” state, as opposed to a
capitalist state with large-scale public enterprises, is the topic of considerable discussion;
the debate, as one might imagine, is difficult to separate from controversies regarding
external relations and has important implications for contemporary policy issues. For a
skeptical view of Israeli socialism, see Ze’ev Sternhell, The Founding Myths of Israel
(1997) (arguing that nationalism took precedence over socialism in Israeli ideology and
socialist goals were regularly compromised or abandoned when conflicting with national
aspirations). For a somewhat more traditional viewpoint, see Howard M. Sachar, A
History of Israel: From the Rise of Zionism to Our Time (2nd ed. 1996) (providing a
generally sympathetic treatment of the Zionist enterprise and the rise of modern Israel).
37
who seek a “better life” along an American or European
model.
This change in focus expresses itself both in
specific governmental policies and in the allocation of
benefits within the private sector, with a widely increasing
gap between rich and poor that has raised concerns for
tzedek khalukati (distributive justice) and indeed the fate
of the entire Zionist enterprise.22
These concerns are
exacerbated by the reality, always present but previously
overlooked, of a powerful correlation between ethnicity or
social grouping and wealth, with not only the country’s Arab
minority but also Jewish citizens of Middle Eastern/North
African origin (edot hamizrakh) and in many cases religious
Jews failing to share in the prosperity of the largely
secular, European upper middle class.23
While setting the
context for the broader debate on social justice, ethnic or
religious differences also reflect themselves in highly
specific and focused policy issues.
For example, family and
child allowances in Israel, which actually increase the
22 See supra note 18.
23 On the correlation between ethnicity and economic status, see “The Ashkenazim
Earn 36 Percent More Than the Mizrakhim,” Ma’ariv (daily newspaper), Dec. 13, 2005,
at 1 (front-page headline for articles citing a study by Adva Center, finding Jews of
European origin earn substantially more than those from North African and Middle
Eastern families and that benefits of recent economic growth go disproportionately to
upper income brackets). The full study is entitled “Israel: A Social Report” and is
38
greater the number of children, are theoretically available
to all citizens, but in practice benefit overwhelmingly the
religious (and to some extent the Palestinian Arab)
communities who tend to have much larger families, and are
subject to frequent criticism from various political parties
on this basis.
One result of these factors is that, while social
justice in Italy tends to be perceived in class and perhaps
regional terms, in Israel it is more likely to be viewed in
terms of ethnicity, coupled with an ideological, quasireligious debate about the fact of socialist Zionism and the
role of alternative ideologies.
Taxation and fiscal policy
are also constrained by the country’s somewhat unusual tax
culture (see below) and by the prevalence of security
concerns, which make higher taxes appear almost patriotic
and at least until recently made it difficult to propose
changes that might result in the loss of even short-term
revenues.
Perhaps as a result of these factors,
redistribution in Israel has traditionally been accomplished
more by spending than tax measures, and only recently if at
all have taxes come to occupy center stage in the country.
available at www.adva.org . Arab families in Israel have lower incomes than either category
of Jews although somewhat higher than neighboring countries.
39
Informality, confrontation, and an overreliance on
withholding taxes:
Israel’s unusual tax culture
A further result of Israel’s founding ideology,
together with its British colonial heritage, is what most
Americans would probably consider to be a somewhat unusual
tax culture.
Taxation in Israel has historically been
characterized by several factors, including extraordinarily
high taxes on wages, with income tax rates until recently
peaking at over 50 percent (higher when social insurance
taxes are included) and the maximum rate reached at a lower
relative income than in most industrialized countries; a
heavy and at times exclusive reliance on salary or wage
withholding, with a small number of deductions and credits
and many or most individual taxpayers not filing tax
returns, at all; and a correspondingly leaky taxation of
unearned income, with outright exclusion of all capital gain
income until recently, and subsequent full or partial
exemption of more specific categories of income and
inconsistent enforcement as applied to business taxpayers.
The tax system is further characterized by a high degree of
informality and (some would argue) inconsistency, with many
rules unwritten, business taxes often negotiated between the
revenue service and business owner, and high-priced or in
40
any event well-connected tax advisors, many of them former
tax officials, frequently hired by better-off taxpayers in
an effort to reduce tax liability.
