Some Theoretical Aspects of "Comparative Taxation" '.HAT IS COMPARATIVE TAXATION? A- surprising as it may seem, even amid voluminous scholarly w ritings in comparative tax law, tax eomparatists usually neglect to define what it is, exactly, they deal with. Wo have no intention lunching such a scholarly effort here (and this is certainly not the n purpose of this book), hut we would like to suggest two possible • ers to the question presented in the subtitle above. Possibly and obviously, "comparative taxation" could be seen as a ■i scholarly method of research and teaching. To assert such an argument is also to argue that whatever this method is. it holds its own c characteristics, processes, techniques, and modes ol ev aluation. cautiously assert that to date, no such method can be identified. F-ither. legal tax eomparatists have usually adopted well-defined parative methods that are used in general comparative legal stud* es Given the wide array of methods available for legal comparison rt of w Inch are briefly surv eyed below ); there is probably no need ir vent a unique method of comparing tax rules. I comparative taxation" can also represent a unique body on . ledge, I lowever, this is not immediately apparent. To explain this issertiott, we must start by pointing to the obvious: any process of tax romparison will involve, at some point, the juxtaposition ol lax laws ol ral jurisdictions. I lowever, the mere juxtaposition is not, by itself, new knowledge." Simply looking at the tax treatment of punitive age awards in the United States and in Germany, lor example, and ":vz the similarities or differences between them does not tell us a lot These tax law s are already "there " Bv "comparative tax know I-w e mean, rather, the new insights and conclusions that can only be Ded bv way of comparison. An example may illustrate this point. In a book titled Tax Law Design nint Drafting, Victor Thuronyi pioneered what may be referred to as the taxonomy ot legal "lax families."1 ictor I huronv i, Tax Law Design and Drafting, xxiii-xxxv (International '•* >netary Fund 1996 ); Victor Thuronyi, fax Law Design and Drafting l-rerrahonal Monetary Lund IsWK ): Victor 1 hurom i • Camparatn r* Tax Law, 23-« I Kluwer 2003). : GLOBAL I'ERSI'KTIVES ON INCOME TAXATION LAW Even though the classitic.ilion of legal families is a long-established concept in general comparative law, such a comprehensive classification was new to tax laws when introduced by Thuronyi. According to Tluironyi, such classiticalion plavs an important role, as it provides assistance to those seeking to understand the tax law of different countries, whether tor the purpose ol comparative study or as part of tax practice."3 Specifically, such a classification is most helpful in generating "relevant questions."3 The concept of classification is regarded by its proponents as an essential part of the process ol comparison/ as it suggests which jurisdiction might be "successfully compared" with others Of course, any such typology may be criticized or completely rejected. But it is obvious that such typology could not have been produced without the comparison of multiple tax jurisdictions and hence certainly qualifies as "comparative lax knowledge." In other words, it is an insight that could not have been achieved absent the process of comparing tax rules. In the following text, we will trv to attach this meaning to the term "comparative taxation." II. SOME POSSIBLE APPROACHESTOTHE STUDY OF COMPARATIVE TAX LAW One of the mam problems with the comparative study of law is that there are probably as manv approaches to it as there are comparative scholars. Although over the past three decades or so, legal comparatists have fiercely debated what approaches should be deemed appropriate when conducting a comparative study ot law, they have failed to produce any coherent outcome.5 This is not surprising, since this academic discussion is strictly embedded in the ideological and political stances of its participants. Since ideologies are many times irreconcilable, the same fate may apply to the methodological offshoots of such ideologies. Some legal comparatists did trv to sketch a so-called objective blueprint for comparative research. Professor \V. |. Kamba, for example, portrayed legal comparison as a three-phase process." The first phase is the descriptive phase, in which the comparatist is expected to describe : ThuknoYI, CoviPARAiiv i Tax Law, supra note 1, at 23-2-1. hi ,it S. • John C. Keitz, How to Da Comparative taw. 4n Am. (. CoMft I. M7, 622 (1998). >iv. e.g. Mathias Reimann. The Progress and Failure of Comparative Law in the n\ mid Half of the Twentieth Century, 50 Am. J. Comp. L. 671 (2002). Walter I Kamba, Comparative taw, A Theoretical f ramework, 23 Kt'l Com p. L.Q; -is:? 