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The Notion of Income from Capital

EATLP International Tax S. 1

By (author) A. Rijkers, P. Essers
Format: Hardback
Publisher: IBFD Publications, Amsterdam, Netherlands
Published: 28th Feb 2005
ISBN-10: 9076078815
ISBN-13: 9789076078816
Barcode No: 9789076078816
Synopsis
This work includes an Introduction by Peter Essers and Arie Rijkers. One of the most difficult questions tax law faces is how to determine the taxable base. Starting from the ability-to-pay principle, income is generally considered to be the best indicator to measure the ability to pay taxes. However, no consensus exists with respect to the question how income should be defined. Several theories have been developed, like the source theory, the accrual theory based on the net accretion theory and the cash flow theory leading to a consumption-type notion of income. In practice, in most countries a mixture of these theories determines the concept of taxable income. Besides, politicians have severely biased the theoretical just notion of income to achieve social-economic goals. For that reason, they introduced exemptions, relief's but also extra tax burdens. This process of "instrumentalism" of tax law has led to many conflicts with the equality principle, since -mostly -one can only achieve these social-economic goals by treating equal taxpayers differently. The desire to use taxation as a way to influence the economy has also been the basis for the recent trends in most countries towards scheduler income taxes. From a tax law perspective, a global income tax seems to be superior since all kinds of income are treated equally. Nevertheless, experience shows that scheduler taxes, mostly leading to a lower taxation of income from capital compared to labour income, seem to be better suited to face the challenges of a globalizing world economy in which "one push on the button", replaces capital from one point of the earth to another. For the Netherlands, this was the reason to introduce the so-called box III in its Personal Income Tax Code 2001, resulting in a fictitious income from capital of 4 per cent of the average net wealth in a year, taxed at a flat rate of 30 per cent. Finally, the notion of taxable income in most countries has proven not to be resistant against tax saving schemes and constructions. The natural reaction of most legislators to introduce specific and general anti-abuse measures has led to very complicated regulations which seem to be only accessible to taxpayers who can afford expensive tax lawyers. On the other hand, it must be said that these schemes and constructions were made possible by imperfections of the legal concept of the notion of income. These imperfections were often the result of negligence or political compromises. Because of these developments, general legal principles as equity and equality, which are crucial for a fair tax system, are constantly under fire. Tax science should take the responsibility to create an alternative for the present situation by trying to develop a generally accepted notion of income based on the general legal principles of equity, equality and certainty, and generally accepted specific tax principles as the ability-to-pay principle and the benefit principle. This notion of income should not be influenced by political motives, nor should it be susceptible to abuse. Besides, it should fit within generally accepted principles of international tax law and within supranational agreements like the EC Treaty and the WTO-agreements. This also means that the notion of income should make a comparison possible, leading to co-ordination and adjustments between countries. Seen from both an EC and a WTO perspective, this would mean an important step forward. The European Association of Tax Law Professors offers an excellent forum to accept this challenge. It provides European tax academics the opportunity to develop a notion of income, which is adapted to the difficulties and challenges of the 21st Century. Of course, such a wide topic could not be discussed in detail during only one conference. For that reason, the Academic Committee of the EATLP has chosen to focus on the subject of the notion of income from capital. There are many good arguments for this choice. Most problems with respect to, e.g., the ability-to-pay principle, the relationship between personal income taxes and other taxes like the wealth tax, the inheritance tax and corporate income tax occur in the field of taxation of income from capital. Also, the differences between the various theories on the notion of income can be explained by referring to the different results with respect to the taxation of income from capital. Finally, globalization proves that the traditional way of taxing income from capital on the basis of the residence principle does not work any longer. As a reaction, this could lead to more emphasis on the taxation of "sitting ducks", meaning that ordinary workers have to pay the burden of the fact that capital owners cannot be taxed any longer. To avoid this process, a new concept with respect to taxation of income from capital has to be developed. This book has been divided into three parts. In the first part, the general aspects of income taxation on income from capital are discussed. The first question that arises in this respect is what should be the influence of general legal and specific tax principles on the taxation of income from capital. In his report, Joachim Lang addresses this question. After describing the framework of tax principles in the constitutional and European law, he analyses specific tax principles to determine the income. Many theories and methods to determine the income have been derived from these principles. Lang first describes the historical debate between the net accretion