The End of Progressivity

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From Milan to Mumbai, Changing in Tel Aviv: Reflections on Progressive Taxation and “Progressive” Politics In a Globalized But Still Local World Note: A slightly revised version of this paper appears 55 American Journal of Comparative Law 555 (2006). Copyright American Society of Comparative Law, Inc. (2007) By Michael A. Livingston1 Progressive taxation—the idea that people with higher incomes should have to pay a higher proportion of that income in taxes--continues to be on the defensive in many quarters.

The reasons for this defensiveness range from

political changes, including the decline of Marxism and the spread of a conservative political philosophy in the U.S. and other countries; economic developments, including increasingly sophisticated tax shelters and a growing mismatch between tax evaders and national enforcement bodies; and, perhaps, a sense that progressivity has failed to meet its goals of promoting social welfare and achieving

Professor of Law, Rutgers-Camden School of Law. A. B. 1977 Cornell, J.D. 1981 Yale. I wish to thank Pete Raukar, Noah Burton, Brian Moss and Margaret Roberts for outstanding research assistance together with friends too numerous to mention in the countries in question. Additional thanks to Profs Dan Shaviro and the late David Bradford together with the students at the NYU Law School Colloquium on Tax Policy and Public Finance for their written and spoken comments on this project. This project was made possible by a generous grant from the American Tax Policy Institute and additional research support from the Rutgers-Camden School of Law. 1

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at least some redistribution of income.2

Globalization is a

particular challenge, since high tax rates tend to be imposed on precisely those people who have the greatest capacity to shift all or part of their income to lower-tax jurisdictions. Although there is a great deal of scholarship on progressivity--and much of it is very good indeed--it tends to emphasize the experience of the United States and a few other countries, such as the United Kingdom, Germany, and Japan, that have rather similar economic and political structures.

This focus makes it difficult to know if the

apparent limitations of progressivity are inherent in the concept itself or are instead the products of a particular time and place.

In particular the role of globalization is

difficult to pin down from the study of one country alone. A comparative approach, which considers the fate of progressivity in different nations and cultures, offers a better chance to evaluate these issues.

By focusing on a

relatively specific problem, such a study might also offer important insights into the intersection of tax and culture and the broader globalization phenomenon.

See Michael A. Livingston, Blum and Kalven at 50: Progressive Taxation, “Globalization,” and the New Millenium, 4 Florida Tax Review 731 (2000). 2

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This article attempts such a study.

It considers

progressive taxation and its fate in three foreign countries--Italy, Israel, and India--as well as the United States, for a total of four case studies.

The countries

were chosen in part for my linguistic capabilities and, in part, because of their distinctive features.

Italy is an

advanced industrial society and a member of the European Union but with a highly idiosyncratic political system and an unusual degree of regional differences in economic and social indicators. Israel is a Middle Eastern nation with First and Third World characteristics and a high degree of inequality that is correlated with ethnic rather than regional status; the country's shift from a collectivist to an individualist economic philosophy at the same time as it faces serious internal and external challenges makes it an especially interesting test case.

India is a Third World

country which has similarly moved from a socialist to a capitalist economic policy but which continues to face enormous poverty and whose limited administrative resources place a serious constraint on its tax policy choices.

All

of the three countries are thus advanced enough to have a sophisticated tax policy discourse, but each has political and cultural features that make its tax policy necessarily

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different from that of the others and the United States. By a happy coincidence, all three countries have recently been involved in substantial tax reform projects, which have as common features the substantial reduction of income tax rates and at least some effort to broaden the corresponding tax base. By comparing them to one another and to the United States, something approaching a cross-section of contemporary progressivity and its problems can be achieved. In order to evaluate the progressivity of a particular tax system, at least some technical issues must be addressed. These include, inter alia, the nominal tax rate structure; the tax base to which these rates are applied; enforcement and compliance issues; and the scope of the inquiry, i.e., is one concerned exclusively with income taxation or must other taxes (wealth taxes, inheritance taxes, excise taxes, etc.) also be taken into account.

The

article thus devotes some space to a description of each individual country’s tax system and an evaluation of its progressive or regressive nature. The bulk of the article, however, is devoted to the public tax debate in each country.

What is the attitude

toward progressive taxation of the country's principal political movements, and of its professional tax elite?

