Taxation and Democracy

Abstract

Political economy assumes that taxation and democracy interact beneficially when there exists “congruence” or “equivalence” among those who vote on the tax, those who pay the tax, and those who benefit from the tax. Yet this only holds true when we look at the community of taxpayers as an aggregate, not at the position of the individual taxpayer. Individuals might regard democratic decision-making as a tool for the majority to exploit the minority. They might also perceive powerful special interest groups to extract preferential tax treatment to the detriment of other constituencies. In the international situation, the notion of “congruence” or “equivalence” comes under additional strain. Why do most countries allow citizens abroad to vote without being subject to tax while resident aliens are subject to tax without the right to vote? In recent years, tax competition has exerted even more pressure on democratic discourse: Is the “exit” option for individuals a source of irritation for democratic tax legislation or is it rather a useful device to protect the individual against being overtaxed? To what extent shall outside investors take into account the redistributive policies of States? These issues do not only challenge the traditional balance of taxation and democracy. They also challenge our views on how we perceive the State and how we define the community of taxpayers as agents of social justice. In tax law, the borderline between “us” and “them” has to be addressed as unlimited tax liability involves a notion of solidarity that is hard to capture in a globalized world.

Against this background, this article explores the constitutional framework of taxation and democracy in a comparative fashion. It presents two major pathways for the protection of the individual in fiscal matters: protection by “content” (material tax principles) and protection by “consent” (voting rights) as they have evolved since the days of Hobbes and Locke. While the United Kingdom and the United States largely rely on the protective value of democratic consent, countries in Europe and in Latin America have resorted to hard-wired constitutional constraints on tax legislation, ensuring a high-degree of judicial review by constitutional courts. This constitutional framework comes under increased pressure once a country opens itself to the globalized world. It remains to be seen to what extent material principles – like the principle of equality – are in the position to restrain a country’s engagement in international tax competition.

Keywords: Tax Law, Constitutional Law, Comparative Constitutional Law, Taxation, Democracy, Principles of Taxation, Citizenship, Tax Competition, Taxpayer Protection

JEL Classification: H2, K16, K34, K33