theory (The S-H-S-model) and the source theory. Then, he comes to the analysis of the present debate between the accrual method and the cash flow method. In that respect, he also addresses the question whether scheduler or global income taxation should be adopted. In his response to this contribution, Wolfgang Gassner heavily criticizes the importance many authors give to the ability-to-pay-principle in respect to the concept of income. Manfred Rose stresses in his report the importance and relevance of income theories like the cash flow method from an economic point of view. The problem of the relationship between personal income tax on income from capital and other taxes related to income from capital is discussed in the report of Claudio Sacchetto and Laura Castaldi. The first problem they face is whether the combination of a personal income tax on capital proceeds and a wealth tax causes double taxation. They also discuss the problem of economic double taxation caused by the co-existence of corporate income tax and personal income tax on dividends. In his contribution, Daniel Gutmann responds to the conclusions of Sacchetto and Castaldi. Henk van Arendonk deals with the question whether the real income from capital or a fixed amount like in the Netherlands should be taxed in personal income taxation. His contribution concludes the first part of this book. The second part deals with the question how in the various notions of income from capital the taxable base should be determined. Peter Kavelaars addresses the question whether income should be determined on an accrual basis or whether the realization principle should prevail. Kevin Holmes poses the fundamental question whether deferral is allowed. He describes the conflicting objectives in this respect: investment and economic efficiency arguments versus equity, simplicity and other economic efficiency arguments. Alain Steichen responds to this contribution. Judith Freedman explores the treatment of capital gains and losses. Some jurisdictions include capital gains and losses in their general income taxation; others regard them as a conceptually different tax base and treat them separately, in some cases under an entirely different tax code, or under the general tax code but with some different rules. She analyses the justifications both theoretical and practical for differential treatment of capital and income gains. Leif Muten reacts to Judith Freedman's contribution. Ian Roxan deals with the difficult problems caused by the influence of inflation on taxation. He also considers the phenomenon of imputed income. Bertil Wiman analyses some problems related to emigration taxes, especially with respect to income from capital. Some of the issues he deals with are the possible conflict with the ability-to-pay principle, the topic of treaty override and the EC aspects. This book is concluded in the third part by the general report of Peter Essers and Arie Rijkers. This general report is based on the conclusions of the various contributions to this book and on the discussions at the conference in Cologne.

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One of the most difficult questions tax law faces is how to determine the taxable base. Starting from the ability-to-pay principle, income is generally considered to be the best indicator to measure the ability to pay taxes. However, no consensus exists with respect to the question how income should be defined. Several theories have been developed, like the source theory, the accrual theory based on the net accretion theory and the cash flow theory leading to a consumption-type notion of income. In practice, in most countries a mixture of these theories determines the concept of taxable income. Besides, politicians have severely biased the theoretical just notion of income to achieve social-economic goals. For that reason, they introduced exemptions, relief's but also extra tax burdens. This process of "instrumentalism " of tax law has led to many conflicts with the equality principle, since -mostly -one can only achieve these social-economic goals by treating equal taxpayers differently. The desire to use taxation as a way to influence the economy has also been the basis for the recent trends in most countries towards schedular income taxes. From a tax law perspective, a global income tax seems to be superior since all kinds of income are treated equally. Nevertheless, experience shows that schedular taxes, mostly leading to a lower taxation of income from capital compared to labourincome, seem to be better suited to face the challenges of a globalizing world economy in which "one push on the button", replaces capital from one point of the earth to another. For the Netherlands, this was the reason to introduce the so-called box III in its Personal Income Tax Code 2001,resulting in a fictitious income from capital of 4% of the average net wealth in a year, taxed at a flat rate of 30%. Finally, the notion of taxable income in most countries has proven not to be resistant against tax saving schemes and constructions. The natural reaction of most legislators to introduce specific and general anti-abuse measures has led to very complicated regulations which seem to be only accessible to taxpayers who can afford expensive tax lawyers. On the other hand, it must be said that these schemes and constructions were made possible by imperfections of the legal concept of the notion of income. These imperfections were often the result of negligence or political compromises. Because of these developments, general legal principles as equity and equality, which are crucial for a fair tax system, are constantly under fire. Tax science should take the responsibility to create an alternative for the present situation by trying to develop a generally accepted notion