Is

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there a consensus in favor of progressivity, or is there a strong movement for a flat or significantly flatter levy? How, if at all, is the tax debate connected to the broader debate about economic and social equality in the country, and are there particular "cleavages" within the societyethnic, religious, regional--that affect the country's perception of economic equality and (indirectly) of the progressivity issue?

Is there a serious debate about tax

matters at all, or does it tend to be subservient to other, arguably weightier issues? Finally, the article asks how the debate is affected by what might be called the tax culture or tax anthropology of the country in question.

Among the factors considered are

the education and training of tax elites; the relationship between lawyers, economists, and other tax professionals; the nature of tax administration; attitudes toward tax compliance and evasion; and the unwritten traditions that govern the making and implementation of tax policy in the country in question.

A recurring theme of the article is

the extent to which these relatively narrow, tax-specific considerations may be as or more important than broader political and social factors in determining the fate of progressive taxation and of tax reform generally. A further,

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related theme is the degree to which tax systems are or are not converging with one another, on both a technical and a political level, as reflected in progressive taxation and other policy issues.

The paper is thus on one level a study

of tax progressivity, but on another level an inquiry into the fate of national legal systems in a globalized world,and the potential and limits of comparative law scholarship in addressing this question. Part I of the article discusses the concept of progressive income taxation and the principal arguments for and against it, using the American experience as a guide. Parts II through IV consider the progressivity issue in Italy, Israel, and India respectively, emphasizing the impact of globalization and the relationship between the tax debate and broader political discourse in the country concerned.

Part V presents the author's conclusions

regarding the fate of progressivity in a globalized world, the elusive concept of tax culture, and directions for future research. I.

Background: A Brief Primer on Progressive Taxation and the American Experience With It

A.

Traditional arguments for and against progressivity

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Progressive taxation has always been a phenomenon that is easier to describe than to explain.

Although nearly all

advanced societies have some form of progressive income tax, the justification for it is difficult to pin down, and (perhaps for that reason) progressivity has frequently been on the defensive although rarely if ever completely eliminated from a tax system.

After two generations Blum

and Kalven's famous phrase, that the case for progressivity was "stubborn, but uneasy," remains as true as ever. I summarized the arguments for progressivity in a previous article and need only briefly to recapitulate them here.3

These arguments traditionally divide into two

categories.

The first are direct arguments for

redistribution of income, based upon the alleged injustice of pretax income allocations or (more broadly) the notion that resources should be allocated at least partially according to the needs of individuals rather than their

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See Michael A. Livingston, supra note 2, at 733-36. For a classic statement of arguments for (and against) progressivity, see Walter Blum and Harry Kalven Jr., The Uneasy Case for Progressive Taxation, 19 University of Chicago Law Review 417 (1952). While Blum and Kalven’s article is unquestionably the principal source on this issue, many of the arguments contained in their study were made by earlier European and American scholars. See, e.g., E.R.A. Seligman, Progressive Taxation in Theory and Practice (1908); Louis Suret, Theorie de l’Impot Progressif (1910). For an interesting exchange on progressivity, taking place just under halfway between Blum and Kalven and the current era, see Charles O. Galvin & Boris I. Bittker, The Income Tax: How Progressive Should It Be (1969).

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abilities.

The second is the notion of the diminishing

marginal utility of money, that is, the idea that wealthy people derive less advantage from each additional dollar of income so that--by taxing them at a higher percentage--we may in fact be demanding an equal or lesser sacrifice from them than from their poorer compatriots.

This argument has

the advantage of appearing scientific in nature and avoiding some of the more overt politics of the redistribution issue; the problem is that utility is difficult to measure and nearly impossible to apply to tax system design.

A third

historical argument, the so-called benefit theory, suggests that the wealthy derive more benefit from government services and should therefore pay more to support them. If the arguments for progressivity emphasize its (alleged) social and political consequences, the arguments against it focus on individual behavior.

The principal

argument relates to incentives, that is, the notion that people will work less hard if they have to share more and more income with the government.

Thus the metaphoric pie

representing national economy will become smaller while people argue over who is to receive a larger slice.

A

further argument is more libertarian in nature, relating to people’s inherent “right” to enjoy the fruit of their labors

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and the strong burden that must allegedly be overcome before they are required to share it.