11974). Some Dworetical Aspetis of "Gompflrative taxation the "notms, concepts and institutions of the systems concerned," The second phase is the identification piiose, in which the researcher indentifies liu-differences and similarities among the systems studied. The third phase is the explontttoty pltase, in which the reasons tor convergences and divergences are explained. I lowover, even it we accept such a generalized scheme, it is obvious that once executed, it must be tilled with some real contents. One must choose which jurisdictions to compare what laws to compare, which legal and fionlegal texts to read, and mi on. In other words, we an- thrown back into the realm of subjective choices, which, b\ definition,are ideologically affected. Obviously then, we cannot possibly point to a single approach that can be regarded as superior to others. Indeed, given that these approaches represent different ideological views, we would probably not be able to reach an agreement among ourselv BS as to the most promising method of comparative tax research. Hence, any reader of this book would clearly identifv some shitls in the focal points of the discussion, a result of our theoretical agreements and disagreements. Thus, a shift from a functional discussion to a discussion in comparative economics, with side trips to cultural comparativism, should be viewed as an invitation to consider multiple possibilities of analysis, rather than lo suggest a "proper* one in each case. However, this unsolved debate did successfully emphasize the pivotal points of ideological differences. Some "schools of thought" can be clearly identified, each of which has its own basic assumptions and purposes and each of which has its own idea as to how comparison should be executed. In this respect, the key debates revolve around three basic questions: the first is the purpose of comparative legal studies; the second is the objects of comparatives studies, namely which jurisdictions and which laws should be compared; and the third addresses the techniques ot actual comparison. I he intent here is not to overburden the reader with theoretical aspects of research but rather to briefly survey some of the possible wa\ s by which one might approach a comparative study in the context of tax laws.* Unavoidably, such a short summary tends to generalize and ignores some important nuances. Hence, it does not bv any means intend to prescribe in details any technique that should he followed when conducting a comparative studv in tax law. But it can still clearly illustrate where the key ideological (and consequently methodological! differences lie. These approaches can thus serve as "ideological rallying points" from which a comparative debate can be launched. We will survey four possible approaches to the comparative studv of " Id. at 511. * For a tnoreeljborative survey, -77 (2009), Kelven Avi-ionaii. Intfrnaiionai I'ax as Imh<\vitoxi.u I .aw: \\ \nalysisoi i he Imernaiiosai I ax Rfciml (Cambridge University Press iooT); Yariv Brauner, An International Tin Kiynr.r m Crystallization, 56 1 \x I Rev, 259 (2003). Some Theoretical Aspects o4 "Comparative faxal Garbarino's functionalist approach is a good example." He refers-to tin- European Common Consolidated Corporate Tax base Project (CCC I'H). among others. In 2001. the European Com mission "identifiid corporate taxation across the European L mon European taxation, in Common C unsoi iDAi Ll) Loni'orati I \\ basi II 52 I Michael I ange!. al eds., 201 is i. 4 Garbarino. -:iy>-' note lit, .it 709 1 Clivt- M. Schmitthoff, /he Scknee ofCempafalive Un\ 7 Cambridc.i I I "4 96(1941) !" ThCRONYI. Comparative Tax Law fupra note I, al 9. « kt. ■■ CI OBA1. PERSPECTIVES ON INCOME TAXATION law The functionalist premises sn^^L-st that a comparative legal researcher should start by identifying a particular practical problem and question the way in which it is solved in each of the jurisdictions compared (the "problem-solving approach".!. Another possible way to address such assumptions is to take an institutional view, namely to ask which institutions in the countries compared perform the same problem-solving functions ("the institutional approach"). Two comparative methods are worth mentioning here. The first is the comparison ot legal transplants. According to this approach, most legal systems are built upon the borrowing of legal models ol other systems, In that sense, transplantation is the main source ot legal development and evolution ;s In the tax context, Garbarino argued that the "pervasiveness of tax transplants challenges the idea that lax law is exclusiveh a local response to social demands felt by a specific national community "'' In other words, an effective comparative tax studv might be conducted by identifying the tax rules that successfully circulate among various jurisdictions and are being similark implemented. A derivative ot the transplants approach is the "common core" approach to comparative research Given that legal rules are borrowed and re-borrowed in the multinational context, it is not unreasonable to assume that models that successfully address common problems will Survive, while those unable to do so will disappear. Over time, this may create a "common core" of tax rules that mav be shared