One result is that non-
wage or in any event unreported income tends to be rather
highly prized in Israel, being worth at least twice as much
on the dollar as the taxable wage variety, a situation which
leads to substantial economic distortion and a widespread
perception of abuse.
A further consequence is that tax
reform in Israel typically begins with a discussion of the
country’s tax base, and particularly the allocation of taxes
between earned and unearned income, rather than the nominal
tax rates.24
There is no equivalent to the EU or similar regional
organization in Israel, although the country’s small size
and geographic isolation make it unusually suspect to
external political or economic pressure.
24 For an assessment of Israeli tax culture and institutions, paying particular attention to
the colonial (i.e., British mandate) origins of the Israeli tax administration, see generally
Harold C. Wilkenfeld, supra note 18, at 43-81 (tax administrative structure), 177-208
(dispute resolution mechanisms), and 209-251 (responses to tax evasion). For a more
recent treatment of the tax evasion issue, including several fascinating insights into Israeli
attitudes generally, see Assaf Likhovski, “Formalism and Israeli Anti-Avoidance
Doctrines in the 1950s and 1960s” in John Tiley ed., Studies in the History of Tax Law
(2004).
41
Reaction and counter-reaction: the Netanyahu reforms
Even more than Italy, Israel has recently been involved
in a series of tax reforms with a distinctly American stamp.
This process involves a tradeoff of reduced tax rates for a
somewhat expanded tax base and is part of a larger series of
reforms, which were pushed aggressively by (until recently)
Finance Minister Binyamin Netanyahu and a largely Americantrained cadre of advisors, that had the specific intent of
reversing Israel’s socialist heritage and building a more
competitive, U.S-style economy.
The tax reforms were
accompanied by significant reductions in welfare payments,
especially to large families, and other spending reductions.
(Isral’s Government is presently headed by the centrist
Kadimah Party, founded by Prime Minister Ariel Sharon before
his current illness; the opposition Labor Party has
criticized the Government’s tax and spending programs but at
the moment appears unlikely to achieve power.)
Yet the reforms and their fate differ significantly
from either an American or an Italian context.
This is true
both of the changes themselves, which still leave a
relatively large part of the population paying tax at a 35
percent or higher rate, and of the public response to them.
While neither as broad-based or effective as in Italy, the
42
opposition has been vociferous in raising the banner of
distributive justice, i.e., of the socialist tradition,
although it has to this point emphasized reduction of family
and child support payments—a nontax issue in Israel although
an equivalent function is filled by the earned income tax
credit in the U.S.--rather than specifically tax matters.
(One of the leading personalities in Israeli newspapers over
the past two to three years has been Vickie Kanfo, who led
widely covered demonstrations on behalf of single parent
families and others hurt by the reduced allowances, although
her credibility was somewhat damaged when she announced her
support for conservative parties and posed naked in a
popular magazine.)
That the spending rather than tax side
has been emphasized appears to result both from the
particular features of Israeli society, notably the
disproportionate number of large families, and (perhaps)
the recognition that high tax rates were being avoided by
the use of nonsalary or foreign income, in any event.
For
these reasons the link between tax and spending policy
appears to be somewhat weaker than in an Italian or perhaps
an American context.
The force of the tax issue is further
weakened by the tendency to rely on “nonpartisan” experts
and the sheer weight of other, especially security, issues.
43
Israel demonstrates the tension between global and
local forces that lies at the heart of the progressivity
problem.
Although there is enormous pressure for the
country to conform itself to a low-tax, reduced services
model—and although American trained experts aggressively
encourage this view—there is an equally strong resistance
that emphasizes the uniqueness of the country and seeks
alternate models.
The debate itself takes place against a
backdrop of ethnic and cultural rivalry, not to mention
political and administrative factors, that have no precise
parallel in the other nations studied.
As in Italy, whether
these “particular” factors outweigh the “universal” forces
pushing toward convergence in tax matters is hard to say.
But the Israeli experience cautions against ignoring the
effect of local, even quirky national characteristics, or
assuming that the pattern followed in one country will
necessarily be followed in all.
IV.
