Two Conceptions of the Rule of Law's Prospectivity Requirement in Taxation

Abstract

Amidst growing concerns over income inequality and public sector finances, governments across the developed world have re-embraced “retrospective taxes”, taxes that have an effective date preceding their enactment date. Among other examples, governments have introduced retrospective excess profits taxes in Canada, Italy, Greece, Luxembourg, the Netherlands and Spain, and retrospective remedial taxes on long-established tax planning arrangements in the UK. Taxes of this sort are routinely condemned by tax scholars and lawyers for breaching Fuller and Raz’s prospectivity requirement, which provides that laws should only apply on a going-forward basis. This claim, however, obscures an important difference between Fuller and Raz’s conceptions of prospectivity in taxation. Fuller endorses a “compliance conception” in which retrospective taxes on past transactions are permissible so long as taxpayers are provided with a future payment window to comply with their new obligation. Raz, in contrast, endorses a much less permissive “reliance conception” in which taxes on past transactions are problematic, even with a future payment window, because they disrupt reliance interests in pre-existing law. 

This chapter compares and weighs possible justifications for the compliance and reliance conceptions of prospectivity. Its central claim is that it is surprisingly difficult to construct a satisfying rule-of-law rationale for the reliance conception, even though the reliance conception is implicitly adopted in most accounts of the rule of law in taxation. One implication is that the widespread condemnation of many retrospective tax laws requires reassessment. Another is that more attention should be paid to developing the compliance conception or other plausible alternatives.          

Keywords: tax law, rule of law, prospectivity, retroactive laws, retrospective laws, Fuller, Raz, windfall taxes