Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
A Normative Evaluation of Consumption Tax Design:
The Treatment of Sales of Goods Under VAT in the European Union and Sales Tax in the United States
Dr. Robert F. van Brederode*
There exists by necessity a correlation between law and morality. Laws to a great extent are the reflection of the moral standards of society. This is particularly evident in criminal law and family law. Laws prohibiting and sanctioning murder, theft, rape, driving under the influence, or animal abuse contain the notion that such behavior is not only detrimental to the proper functioning of society but is morally wrong as well. Laws that allow marriage between one man and one woman but prohibit polygamous and polyandrous or same-sex marriages bear a clear moral distinction of correctness and incorrectness.
Similarly, normative principles are applicable to tax laws as well. Beyond the mere function of providing funding for the services that the government provides for its residents, tax laws contain normative rules, either explicit or implicit, on how the tax law should be applied. There are general moral tax rules, such as equality, and rules that are more specific for, and dependent on, the type of tax. These more specific rules define what is sometimes called the nature of a tax, or referred to as the legal character of a tax. The characterization of a tax should not merely function as a tool to arrive at an accurate scholarly description of a tax. It is my thesis that direct normative consequences derive from the legal character of a tax. In its design, a tax must conform to the principles that are immanent to its legal character in order to meet the standard of moral fairness.
As a consequence, the nature or legal character of a tax should play an important role in guiding the legislative branch of government when designing and determining the features of a certain tax, and the judicial branch when called to interpret tax laws. Should the government, through the actions of the legislature and judiciary, develop morally just tax policy, this will in turn generate a higher potential for taxpayer compliance. As further explained in Part VIII, it is my opinion that there exists equilibrium between the degree of morality of tax laws and their application on the one hand and voluntary compliance on the other hand. The focus of this Article is only on the design side of U.S. sales taxes and the EU Value Added Tax (VAT), both of which can be characterized as a consumption tax, and not on judicial interpretation. The purpose is to examine the extent of compliance of these taxes in their legal design with the normative standards embodied in their legal character. It offers a comparison of the mechanics of these consumption taxes from a normative perspective. First, a closer look needs to be taken at the elements that make up the legal character of a consumption tax as well as to the concept of consumption itself.
In this Article, Part II examines the extent to which the VAT in the European Union (EU) and the sales tax as applied in the United States can, indeed, be characterized as taxes on general consumption. Next, the Article compares in further detail the tax treatment of used goods under both a VAT, as applied in the EU, and a retail sales tax, as generally applied in the United States at the subnational level as a specimen of normative performance by the legislative branch of government. This is done for the purpose of establishing whether, and, if so, to what extent, the legislative branch of government in designing the VAT or sales tax has met the normative expectations implied by the legal character or nature of these consumption taxes. Part III examines the taxation of a good that is used by different types of buyers until the end of its life cycle. Part IV examines the taxation of a good that is resold during its economic life by a business purchaser to another business or to a consumer. The treatment of second-hand goods is dealt with in Part V, and trade-in sales are covered in Part VI.
Where appropriate, each Part begins with an evaluation of the correct theoretical tax treatment, and then provides an assessment of whether, and, if so, to what extent, the VAT and sales tax arrive at the same or similar result as the theoretical model. Part VII outlines technical conclusions and Part VIII explains the value and purpose of normative assessments as demonstrated by the evaluation of these taxes in Parts II through VI. This is done on the basis of two interconnected premises. The first premise is that the public has a moral obligation to pay the taxes lawfully imposed on them. This obligation is balanced, however, by the second premise that the government has the moral obligation to only impose taxes that are just and fair. The crux from a normative perspective is the balance between the two premises. Normative evaluation can be a helpful tool in developing good tax policy which may generate potentially higher taxpayer compliance.
*Adjunct Professor of Law, New York University School of Law, Graduate Tax Program