India: Class, Caste, and the Gandhian Legacy:
Progressivity Meets Economic Reform
India is the “outlier” in the project, being both much
larger and poorer (median income of approximately $600-700
44
per year)25 than the other three countries that I studied,
although possessed of a rather sophisticated tax policy
debate owing to its colonial history and native ingenuity.26
The difference in size and wealth means that income taxes
are paid by a small fraction of the population, but also
that they must be kept relatively simple, given the lack of
administrative resources and the more informal nature of the
economy, in order to have any serious chance of
enforcement.27 Questions of administration and compliance,
which in the U.S. are often secondary concerns, are thus the
starting point for Indian tax policy debates.
India also
25 See The Economist” The World in 2005 at 95 (citing 2005 figure of $640). The figure
rises to almost $3,000 if purchasing power parity is used. See supra note 10.
26 This section is based upon interviews conducted during a visit to India in March 2004,
together with Indian on-line newspapers (notably the Times of India) and a variety of
written sources as indicated below. For an overview of the Indian income tax system, see
M.M. Sury, Income Tax in Theory and Practice (2002). For statistical background,
including income and other taxes, see India Tax Foundation, Indian Tax Statistics 19502001 (2001). Up-to-date tax rates may be found at www.madaan.com/taxrates.htm .
27 Two recent authors have argued that, because of administrative costs and the
availability of alternate tax and spending measures, the progressive income tax may be a
relatively poor way to redistribute income in developing economies. See Richard M. Bird
& Eric M. Zolt, Redistribution via Taxation: The Limited Role of the Personal Income
Tax in Developing Countries, 52 UCLA L. Rev. 1627 (2005). Although I believe that
there is a great deal of merit to this argument—and indeed aspects of Indian experience
confirm it—I believe that it remains useful to study the comparative progressivity of
income taxes and that a representative study ought to include some developing countries
as well as the more traditional First World nations. I also believe that Bird and Zolt’s
arguments, although frequently persuasive, may be (or at the very least, may become)
somewhat less relevant to India which, although remaining on average a poor nation,
retains an unusually large middle class sector and a tradition of sophisticated, if not
always effective, tax policy, see infra.
45
has several quirky institutional factors, notably a ban on
federal taxation of any agricultural income, which impact
upon progressivity and tax reform in various ways.
The
country thus provides an interesting test case of the
effects of both large- and small-scale cultural differences
on tax and fiscal policy formation.
The Indian tax system: a general outline
India has a federal system so that taxes are imposed at
both the national and state level.
At the national level
there is an income tax imposed at rates of 10, 20, and 30
percent, with the 10 percent rate being imposed on incomes
exceeding Rs 100,000 or approximately $2,000 per year (this
amount is increased to RS 125,000 for women and Rs 150,000
for senior citizens) and the 20 and 30 percent tax rates
being reached at Rs 150,000 ($3,000) and 200,000 ($4,000)
respectively.
An additional 10 percent surcharge is imposed
on incomes exceeding RS 1,000,000 (about $20,000) resulting
in an effective 40 percent marginal rate.
There is also a
flat, 20 percent tax on adjusted capital gains; a company
(corporation) having a maximum rate of 30 percent for Indian
and varying rates depending on the type of income for
foreign companies; a 10 percent tax on various services;
and a wealth tax although the latter is reported to be
46
easily avoided. A uniform value added tax having a 12.5
percent standard and several reduced rates replaced
previous state sales taxes in April 2005.
Additional taxes
are imposed at the state level.
One of the more unusual features of Indian taxation is
the ban on federal taxation of agricultural income—hardly a
small exception in a country 60 percent of whose population
remains agriculturally based.28
This provision, which dates
from the colonial era, is politically sacrosanct and efforts
to tamper with it have so far met with little success.
As
one might expect, this provision protects many wealthy
landholders as well as India’s poor peasant class, most of
whom would be below the income tax threshold in any event.
Indeed a large number of Indian tax shelters involve the
shifting of income from urban to “agricultural” sources, by
purchasing property in a nominally rural area on the edge of
a city, or by means of rental or other monetary payments
from urban to rural entities.29
The tax system has further
28 See India Constitution art. 270 (“Taxes on income other than agricultural income
shall be levied and collected by the Government of India and distributed between the
Union and the States . . .”)