of income based on the general legal principles of equity, equality and certainty, and generally accepted specific tax principles as the ability-to-pay principle and the benefit principle. This notion of income should not be influenced by political motives, nor should it be susceptible to abuse. Besides, it should fit within generally accepted principles of international tax law and within supranational agreements like the EC Treaty and the WTO-agreements. This also means that the notion of income should make a comparison possible, leading to co-ordination and adjustments between countries. Seen from both an EC and a WTO perspective, this would mean an important step forward. The European Association of Tax Law Professors offers an excellent forum to accept this challenge. It provides European tax academics the opportunity to develop a notion of income, which is adapted to the difficulties and challenges of the 21 Century. Of course, such a wide topic could not be discussed in detail during only one conference. For that reason, the Academic Committee of the EATLP has chosen to focus on the subject of the notion of income from capital. There are many good arguments for this choice. Most problems with respect to, e.g., the ability-to-pay principle, the relationship between personal income taxes and other taxes like the wealth tax, the inheritance tax and corporate income tax occur in the field of taxation of income from capital. Also, the differences between the various theories on the notion of income can be explained by referring to the different results with respect to the taxation of income from capital. Finally, globalization proves that the traditional way of taxing income from capital on the basis of the residence principle does not work any longer. As a reaction, this could lead to more emphasis on the taxation of "sitting ducks", meaning that ordinary workers have to pay the burden of the fact that capital owners cannot be taxed any longer. To avoid this process, a new concept with respect to taxation of in- come from capital has to be developed. This book has been divided into three parts. In the first part the general aspects of income taxation on income from capital are discussed. The first question that arises in this respect is what should be the influence of general legal and specific tax principles on the taxation of income from capital. In his report Joachim Lang addresses this question. After describing the framework of tax principles in the constitutional and European law, he analyses specific tax principles to determine the income. Many theories and methods to determine the income have been derived from these principles. Lang first describes the historical debate between the net accretion theory(The S-H-S-model) and the source theory. Then, he comes to the analysis of the present debate between the accrual method and the cash flow method. In that respect he also addresses the question whether schedular or global income taxation should be adopted. In his response to this contribution, Wolfgang Gassner heavily criticizes the importance many authors give to the abilityto- pay-principle in respect to the concept of income. Manfred Rose stresses in his report the importance and relevance of income theories like the cash flow method from an economic point of view. The problem of the relationship between personal income tax on income from capital and other taxes related to income from capital is discussed in the report of Claudio Sacchetto and Laura Castaldi .The first problem they face is whether the combination of a personal income tax on capital proceeds and a wealth tax causes double taxation. They also discuss the problem of economic double taxation caused by the co-existence of corporate income tax and personal income tax on dividends. In his contribution Daniel Gutmann responds to the conclusions of Sacchetto and Castaldi. Henk van Arendonk deals with the question whether the real income from capital or a fixed amount like in the Netherlands should be taxed in personal income taxation. His contribution concludes the first part of this book. The second part deals with the question how in the various notions of income from capital the taxable base should be determined. Peter Kavelaars addresses the question whether income should be determined on an accrual basis or whether the realization principle should prevail. Kevin Holmes poses the fundamental question whether deferral is allowed. He describes the conflicting objectives in this respect: investment and economic efficiency arguments versus equity, simplicity and other economic efficiency arguments. Alain Steichen responds to this contribution. Judith Freedman explores the treatment of capital gains and losses. Some jurisdictions include capital gains and losses in their general income taxation; others regard them as a conceptually different tax base and treat them separately, in some cases under an entirely different tax code, or under the general tax code but with some different rules. She analyses the justifications both theoretical and practical for differential treatment of capital and income gains. Leif Muten reacts to Judith Freedman 's contribution. Ian Roxan deals with the difficult problems caused by the influence of inflation on taxation. He also considers the phenomenon of imputed income. Bertil Wiman analyses some problems related to emigration taxes, especially with respect to income from capital. Some of the issues he deals with are the possible conflict with the ability-to-pay principle, the topic of treaty override and the EC aspects. This book is concluded in the third part by the general report of Peter Essers and Arie Rijkers. This general report is based on the conclusions of the various contributions to this book and on the discussions at the conference in Cologne.