by man\ jurisdictions Comparative tax researchers are sometimes specifically aiming at exposing this core. A good example tor a common core-style project in the tax arena can be found in the book that is regarded as canonic by many, authored by I high Ault and Brian Arnolds" 1 heir book states its functional orientation at the outset by saving th.it "the purpose of this book is to compare different solutions adopted by nine industrialized countries to common problems of income tax design."1' Aultand Arnold approached local specialists in main jurisdictions, who were requested to provide accounts of their home tax systems. Ault and Arnold later synthesized the country reports into a form of general analysis that categorizes the findings into an easily read classification. Their work is primarily oriented to reveal the "main comnuinahtics"r among the systems compared, thus pro* iding us with a form ot tax common core. Ai.an Watson. Licai Tr.\nm*i.a\ rs: \\ Approach to Comparative Law (1074) ;'' Garbarino. supra note 10, at 696 Hugh (.Ami & Brian I. Arnold. Comparai ivt. Income Tax a i kin: a SiKueiiRAi Analysis (University Press of Virginia 2004). : Id. at xix. Miranda Stewart. Vw " Mm" la/vwinv: Comparative Income tax Systems, 19 T\x NotesInt'i I323, 1327(1999». Some rhcoretical Aspects nt "Comparative Taxation B. Comparative tax law as a study ot cultural differences Cultural comparatists reject the functional assumptions bi similarities ot social problems and legal solutions. Rather, cultural comparatists assume that law is part ot a broader cultural phenomenon Tach culture contains elements such as values, traditions, and beliefs, which give each culture its uniqueness. This "differentiation of cultures" entails, according to such an approach, that the laws (which are embedded in these cultures) are also necessarily different.:' Thus, it is not surprising that cultural comparatists also reject harmonization projects, since they call—by definition—for the annulment of cultural identity as expressed in the unique laws of a given society. Writings in comparative legal culture have long celebrated (or urged that we should celebrate) the virtue of "difference," since difference "satisfies the need for self-transcendence.":l liven if harmonization nj> somehow desirable, cultural comparatists perceive it as an unattainable goal, since cultural and political differences are irreconcilable.-1" Rather, according to this approach, comparative analysis should be aimed at understanding the cultural; social; political; and ultimately, the legal identities of "the other." In turn, such "understanding" should serve us better when reflecting on our own legal rules and cultural identity. In a sense, cultural comparison is a hermeneutic process;a culture cannot successfully reflect on its own law without the process ol comparison and cannot reflect on the process of comparison without questioning its own law. Such a cultural "difference-oriented" stance is clearly visible in the writings of several comparative tax commentators.-'" Michael Livingston, tor example, defines "tax culture" as "the body of beliefs and practices that are shared bv tax practitioners and policy makers in a given society and thus provide the background or context in which 11 S;w note 2t>. at 5bl). a Vr. e.g., Anthony C. Inianti. The fc'Jftji $ ,n.s from lot.in ,m,l Tih- United States. ISO L. Pa. I. Rev, 527 (2001). ■" Assai Likhmski, /- t,i.\ I ,»,«• ( uttui.ilhi S/'tvific' Lca*,m> from the tli>toru ojf Income Tax line hi Mandatory Palestine, II liitoiat n ai Ivtj. L. 72^ (2010). See. I,i\ ingston. I he Hopes and Limits of Comparative Taxation, supra note 2r>. U. al H2 Some rheoretical Aspects of "Comparative Taxation suggest thai tax cultures are best understood as a general category from which narrow indicators can he subsumed and easily compared. Such indicators might he the education and training ot tax elites; the relationship between lawyers, economists, and other lax professionals; the nature of tax administration; the attitudes toward tax compliance and evasion: and the unwritten traditions that govern the making and implementation of tax policv in the country in question. C. The critical approach to comparative tax studies At the most general level, critical studies in comparative law are aimed at exposing the pretentious apolitical nature of so-called mainstream discourse in comparative law and to suggest alternative discursive agendas. Critical scholars ot comparative law ollen see mainstream comparative law as a hegemonial-ideological project aimed at either assimilation or inclusion ot Other traditions, a process culminating in projects ot harmonization. ' Such scholars argue thai Comparative legal studies should be a "liberating project." releasing us from the cognitive cage of abstract relativ ist dichotomies (such as common law civ il law. Western/Oriental, self/other), which are wrongly perceived to be "objecth e."11 In thi' tax arena, critical comparisons can be easilv associated with Infanti. Fot