29 Tax evasion generally appears to be something of an obsession in India, at least
among the salaried classes. A volume purchased in a Mumbai bookshop has on its cover
a drawing of a large arm, dressed in a sleeve bearing the colors of the Indian flag, at the
end of which extends a hand from which a man in a suit is dangling upside down while
money is being shaken from his pockets; the inside of the book contains numerous
47
wrestled with the problem of taxing small cash businesses at
various times trying a flat percentage of revenues or even a
flat annual payment by all shop owners in lieu of a
computation of actual profits, and no system yet proving
entirely successful.
As a result of low wages, the
exemption for agricultural income, and enforcement problems
a relatively small portion of the Indian population actually
pays the income tax.
Since 1991 India has been engaged in a process of
economic reforms designed to reverse the Gandhi-Nehru
concept of economic self-sufficiency and enable the country
to compete more effectively on world markets.30
This
process, which is supported by both major political parties,
has been paralleled by an ongoing series of tax reforms,
designed to rationalize the tax system and increase the
share or revenues from direct (i.e., income) taxes which had
generally fallen throughout the first half century of Indian
independence.
The reform process began with the Chelliah
Commission in 1991 and involved numerous changes including a
reduction of marginal tax rates, which reached an
suggestions for deductions and other items which may serve to reduce taxable income.
Raghu Palat, Tax Planning for Salaried Employees: Incorporating Latest Amendments in
the Finance Act 2003 (2003).
48
astronomical 95 percent-plus in the 1970s, together with an
increase in the exemption amount; assertive efforts to
streamline tax administration and identify prospective
taxpayers; and (less successful) efforts to tax the small
business and services sector as well as to reduce the
dependence on import duties which was consistent with the
opening to foreign investment.
The Kelkar Commission in
Fall 2002 proposed still further changes including the
doubling of the previous Rs 50,000 exemption to Rs 100,000;
changes in business, excise, and value added taxes; and
additional improvements in tax administration, with a
general purpose of creating a broader, more efficient,
less distorting tax base.
and
Following a change of Governments
(Congress Party replacing the BJP or Indian People’s Party)
in 2004 many of these provisions were ultimately included in
the 2005 Budget Act although action was delayed on a number
of other proposals and many underlying issues—notably the
complete integration of the Union and State VATs and the
persistent problem of agricultural income exemption--remain
to be dealt with.31
30 See generally Bimal Jalan, India’s Economic Policy: Preparing for the Twenty-First
Century (1992); Vijay Joshi & I.M.D. Little, India’s Economic Reforms 1991-2001
(1996).
31 See PriceWaterhouseCoopers, Flash on Budget 2005-2006, Feb. 28.2005, available at
www.pwcglobal.com. As in Israel, Indian tax reforms have typically originated with reports
49
Gandhi, the G-8, and the politics of caste and region: the
context for Indian tax policy
The issue of tax progressivity must be seen in the
broader context of poverty and inequality and the correction
of these evils which is a large part of the Indian national
project.
India’s founder Mahatma Gandhi believed that the
caste system and resulting inequality were, together with
colonialism, the chief source of India’s backwardness and
encouraged policies—some of them symbolic but others more
substantive in nature—designed to reverse these tendencies.
These included the outlawing of the caste system, together
with a policy of affirmative action for the lower castes;
enactment of high tariffs and attempted economic autarky;
and strict economic regulation that encouraged the rise of
the so-called “license raj” under which government approval
was required for various and sundry forms of economic
activity. Gandhi and Nehru also believed that excessively
high incomes were inappropriate for a poor country like
India and supported a policy of near-confiscatory taxes (at
that invariably become known by the names of their chairmen or dominant figures, most
notably the Reports of the Tax Reforms Committee (Chelliah Committee) in 2003 and
2004 and the Reports of the Task Forces on Direct and Indirect Taxes (Kelkar
Committee) in 2002. The tax reform process has proceeded simultaneously with a more
general process of deregulation and economic reform, described below; indeed the current
50
one point marginal rates exceeded 90 percent) although
enforcement of both income and wealth taxes remained
inconsistent at best. This system achieved significant
results most notably in agricultural development (the socalled “Green Revolution”) but left the country relatively
poor and, following the collapse of the Soviet Union and the
coming of a new generation to power, a new or at least
modified course was chosen for the Indian economy, as
described in previous sections.32
Given India’s historical commitment to equality between
economic and social classes, one might expect that the
country’s tax reforms would attract a higher degree of
political attention.