These arguments are likewise

difficult to quantify, but--like the arguments in favor of progressivity--maintain a strong hold on the popular imagination, particularly in more conservative circles. In my previous article I suggested that--while the arguments for and against progressivity were largely unchanged--there was a long-term erosion in the support for progressivity, with the result that its opponents had generally become more assertive with the passage of time and its adherents had adopted an increasingly defensive posture. I attributed this to three distinct but related processes. First, the conservative direction of politics in the U.S. and other countries weakened the support for progressivity at a philosophical level.

Second, the identification of

poverty with women and minorities--while enhancing the moral case for redistribution--tended to weaken it politically, since other factions of society saw an interest in reduced taxes and “progressive” forces were increasingly concerned with specific women’s and minorities’ issues.

Finally, the

globalization process weakened the case for progressivity by suggesting that a country which maintained highly progressive taxes would simply lose business to countries

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that were more forthcoming in this area.4

This last

argument was especially forceful, for it suggested that-even if a country wished to maintain progressive taxes--it would be prevented by economic forces from doing so. Whether I am right that there is a long-term trend against progressive taxation remains to be seen, and indeed progressivity has shown surprising resilience despite the factors above.

Yet the very suggestion of a decline

suggests some interesting questions.

If progressivity is

indeed on the defensive in the United States, is this a temporary or an ongoing phenomenon?

Does it result from

conditions specific to the United States--conservative politics, individualism, a tradition of antitax rhetoric--or from more universal factors?

Are other countries likely to

encounter the same resistance to progressive tax rates, or will their tax systems remain more progressive even if the U.S. goes in a flat or flatter direction?

Do the answers

vary between rich and poor countries, or between countries

4 For a more complete summary of these arguments, followed by suggestions for revised arguments by progressivity advocates, see Michael A. Livingston, supra note 2, at 73766. For an effort to apply contemporary philosophy in support of progressive taxation, see, e.g., Donna M. Byrne, Progressive Taxation Revisited, 37 Ariz. L. Rev. 739 (1995) (citing Rawls, Nozick, Dworkin, and others on the issue of progressive tax rates); but see Charles R. O’Kelley, Jr., Tax Policy for Post-Liberal Society: A Flat-Tax Inspired Redefinition of the Purpose and Ideal Structure of a Progressive Income Tax, 58 S. Cal.

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with a history of socialism and those with more conservative or traditional governments?

While primarily interesting as

comparative tax issues, these questions are also important for the U.S. itself: for if opposition to progressivity is temporary or local in nature, it is likely to be overcome, while if it is universal and permanent progressivity is likely doomed. B.

Progressivity and tax culture: distinctive features of the American tax system To answer these questions, it is necessary to consider

the American tax system from a comparative perspective, i.e., to evaluate what might be called American tax culture or tax anthropology.

Tax culture is an elusive concept, but

may be defined to refer to the body of beliefs and practices that are shared by tax practitioners and policy-makers in a given society and thus provide the background or context in which substantive tax decisions are made.

Put differently,

tax culture may be thought of as the noneconomic or nonquantifiable side of taxation, which varies between different countries even as underlying economic principles remain more or less the same.5

Tax culture is related to

L. Rev. 727 (1985) (applying some of the same authors in support of an argument for a flat tax with a generous exemption amount). 5 The definitions are taken from Michael A. Livingston, Law, Culture, and Anthropology: On the Hopes and Limits of Comparative Tax, 18 Can. J.L. &

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but distinct from a country’s broader political and social culture, so that (for example) a country might have a political or social culture that favored a progressive distribution of tax burdens, but a tax culture that somehow or another impeded it; or conceivably the other way around. As compared to most other countries, the United States tax culture is distinct in several respects.6

The first is

our relatively sophisticated system of tax administration and (by most accounts) the relatively high level of compliance with income and other taxes.

For all the talk

about Americans evading or hating to pay taxes, voluntary tax compliance appears to be as high or higher in the United States as in most comparable countries, a situation that