example, Infanti explains his choice of comparative tax studies as a tool ot tax reform by noting that "[t]hc ensuing debate over how to reform the ailing L.S international tax regime has largely been shaped by the traditional concerns of efficiency, fairness, and simplicity."'" I le further notes that "|t)he traditional tocus on these concerns may stem from the fact that they lend themselves to the theoretical analysis preferred by commentators."'" Professor Anthony Inland suggests that tax reform debates should shift their perspective. He believes that placing the reform debate in a comparative perspective is needed in order to liberate current discussion from its own "parochial" view." By doing so. Inlanli expresses ,i true critical stand, aiming at exposing the true nature of current "mainstream" tax policy debate and to suggest an alternative agenda. ,: See Livingston, Fnww Milan to Mumbai. supra note lb. at 557: " Anne IVters & I (finer st hwenke, Conrpnratiiv taw tttryond Post Modeiiuntn 4" l.x i i & COMP. 1.. Q 800. 822-24 (21)00). 14 Gunter Frankenherg, Critical Comparisons: Ke-tlinikin^ Comparative I ate, 26 Harv. Ivt'i. I .J.411.444-45(1985). Anthony C Infanti, Spontaneous tax Coordination: On Adopting a Comparative Approach to Reforming Hie U.S. Ititmuittoiwl fax Regime. 35 Vand. I. Transnat'i L. 110?. 1113120021. ' /./.at 1114. Mat 1119-20 I!' ' CiLOBAI I'KRSPECTIVLSON INCOME TAYAIION LAW Fo do so, one must step out of the usual choices oi objects and jurisdictions to compare. One must specifically "free herself" from the torn-monlv selected issues of tax comparison in order to expose what the common paradigmatic discourse preters to avoid. Indeed, Inland explained his choice to compare the ta\ treatment ot contributions made by domestic taxpayers to foreign nonprofit organizations tor its marginaliry, specifically "because it was not a topic about which academics studying international tax normally write.Part of his purpose in doing so, he continues. " w as to fry to move the international tax discourse beyond the usual subjects."""' Frankenberg portra) s the actual process ot critical legal comparison as a three-stage process.11 Critical study should start, according to Frankenberg, where other studies end: the conceptualization ot complicated social phenomena into abstract terms, which can beeasih fitted with a legal framework. Then, the critical comparative scholar is asked to deconstruct the process of legal decision making, questioning, and exposing the political interests underlving the process. Once we are in dear view of the abstract "objective" legal framework on the one hand, and the underlying political interests on the other, the thud step is to reintroduce the legal process, showing how its discourse "ignores, marginalizes or transforms."" Namely, the third stop shows how interests shape legal understanding and create the abstract concepts with which wo started, D. Comparative tax study as an exercise in economic analysis Comparative Law and Lconomics (CLE) is sometime categorized as an approach ol its own right, but it may also be viewed as an offshoot of functionalism, taking a more self-aware ideological turn: efficiency.45 Instead ol simply asking which laws o* institutions fulfill which functions, it asks which do so in the most efficient wav. CLE starts with an assumption that "there is a competitive market tor the supply ol law/'*' legal transplants, from an economic point of view, are actually a competitive circulation ot legal models, ,1 process m 8 Anthony C. Inranti. A Tax Cril Identity Crisis? Oi T,n Expenditure Analysis, Dcconstructkm, and tin- Rethinking ii/'.i Collective Identity, 2^ Whutilk L. Rev. 707. 7% CiXIs). *' hi. at 7*0-^7. *' GunttT Frankenberg, Critical Comparisons: Re-thinking Comparative Law, 2* Hakv. Nt'i.. L I. -111.450-52(198?). " Id. at 452, I: See lc;o Mai hi. Compakai ivi Law and ECONOMICS (Michigan University Press W"). Raffade Caterirta, Comparative Law and Economics, m 11 car Encyci onniA 01 CoMPAHATlVI Law 161 (Jan M. smitsed., 2006). Some Tluvivtii .il Aspects oi "Comparative Taxation which only successful u>r efficient) models survive, hence leading to convergence.14 From a nietliodologic.il point of view. (. I I seeks to begin the Comparison from a 'neutral scale' th.it can he validated by observable data: economk efficiency."4" In essence, OF research is aimed at comparative inquires into the deviations or different jurisdiction from an economically efficient benchmark: a so-called "model legal institution."4" from that perspective, CI.F can be either "problem-sob mg oriented"4" (asking how we can sol\ e a common problem in the most efficient way) or institutional oriented" (asking which existing institution is the most efficient). At least one legal tax comparatist adopted a similar approach. Barker asserted that a comparative tax analysis should seek to measure how tax systems deviate trom a well-known benchmark: the Haig-Simons model.1'' Under Barker's approach, this model has to be used as a