Instead they appear to have at least
the public support of both major parties and—with the
exception of the repeated and unsuccessful proposals to
repeal the exemption for agricultural income—have attracted
relatively little opposition at the national level.
This
appears to result from a number of factors. First, tax
Prime Minister, Manmohan Singh, first came to public attention as a bureaucrat who
supervised the early reform efforts.
32 For an argumentative but fascinating history of modern India, emphasizing the
successes (largely political) and failures (largely economic) of the country’s first fifty
years of independence as well as the never fully resolved issues of religion and caste
(including but not limited to the India-Pakistan problem), see Ranabir Sammadar, A
Biography of the Indian Nation 1947-1997 (2001). On Gandhi and his philosophy, see
51
reforms are but one part of a large series of changes
including repeal of the license raj, reductions in direct
interference in the economy, and other adjustments affecting
far larger numbers of people than the income tax, never paid
by more than a small fraction of the population.
Second
there is the brokered nature of Indian politics, where a
large number of regional parties compete with the Congress
and BJP (Indian National Party) and tend to focus on local
rather than national issues.
Finally, and more cynically,
there is the suspicion that people are not particularly
upset about tax changes because many of them are not paying
their taxes, anyway.
It is also possible that there is more
opposition to India’s changes in economic direction than are
commonly revealed in conversations with the Delhi and Mumbai
elites: on a 2004 visit to India, I was repeatedly assured
that the BJP (generally the more conservative of the
parties) would thrash Congress in the upcoming elections
whereas in fact the latter, campaigning against several
aspects of the country’s reform program, won a resounding
and almost wholly unanticipated victory.33
generally The Essential Gandhi: An Anthology of His Life, Work, and Ideas (Louis
Fischer ed.) (2002).
33 For a somewhat contrarian view of the politics of India’s tax, budget, and financial
reforms process, see N. Chandra Mohan, Politics of Economic Liberalization in India, 7
Harvard Asia Quarterly (Spring 2003) (arguing that politics rather than economics has
52
The colonial legacy and its aftermath: assessing the Indian
tax culture
In addition to the macroscopic features above it is
important to consider some of the peculiar characteristics
of the Indian tax culture.34
First, one must consider the
large gulf between tax (and other) policy-makers and the
bulk of the Indian population.
This is a matter not only of
wealth and education but even of language, with most tax and
other legal business being conducted either in English or an
English-Hindi patois that is quite different from the way
most Indians, even in major cities, speak.
Second, there is
the rather strict line drawn in India between the government
and private sector, with most tax policy made by career
civil servants and most private tax lawyers engaged in
litigation of individual cases rather than tax policy or
even big-picture tax planning work.
(The current Prime
Minister, Manmohan Singh, was a career bureaucrat when he
was first called upon to run for political office.)
Finally
there are the limited administrative resources referred to
determined the pace of Indian reforms and in particular made tax reform, notably in the
agricultural sector, difficult to achieve). See also Arvind Panagariya, Have the reforms
failed India, The Economic Times, Dec. 31, 2003 (“Reforms have not failed India . . .
India has failed to reform enough.”)
34 On tax administration/tax culture in India, see M.M. Sury, supra note 25, at 67-150.
53
above, which hamper tax enforcement and severely restrict
the Government’s options in designing and enacting tax laws.
The Indian tax culture affects the debate on
progressivity and tax reform in contradictory ways.
On a
political level, the Indian bureaucracy is probably freer to
ignore popular sentiment and even the opinions of the
practicing bar than their counterparts in Italy, Israel, or
the United States.
On a technical level, however, Indian
policy-makers are probably more constrained than those in
their sister countries: indeed the starting point of their
discussions is typically not “what system would be
theoretically fair and efficient” but “what is it realistic
to accomplish with our existing resources, and will it be
better or worse than what we have now?”
