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What is tax?

“Taxation is key to the character and functioning of the state, the economy and society as a
whole.”
– Solomon Picciotto

1 Before facilitating any session to do with tax, it is important to ensure a common understanding in the group of what is meant by ‘tax’. Taxes have been described as the price paid for having a government, paid by anyone who benefits from the existence of the state and the public services it provides. The formal definition of a tax is “a compulsory contribution levied upon persons, natural or corporate, made to the public authorities in order to generate revenue to
help the government defray the expense incurred in conferring common benefits upon the residents of the state 2”. In more simple terms, a tax is compulsory, increases government revenue (also known as government income), is placed upon those incorporated which means both people and corporations (note the existence of “corp”, in Latin meaning anything to do with the body), and is used for the purposes of offsetting some of the costs that are incurred by governments in the process of providing public services to their population, like healthcare, education, and public transport for example. Tax is a core element of what is known as fiscal policy, or government policy concerning in particular public revenues and taxation.

Importantly, even though it is a payment from one party to another, tax is different to a regular transaction in the sense that it is not paid with the expectation that a specific item or output is given on payment, in the way that we may exchange money for food or clothing. In other words, there is no quid pro quo (direct return) in the case of a tax. Instead, taxes are paid to the authorities and it is they, along with councils etc. (depending on the decision-making structure of the country’s public institutions) who ultimately decide, with more or less input from and responsiveness to the population, what tax revenue should be used for and how it should be apportioned between services.

In contrast however, many people argue that tax is just a way for governments to deprive citizens of their hard-earned money. However, this analysis of tax ignores the reasoning behind tax systems, namely that their existence supports the fulfilment of economic, social and human rights. How so? The human rights legal framework states that the minimum requirements needed to fulfil economic and social rights include providing sufficient foodstuffs, essential
primary healthcare, basic shelter and housing, and the most basic forms of education3 . Tax is crucial for ensuring that these rights are fulfilled. Without adequate taxation to ensure the
provision of basic services, states are undermined from meeting their human rights obligations.

What does tax do, or, what are the purposes of tax?
4Rs &? 2Ss.

Revenue

Tax has four key purposes, which are often referred to as ‘The Four Rs of Tax’. The first of these is generating revenue, also known as government income. This revenue provides three functions:

1) It is used to fund essential public services like education and healthcare, as well as infrastructure like roads, street lights, and bins for example.

2) It is also related to the strengthening of the democratic process, because when governments receive revenue via tax, it places the citizens of that country in a position whereby they can demand to have an input into how the revenue is spent. Tax is therefore related to democracy, and we will see some evidence of this shortly when we move onto ‘representation’.

3) It provides governments with the predictability needed to be able to make financing decisions into the future. For example, if a government was using only aid to pay the salaries of all nurses, doctors and teachers, what would happen to the country if that aid were to be removed?

Redistribution

The second purpose of tax is to support the redistribution of wealth. Redistribution refers to redistributing the country’s resources from the wealthy towards the poorest and most vulnerable people, a strategy which can help to reduce inequality in society.

However, redistributing wealth via tax can be done in a number of ways, and not all are equally just. In fact, the way a country’s citizens are taxed can either lessen or increase equality. Therefore the already existing income inequality means that it is not solely enough to increase the amount of tax, instead governments must decide how to tax its population in order to ensure an equitable burden that does not worsen existing inequality.

Specifically, there are two ways in which tax can be applied on individuals in society that can lessen or increase income inequality. These two ways are progressive or regressive. A reliance on consumption taxes like sales tax or value added tax (VAT), for example on food, fuel and other goods is seen as regressive as everybody is taxed the same amount regardless of their financial status. In contrast, an example of a progressive tax is income tax in some countries, as index bands change the tax rate based on how much income is earned, and the more people earn, the more tax they pay (to a point). This is because the marginal utility (i.e. the usefulness of the surplus) is lower as one earns more money . For example, when a person has less money,
each unit of that money becomes more valuable. Think about it; the marginal utility of €10 to a person earning €4,000 per month is much greater than to a person earning €10,000 per month.