reference point for the identification ol similarities and differences among tax systems. Yet, unlike the traditional approach to law and economics. Barker sees comparative lavs and economics as aimed at distributive justice rather than efficiency. Such an assertion has an important implication with respect of the choice of laws to be compared: it we seek tax benchmarks of distributive justice, ive should probably studv tax laws that deviate trom the I laig-Sinions formula by wav ot actual "distribution." Barker provides some examples of significant tax laws that should be regarded creating "exemptions and tax preferences" rules,1' namelv those which affecl economic distribution. For example with respect to the taxation of sen ice income, he includes deferred compensation arrangements, the tax preferential treatment of health and other insurance, and fringe benefits. With respect to the taxation of capital gains, he notes the inclusion of interest and dividend income, the deduction of interest payments, rules lor capital cost recovery, the deductibility of current versus capital expenditures, timing of income and deduction, and the deduction ot net operating kisses. 44 /./. .11 161-62. Oliver Brand, Comci'timl Comparisons: ttmmds a CwfcfwwJ Methodology of Comparative Legal Sliuiie*. 12 broomjvn J. Km i 405.421 (2007). '" Mattei, supra note 42 at 1S2. L'gn Mattel & i ahri/io Catiagi. Comparative Law and Economics, 1» tin \iw Palgrave Dictionary of Economics and Law -«46.147 (P. Newman ed.. 1998), ' i he language ot this approach the one mainh adopted in this book. " William Darker. Expanding the Study of Comparative Tax Lure to Promote Democratic Policy: The Example oi the Move to Capital Gam* luxation in Post-Apartheid South Africa. 109 Pi \s St. 1 &v 703, 712-714 (2005). hi. at 713-10 c;u>K\i n KM'ľ.i n\ i m >\ i\( o\ii r\\.viio\ i \n 1 .The economic principles of taxation: efficiency, equity, and simplicity As noted above, thi> book is intended to serve as a supplement to the basic tax class Thus, mam times t his. book stops exactly in the juxtaposition ot tax rules and onlj briefly compares them using the economic principles ot taxation. Therefore, even it the book is not a scholarly effort to produce 'comparative tax law knowledge." it follows, to a certain extent, a comparative law and economics perspective in a prob-lem-solving-oriented manner. This is whv it is worth offering a few words about the three general economic principles ot taxation: efficiency, equity, and simplicity.'1 However, this mode ot explanatory analysis is primarily technical. Namely, it does not seek to advance a particular normative choice but rather to use economic analysis as a handv to»>l to illustrate differences and similarities Particularly, even though each ot the terms explained below is in essence an economic term each represents a completely different (usually competing) ideological choice that may be exemplified using economic language but can probably be explained only by looking at social, cultural, and historical perspectives I'o summarize, the "economics" underlying this book are not real!) "comparative" economics in that they do not advance a particular poliev choice. Similarly to Barker, we occasionally adopt an economic technique, but we do not necessarily advance an efficient (or any other, for that matter) outcome in particular in this book. I. Efficiency The concept of efficiency is the one which is usually associated with comparative economics, i.e.. the comparative search tor the most efficient solution. The concept of efficiency moves from the invisible hand theorem by Adam Smith: under certain conditions, an unfettered free market economy will be efficient and will move on its own, like it it was an invisible hand. Unfettered economy means that there is no government interference or a minimal government intervention (i.e., government should not interv ene). T w-market economy means that there is perfect competition. The conditions in order In have perfect competition (i.e.. the conditions needed tor the inv isible hand theorem to work) are the following • Small agents, each agent has to be small enough so not to single-handedly atleet the economic market, lor example, no matter how manv pops one buys, it will not affect the prices (this brings in the assumption that we cannot have monopoly, otherwise prices would be affected), In other words, each participant needs only to ' I or an in-depth analysis ot these three principles, see | ii Ion Uamia. i a mm. Ourselves, \ c itizcn's Ci um n> nu l)i »v 11 ov in t.wi s i The Ml I Press2008). Some theoretical Aspects al "Comparative Taxation know about bis or her own preferences and constraints, there is no need to manage a huge amount of information like in a planned econom y; • Rational agents: each agent has to hi- a rational one: rational agents are agents who trv to maximize their profits; • No public goods"1 or externalities: the theorem works onlv when there are not public goods, because the tree market economy would not