Conversations about
progressivity thus tend to turn quickly away from
theoretical issues such as redistribution or diminishing
marginal utility or even political issues such as wealthy
vs. poorer taxpayers, and toward raw technical
considerations like the difficulty of withholding on
taxpayers outside the major cities or whether businesses can
be relied upon to compute percentages in a dependable way.35
35 Perhaps for these reasons, administrative issues seem to take up an unusually large
portion of Indian tax reform studies: for example, reform of tax administration occupies
36 pages of the Kelkar Committee Report on Direct Taxes and appears to constitute the
54
This does not mean that vertical equity is unimportant in an
Indian context, but rather that it must be filtered through
a range of less lofty considerations before evaluating its
impact on the actual taxwriting process.
An alternate way
to say this is that India is at an earlier stage of its tax
development than the other countries studied: it must first
make the progressive income tax work reliably before
deciding how much progressivity it really wants.
The Indian tax reforms: globalization or a new “Third Way?”
Given the above, it is a fair question whether Indian
tax reform really has very much in common with that in more
“advanced” countries or whether we are dealing with
superficially similar but substantively different processes.
The superficial outline of the Indian tax reform—a gradual
reduction in the maximum tax rates coupled with equally
gradual attempts at expansion of the country’s income tax
base—is indeed similar to that in other nations (whether
this results from voluntary convergence or economic and
ideological imperialism on the part of the U.S. and its
allies remains an open question.)
Yet the underlying logic
of the Indian tax reforms appears to be rationalization of
starting point for many other initiatives. Academic Foundation (New Delhi), Reports on
India’s Tax Reforms 46-83 (2003) (Chapter Three of the Report of the Task Force on
Direct Taxes (2002).
55
the existing system rather than reduction of tax rates for
its own sake: as one policy-maker put it, to reduce the
costs of compliance and correspondingly increase the costs
of its opposite, so that the country actually brings in more
and more reliable revenue than it has in the past.
Put more
pithily, the change may be less from a progressive to a flat
(flatter) income tax than from a symbolically reassuring but
practically ineffective form of progressivity to a more
modest, but also a more realistic, version.
Yet India
increasingly operates in a global marketplace and the
pressure to conform to “first world” tax norms remains very
powerful.
This issue of real as opposed to superficial
convergence between countries is an important one in tax
policy and the broader, globalization process, and we shall
have occasion to revisit it.
V.
Conclusion: On the Prospects for Progressivity in a
Globalized World
The pages above have taken us on a veritable tour of
tax reform and progressivity, in which we have observed both
similarities and differences between the "playing fields" in
three or four countries.
What lessons can we learn from it
regarding the likely future of progressive taxation, in a
world of globalization and increasing competitive pressures?
56
What broader lessons can we learn about the role of culture
in taxation, and the future of comparative law?
The first point to be noted is the similarity in the
issues facing each country.
Italy, Israel, and India are
different in many respects, but all are currently enmeshed
in tax reform programs that involve a mixture of reduced
marginal tax rates in return for at least some broadening of
the existing income tax base.
All three processes are
influenced by, and share essential characteristics with, the
1986 U.S. tax reform which serves as a partial model for
later efforts.
In particular there seems to be an emerging
consensus that "punitive" levels of taxation--let us say, in
excess of 50 percent--are counterproductive in a
contemporary economy, but that some measure of progressivity
is worth maintaining and even protecting at this point.
To
this rather limited extent, there appears to be some degree
of convergence between tax systems, at least where the very
broad outlines of fiscal policy and the tax rate structure
are concerned.
Yet if the issues are largely the same, both the nature
of the debate and the details of its outcome vary
significantly between different countries.
Everywhere, we
have seen, the tax debate reflects a broader discussion of
57
social and economic inequality. There is a pronounced
tendency for the tax argument to become an argument about
something else; but what that "something else" is, and how
it impacts the tax process, differs substantially between
different countries.
Thus in Italy, the debate about tax
progressivity has become part of a larger debate about the
Resistance legacy and Berlusconi's alleged assault on it,
framed by allegations of corruption and a long history of
amnesty provisions; in Israel, it has become part of a
debate about "distributive justice" and, particularly, the
fate of poor Sephardic and (to a lesser extent) Israeli Arab
families who are said to suffer economically while large
sums are spent on settlement projects; and, in India, it is
intrinsically tied to the repeal of tariffs, privatization
of Government enterprises, and other aspects of post-1990
economic reforms.