Jurisprudence 121 (2005). My definition is broader if perhaps less systematic than that of (e.g.) Ann Mumford, who approaches tax culture primarily in terms of tax compliance and tax evasion phenomena, and similar authors. Ann Mumford, Taxing Culture (2002). 6 The ensuing analysis is based largely on personal observation of American tax culture and its differences from other countries: since this “external perspective” differs from that normally adopted by American tax scholars it is difficult to cite documentary support for each individual assertion. For a comparative perspective on American tax law, see generally James R. Repetti, The United States in Hugh J. Ault and Brian J. Arnold, Comparative Income Taxation: A Structural Analysis 137-55 (2nd ed. 2004) (general description of history, structure, and style of American tax law and administration); Victor Thuronyi, Comparative Tax Law 28-29 (2003) (brief description of the “American family” of tax systems). The Thuronyi book is arranged by themes rather than geographic materials so that the material on the U.S. is distributed throughout different parts of the book, but the material is no less and perhaps more effective for this reason. See id. at 68-70 (describing U.S. approach toward taxes and constitutional law); 160-71 (U.S. approach to tax shelters and tax avoidance); and 206-30 (tax administration and procedure in U.S. and other OECD countries).

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highly publicized tax shelters and other techniques of evasion only partially detract from. (One reason for the publicity is that people are genuinely surprised by such tactics.)

The relatively large administrative resources at

the disposal of the U.S. Government, and the large size and power of the country generally, put it in a relatively strong position to enforce its will on progressivity and other tax-related matters, so that we generally think of tax policy as a series of autonomous choices rather than decisions forced upon us by outside actors.

This relative

independence of thought and action is something that we have become so accustomed to as to take it more or less for granted; but it distinguishes us from most countries and even in a globalized world remains an important factor. A second point concerns the structure of American tax institutions and the nature of the taxwriting process. These are characterized by a high degree of partisanship on tax matters, but also by a surprising degree of consensus, and a series of institutional arrangements, like the congressional Joint Committee on Taxation and the Treasury Department Office of Tax Legislative Counsel, that both promote the interests of "nonpartisan" tax policy and tend to insulate it from other policy areas.

For example, there

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is a remarkable degree of consensus on the need for at least some form of scaled rate income or quasi-income tax, and a longstanding consensus against a federal sales or value added tax, together with a similar consistency in tax systems between the various states, the latter being partially enforced by federal constitutional standards.

The

tax legislative process is further characterized by a division of power between a large number of congressional and other actors, and between state and federal governments, with the effect that change tends to be slow and incremental and it is difficult to ascribe any clear ideological direction to it.

American tax policy also

ascribes an unusually large role to lawyers, many of them rotating between government and private sector positions,

a

situation that tends to augment the pragmatic inclination of tax policy and (arguably) militates against radical changes in political direction. Third there is the matter of political philosophy and its impact on tax policy.

This matter I believe is more

complicated than generally realized.

Certainly there is a

strong strain of individualism in the United States and the country is by and large more conservative than (say) the Western European or other industrialized nations.

Yet there

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is also a strong strain of egalitarianism and civic duty which--in addition to arguing in favor of "fairness" in the allocation of tax burdens--also makes it more likely than Americans will actually pay those taxes that are imposed upon them.

This contradictory situation was described by

Louis Eisenstein in his book, "The Ideologies of Taxation," which noted that the argument for fairness ("the creed of ability") and that of efficiency ("the ideology of barriers and deterrents") were always present in tax arguments and-depending as they did upon differing assumptions about human behavior--had the additional advantage that neither was readily susceptible to disproof.7

There is also some

question whether the supposed antitax sentiment is really based on taxes or upon the uses to which the tax revenues are put.

Many of the same Americans who oppose federal

income taxes willingly pay high social security as well as local school and property taxes, because they believe the money is either for their own benefit (social security) or for the benefit of their own community.

7 See Louis Eisenstein, The Ideologies of Taxation 16-33 (the troubled creed of ability) and 57-88 (the ideology of barriers and deterrents (1962). Eisenstein is also noteworthy for his observation that, although people’s tax ideologies may be consistent with their or their client’s self-interests, this does not necessarily mean that they do not sincerely believe them. Id. at 13-15.

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Finally there must be added the particular way that Americans think about equity and fairness as applied to tax matters.

This thinking is characterized by an emphasis on

measurable economic data--e.g., what percentage of tax is paid by each "quintile" of the population, as described above--and a rather rigid distinction between horizontal equity (similarly situated taxpayers should be taxed similarly) and vertical equity (the allocation of tax burden between rich and poor).

While a few scholars have

considered the differential effects of taxation on female taxpayers or members of minority groups, this work has until recently been relegated to the margins of the field, with the emphasis (when vertical equity is considered altogether) on income or wealth statistics and a benign neglect of these supposedly extraneous factors.