be able to produce public goods in an efficient way. There is an externality when actions of one individual or firm affect other individuals or tirms, other than through the price system; and • Perfect information: buyers are well informed about prices and quality of what they may purchase. In fact, imperfect information leads to adverse selection (which is information asvmmetries between buyers and sellers) and moral hazard (which is even situation in which a person does not bear the lull adverse consequences of his actions). However, in the real economy, the above-mentioned conditions are not met. In fact, we could always identify market failure, government failure, and people failure. There is market failure because there are monopolies (and therefore there are not onlv small agents), public goods, externalities, and imperfect information (adverse selection and moral hazard). There is government failure because unfettered economies do not exist; since governments do intervene and interfere (tax policy would probably qualify as cme ol the most significant forms of government interventions). Finally, there is people failure because very often, people do not make choices th.it are in their own interest. 1 his field is also known as behavioral economics. • [;or example, it has been proven that people are susceptible to framing (the same person in the same situation rrtaj choose differently depending on how the situation is framed). The concept of (Pareto) efficiettt u is that "no one can be made better oil without making someone else worse oft. In other words, resources are not wasted." Let's assume we have two kinds of people in the economy. They only differ in their ability to sell their services; that is whv we have highs and lows. The more resources one has, the higher her well-being is. The theorem of the invisible hand assumes that the unfettered free market economy will always be on the frontier (the utility possibility frontier or LIT). The assumption is that when we are on the utility 51 A public good is a good that it ii is consumed b\ one person does not diminish its art .lil.ihilitv to anyone else. ■ See Ri iiaviokvi Public I i\\x< >. u.l. VtcCaffery & I Slemrod eds., 20061 U OLOHAL PERSPECTIVESON INCOME TAXATION LAW U(low) \_ Utility possibility \lrontier U (high! possibility frontier, no resources are wasted or. in other words, no one can be made better off without making someone else worse off. Every point inside the curve means that there is a waste of resources, because, theoretically, it is still possible to reach a point where both parties are better off. It is noteworthy that the theorem does not tell anything about rair-ness, I herefore. saying that an economy operates efficiently says nothing about the distribution of well-being among the citizens. 1 his means that an efficient economy is not necessarily a fair one. The distribution may be deemed to be inequitable, although the grounds lor making such a judgment are ethical rather than economic. However, the concept of efficiency is fundamental in analyzing or comparing different tax systems. Most taxes have efficiency costs because they distort taxpayers' decisions. For example, income taxes make leisure more attractive. Generally, for a given amount ot tax revenue collected, efficiency OOSt is higher the greater is the behavioral response to taxes. For example, a tax on food is not necessarily inefficient because it would raise revenue without causing major behavioral responses (besides the ethical problems that may arise). Similarly, a tax on skies is not inefficient because it would reduce leisure and would therefore induce people (at least theoretically) to spend more time working. Efficient taxes are those that correct negative externalities or create positive ones. Regarding progressive income tax systems, these are inevitably accompanied with a waste of resources. This is because the more progressive the income tax system is, the more influenced the behaviors are, which in turns involves a waste of resources. According to the invisible hand theorem, the only neutral tax is the lump sum tax, which doi's not grant any redistribution of wealth. 2. Equity The vertical equity principle slates that the wealthier a person the more taxes she should pay. In a progressive income tax system, a taxpayer's tax liability, as a fraction of income, rises when Sonic Theoretic.il Aspects ot "Comparative taxation" / 15 higher income is Produced. In a proportional income tax system, all taxpayers are subject to a "flat rate" tax at the same percentage of their income, regardless ot the amount oi income. In a regressive income tax system, as the income increases, the tax percentage decreases. Vertical equitv could be introduced in our analysis using one ot two principles. The first is the so-called 'benefit principle": the tax burden is proportionate to the benefits received by the taxpayers. According to this principle, taxes are seen as a charge tor the serv ices provided by the government. However, the benefit