These differences in public discourse
also impact on outcomes: while significant rate reductions
have for a time taken place in Israel and India, they were
until very recently hamstrung in Italy and the progress of
future reforms in the first two countries remains very much
in doubt.
Differing conceptions of equality and social
justice thus affect both the nature of progressivity
58
discourse and (so far as one can tell) the actual political
results of that discourse.
So political differences plainly affect progressivity;
but that effect is often indirect and unpredictable in
nature.
This phenomenon directs our attention to an
intermediate level of institutions and processes that
translate broad cultural preferences into specific policy
outcomes--what we have called the "tax culture" or "tax
anthropology" of a given country rather than its overall
national culture.
Many of these factors are specific in
nature, relating to the training and career paths of tax
professionals, the structure of the legislative and
administrative processes, and the links (formal and
informal) that exist with equivalent groups in other
nations; others are historical or even quirky in content.
Thus, the Italian experience is plainly colored by the
Resistance legacy and the constitutional requirement to
maintain a progressive tax system; but the country’s
historic difficulties in taxing capital income, the history
of recurrent tax amnesties, and even the constitutional
court’s ban on aggregation of family income have no less
important influence.
Indian tax policy is influenced by the
Gandhian legacy, but also by the English-style training of
59
its lawyers and accountants and by essentially quirky
features, like the effective exemption for agricultural
income, that result from historical accident rather than any
deep-seated national characteristic.
Israeli tax policy is
similarly influenced by institutional factors (the historic
reliance on wage taxation, the absence of widespread tax
returns, the aggressive, quasi-colonialist attitudes of many
tax administrators) as well as by broader, more national
concerns.
This sort of feature is, almost by definition,
incapable of generalization: there is no substitute for
detailed, "thick" description of various national tax
systems in narrow and well-defined comparative projects.36
Future research—whether on progressive taxation or other tax
policy matters--should emphasize detailed, local studies.
One fascinating aspect of any comparative study is the
light that it sheds on one's own country.
A study of
comparative tax progressivity cannot help but notice that
the concept is on the defensive in foreign countries no less
than in the U.S. itself.
Indeed when enforcement is taken
into account there may well be a higher level of real tax
progressivity, and a stronger political consensus in its
favor, in the U.S. than overseas.
This phenomenon casts
36 See Clifford Geertz, Thick Description: Toward an Interpretive Theory of Culture, in
60
doubt on the image of the U.S. as inherently "conservative"
and its competitors as inherently "liberal" or
“redistributionist” in tax policy.
Indeed one reason for
our supposedly greater anti-tax sentiment may be the simple
fact that U.S. taxes are actually enforced, whereas
progressive taxes in many foreign countries—especially where
capital or other unearned income are concerned—are
historically much easier to avoid.
The question also arises
whether the attempt to de-politicize U.S. tax policy, for
example by the creation of nonpartisan tax staffs and
extensive participation of the tax bar in the legislative
process, may not be more successful than is usually
perceived by academics critics.
Rather than weakening
progressive taxation, it is possible that these institutions
have helped to preserve an effective consensus in its favor,
arguably more so than in other countries.
The latter point also has interesting implications for
globalization, perhaps the most overused term in
contemporary international discourse but also the most
important.
Globalization is frequently described as the
export of an American-style capitalism and individualism to
other countries with more collectivist, socialist
The Interpretation of Culture: Selected Essays (1973).
61
traditions.37
This study suggests that the U.S. may in
reality not be quite so individualist, and foreign countries
as genuinely collectivist, as the rhetoric suggests.
Indeed
one problem with globalization--particularly where Third
World countries like India are involved--is that it may
entail the export of the negative side of capitalism
(economic inequality, pollution, and so forth) before the
affected countries have a chance to develop those
institutions--social security, health insurance, at least
some measure of effective tax or nontax income
redistribution--that are simply taken for granted in Western
societies.
The historic answer, that one must first
develop an economic base and then worry about distribution,
is unlikely to satisfy countries that see the West fail to
live by its own policy prescriptions.
(Try running for
President on a platform of no social security and full
taxation of health benefits and see what happens).