This is consistent with the

prevailing national mythology under which there is equal opportunity for everyone and race or gender differences, if not wholly eliminated, are at least in the process of being so.

The perception of equity thus differs from other

societies which are perhaps more cognizant of regional or ethnic differences and which tend to see these as inseparable from class differences or other more purely

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economic phenomena, as will be described further in the following, country-specific discussions.8 The result of all this is that Americans talk a lot about flat taxes but in practice tolerate a surprisingly progressive tax system, certainly when the income tax is considered alone and to some degree even when the entire system is considered together.

Although conservative

legislators have succeeded in enacting enormous tax cuts, a strikingly large percentage of individual taxes continues to be paid by the top 10 or even 1 percent of taxpayers. These figures change significantly when nonincome (notably social security) taxes are included in the mix, but the system remains at lease somewhat progressive even in this broader analysis. Although necessarily brief, the survey above suggests that U.S. tax culture is characterized by several factors that are unusual or even outliers as compared to most other

8 In recent years a number of scholars have challenged this consensus, producing scholarship that considers the effect of taxation on women, minorities, and other distinct groups within the broader society; but they have also been subjected to withering criticism in doing so. See Lawrence Zelenak, Taking Critical Tax Seriously, 76 N.C.L. Rev. 1521 (1998) (taking a generally skeptical stance toward efforts to apply the methods of critical legal scholarship in the tax area); Michael A. Livingston, Radical Scholars, Conservative Field: Putting “Critical Tax Scholarship” in Perspective, 76 N.C. L. Rev. 1791 (1998) (defending critical scholars but calling for integration of their work into the mainstream of tax scholarship). See generally Symposium, Critical Tax Theory: Criticism and Response, 76 N.C.L. Rev. 1519 (1998).

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nations: what happens accordingly may, or more often may not, be a good guide to what happens elsewhere. Understanding the future of progressivity thus requires that we consider the experience of other countries. It is to this effort that we now turn. II.

Italy: Resistance, Regionalism, And The Weight (If Any) of Constitutional Tax Provisions The first "foreign" country that I studied, Italy, is

on the surface probably most similar to the United States.9 An advanced industrial country, Italy has (depending on the source that you consult) either the sixth or seventh largest economy in the world, and is a founding member of the European Union.

Popular stereotypes notwithstanding, the

country has a thriving, hard-working capitalist economy with a per capita gross national product (GNP) approaching

9 The discussion of Italy is based on interviews with important figures in the Italian Government, private legal or accounting practice, and various Italian universities; on several years of following the tax debate in Corriere della Sera, La Repubblica, and similar publications; and (for facts and historical background) on a variety of Italian published and web sources. Individual published and web sources are cited where relevant to specific arguments. By contrast the anonymity of personal interviews is for the most part protected. For an overview of the Italian tax system, see Enrico De Mita, Principi di Diritto Tributario (4th ed. 2004); Pasquale Russo, Manuale di Diritto Tributario (2002). For an English-language summary see International Business Publications USA, Italy Tax Guide (4th ed. 2002); for a (briefer) on-line summary see the Worldwide-Tax website www.worldwide-tax.com/italy/italy_tax.asp .

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$30,000 per year.10

Italy also has a progressive income

tax, not entirely dissimilar from our own, and a very highly sophisticated debate on tax issues; indeed the country the source for many interesting and provocative developments in tax theory.

Yet Italy has political and cultural

tendencies that distinguish it from the United States, and cause it to approach progressivity in a particular, Italian way.

The country’s tax system also has various features

that both limit its ability to achieve progressivity and its capacity to undertake significant tax reform.

All these

aspects are on display in the current tax reform process, which began on an avowedly American model but has diverged sharply in both technical content and political fate. The following discussion considers these issues in greater detail. The Italian tax system: a general outline Italy’s tax system is similar those of its principal European neighbors, including a progressive individual

10 See Organization for Economic Cooperation and Development, OECD in Figures: Statistics on the Member Countries (2005), at 13 (citing 2004 Gross Domestic Product per capita of $28,800 at current dollar exchange rates and $27, 700 using the method of Purchasing Power Parities (PPP)); The Economist: The World in 2005 at 92 (citing 1995 figure of $31, 410). The equivalent OECD figure for the United States was $39,700 according to both methods. PPPs are intended to correct for price differentials by estimating the value of GDP in terms of a “basket” of equivalent goods and services in each country; the difference tends to be more pronounced in Third World countries.