principle precludes redistribution policies, and valuation issues for public goods may also emerge The second is the "ability to pav" principle, according to which, as a taxpayer's well-being increases, so does her ability to pay. However, this principle provides only vague guidance for progressivity and ignores the expenditure side of the government budget. Theoretically speaking, this mav be a well-established principle, yet it seems too abstract to actually be implemented. Yet. in many European countries, the "ability to pay" principle is a constitutional one. .Another way to deal with vertical equity is to analyze the trade-off between equity and efficiency. Refer to the diagram of the utility possibility frontier. The efficiency costs of redistributing via progressive tax and transfer policies are represented bv the "utility feasibility frontier" that lies within the utility possibility frontier. The more the UTľ lies within the UPF, the greater is the efficiency cost ot progressivity. This, in turn, depends on the behav ipral response to such policies. fhe principle of horizontal equity is also fundamental tor analyzing and comparing differed I tax systems. According to this principle, individuals (or families?) at the same level ol well-being should have the same tax burden. finally, the principle of intergenerational equity has also to be considered: first, because a tax policy that may seem not equal in a vear-period horizon could be considered equal in a lifetime horizon or the other way around; second, because certain tax policies may create tensions between different generations. 3. Smip/lCiry-Simpucity is not really an independent criterion (and for that matter, not a strictly an economical one, though it carries with it economic Implications), because unnecessary complexities waste resources f inefficiency) cause a capricious assignment of tax burden (inequity). Simplicity is usually measured by looking at compliance and administrative COsts Compliance cosh measure the lime and money spent by taxpayers to comply with the tax system. They represent the time and resources expended by taxpayers to interact with the income tax system. These costs include the value of individuals' lime spent learning the tax law, maintaining records for tax purposes, completing and filing tax forms, and responding to any correspondence from the tax administration In GLOBAl PERSPECTIVES ON l\COMF TAX \IK>\ I AW (including tax audits). Compliance costs also include amounts paid to Others to conduct any of these task-, on behalf ol an individual or a business.53 It compliance costs are too high, taxpayers may have an adv anlage not to comply with the tax system (therefore reducing compliance costs) it the risk ot detection and the other costs are relatively low. Administrative COStS** measure the time and money spent bv the government to implement the tax system, We are left with the fact that the simplest lax system mav not be the lairest. 1 he fairest tax svstem might have efficiency costs. The most efficient svstem is probably not the fairest. £ What to expect next From here, what to do with the information supplied in this book is lor the reader to choose. The examples lo follow are the Start, not the end. and are intended to ignite modes of thinking that are not usually applied in basic tax classes. The foreign examples will be based primarily on the foreign countries covered in depth in I high Ault and Brian Arnold's Comparative Income taxation- A Structural Analysis, namelv, Australia, Canada, France. Germany, lapan, The Netherlands. Sweden, and the United Kingdom. Italian and Israeli tax systems, for obvious reasons, will also be addressed. We will also use examples from developing countries in order to emphasis the policy choices made by countries with less familiar si>cial ami political backgrounds and in which the income tax system plays different roles in economics and politics. This is why occasional examples will also be drawn from the lax law of other countries other than those mentioned above. 1 he organization of the book is designed to help the tax student follow the bonk in parallel with the regular tax casebook that he or she is using. Since most U.S. tax casebooks follow a basic pattern (income, deductions, the taxable unit, timing, capital gains, and so on), the book will follow the same order. A critical comparatist w ill probably be muck to nolo this construction and may even cntici/e us for trying to manipulate foreign tax systems to accommodate the "mainstream" American discourse. Point taken. We invite, by all means, critical tax comparatists to bring forward a critical analysis on the construction of comparative tax discourse around these usual local points. This would be a much-needed (and long overdue) contribution the comparative tax discourse. '; Slemr^ & Bakija. supra note 50 4 ny Tin President's AovrsoM Pamei on Fcderai Tax Reform, Simpi i . i x i u. wo I'ho-Gkowiu. I'k. .i'osals io tlx America's Fa* System i iovernment I'rinting Office 200s).