This
view of globalization as the selective rather than
37 For a sample of the large and growing literature on globalization and its effects, pro
and con, see Jagdish Bhagwati, In Defense of Globalization (2004); Martin Wolf, Why
Globalization Works (2004); Thomas L. Friedman, The Lexus and the Olive Tree:
Understanding Globalization (2000); Joseph Stiglitz, Globalization and Its Discontents
(2002); Anthony Giddens, Runaway World: How Globalization is Reshaping Our Lives
(revised ed. 2002); Amy Chua, World on Fire: How Exporting Free Market Democracy
Breeds Ethnic Hatred and Global Instability (2002). For an insightful study of taxation
and globalization, see Vito Tanzi, Tax Policy in an Integrating World (1994).
62
systematic export of American ideals is increasingly
widespread in the developing countries, particularly among
left-wing critics:
our study of comparative tax systems
suggests that, for all its fashionable anti-global
character; there may be something to it.
Beyond the political rhetoric of the pro- and antiglobalization forces, a comparative study inevitably raises
the question of whether tax systems are converging or
“harmonizing” and whether this is indeed a desirable goal in
the first place.
The pages above suggest a measured
response to this inquiry.
While on a superficial level
there is a remarkable degree of convergence around the
ideals of the 1986 U.S. tax reform—lower income tax rates,
fewer brackets, and at least some effort and base-broadening
and improved enforcement—on a deeper level we have observed
substantial differences in the implementation of these
concepts and their likely political viability.
These
differences are moreover not random, but relate to
underlying differences in both the national and tax-specific
cultures of the countries in question.
In theory
differences of tax culture should be easier to reconcile
than those at the national level, since they relate largely
to historical or institutional factors rather than deeply
63
held values: the European Union is an obvious example of
this process.
intractable.
In practice however they may be no less
In Europe itself, there appears to be a
reasonable degree of harmonization on corporate tax issues,
as well as on the VAT and other nonincome taxes, but
relatively little regarding even the technical aspects of
individual income taxation, not to speak of broader issues
like progressivity or the underlying goals of the tax
system; in less unified regions, or those that span a larger
variety of peoples and cultures, the problem is that much
greater.
Related to the convergence question is the matter of
the “life cycle” of progressivity and its likely historical
fate.
We noted that tax reform in India, which is at a
relatively early stage of economic development, emphasized a
more effective if less flashy brand of progressivity, while
in Italy and perhaps Israel, which were at a somewhat later
phase of development, progressivity appeared to be stuck in
a more receding posture.
Even in countries like the United
States, which have relatively well-established income taxes,
these taxes are rarely much more than a hundred years old,
and the progressive element has been under attack almost
from the beginning.
The question arises whether, in the
64
sweep of history, a progressive income tax is but a single
phase, which becomes attractive at a certain level of
economic development, but less so once that phase has
passed. This is particularly true given the increasing
difficulty of imposing the tax on capital income and its
resulting degeneration, especially in smaller- and mediumsized economies, into effectively a high-rate wage levy.
Of course, as George Harrison (who knew perhaps a thing or
two about India) put it, “all things must pass,” and this
observation does not tell us how long the income tax will be
around, much less what will replace it.
But it is quite
possible that the income tax (and most especially its
progressive element) will prove less permanent than both now
seem to most observers, and that even many “progressive”
thinkers will ultimately arrive at a somewhat less
enthusiastic view about it.38
Comparative tax progressivity is one part of a broader
process, in which an international or comparative
perspective supplants national chauvinism as the principal
38 The experience of several East European countries, who have recently adopted some
form or other of the flat tax, has been cited as evidence of the terminal decline in
progressivity although the experience of these nations is unique in many respects. See
Ken Dilanian, Derided in U.S., flat tax a winner in E. Europe, Philadelphia Inquirer, Oct.
31, 2005, at A1 (reporting experience of flat tax in Estonia and neighboring countries); cf.
65
paradigm for approaching tax issues.
The adjustment is
likely to be traumatic, especially for Americans, who are
used to thinking of their country and the world as
synonymous; but the potential rewards are very great and the
process is, in any event, inevitable.
It is hoped that the
instant project will be a modest but useful contribution.
George Trefgarne, Whatever Brown says, the flat tax is coming, Daily Telegraph Aug. 29,
2005 (assessing possibilities for implementation of flat tax in the UK).