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income tax imposed at rates of 23, 33, 39, and 43 percent, the maximum rate being reached at an income of 100,000 Euros (currently about $120,000), and interest and dividend income, for residents of Italy, being taxed in most cases at a flat 12.5 percent rate.

There is also a corporate income

tax (33 percent rate), a value added tax (VAT) with a standard 20 percent rate, and various additional local and nonincome taxes.

Consistent with a holding by the

Constitutional Court, the income tax is imposed upon individuals rather than family units (i.e., no joint returns or similar aggregation of income). Following a more modest reform in 2003, the Italian Government, headed by Premier Silvio Berlusconi, proposed an extensive overhaul of the Italian tax system in 2004 which was loosely modeled on the 1986 U.S. tax reform and including a reduction to three tax rates (aliquote) with the maximum rate falling to a level below 40 percent.

Following

intensive debate and popular protest (see below), a version of the reform was approved in late 2004, providing for a three-rate system (23, 33, and 39 percent); the substitution of tax deductions, some phased out at higher incomes, for many of the previous tax credits; and additional changes. There is also a (nominally temporary) “solidarity” surcharge

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which results in a 43 percent tax rate for incomes over 100,000 Euros.

A significant aspect of the reform was the

expansion of the 23 percent bracket from a ceiling of 15,000 to 26,000 Euro, as well as a parallel increase in the untaxed (zero bracket) amount, which arguably make the reform less regressive than recent U.S. tax legislation; nonetheless it has been calculated that 60 percent of the benefit of the reform will go to the wealthiest sixth of Italian taxpayers.

More recent discussions have concerned

primarily the struggle against tax evasion (see below) and proposals for new taxes on financial transactions. Resistance, regionalism, and reaction: the Italian perspective on progressive taxation In evaluating Italian tax policy, and specifically the matter of progressivity, one must consider the country’s somewhat unusual history and political culture.

Italy was

unified in the 1860s over the fierce opposition of the Roman Catholic Church, although church-state issues were at least nominally resolved by the Lateran Treaties of 1929. Following the defeat of fascism and the rejection of the monarchy in a postwar plebiscite the country became a Republic, the prevailing mythology of which concerned the Resistance struggle against the “Nazi-fascist” occupation of

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1943-45 and whose Constitution reflected the influence of the two principal groups (Communists and Christian Democrats) that participated in the Resistance and inherited power in the postwar Republic.

The so-called Prima

Repubblica (first republic), which was governed by the Christian Democrats in an endless series of coalitions and characterized by an uneasy mix of political polarization and personal corruption, collapsed in the early 1990s under the weight of the tangentopoli bribery scandals and was replaced by a new party structure which, although following the same nominal constitutional arrangements, effectively amounted to a new political system.

Following a series of left-wing

Governments—the first in modern Italian history—the industrialist Silvio Berlusconi was elected Prime Minister in 1999 at the head of a rather unstable coalition held together by his personal charisma and, some would say, by a continuation of the old corruption in newer, less obvious garb (Berlusconi himself has been indicted more than forty times although he has yet to be convicted of any crime). Berlusconi’s Government has achieved numerous successes including accession to the Euro currency and various additional reforms although a substantial amount of its energy has been devoted to the Prime Minister’s legal

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problems; a left-leaning coalition headed by former Prime Minister Romano Prodi, an economics professor, is widely favored to retire it in the coming elections.

It must be

noted that, while both the Communists and Christian Democrats essentially collapsed in the 1990s, many or most current politicians (although not Berlusconi himself) were previously members of one or another of these parties and the issues as well as flavor of the Prima Repubblica continue to set the tone for much of Italian politics.11 The chronic instability of Italian politics, and the uneasy heritage of the Resistance and the Prima Repubblica, affect Italian tax policy in various ways.

One obvious

result is that there tends to be a high degree of polarization surrounding tax (and other) issues and relatively little middle ground on which to construct a compromise position.

For example, the Berlusconi

Government’s 2004-05 tax rate reductions and accompanying spending cuts were met with large street demonstrations—a historically rare demonstration in favor of high taxes—as well as a sit-in by several thousand forest workers in

11 For a political history of post-unification Italy, see Denis Mack Smith, Modern Italy: A Political History (1997). For a classic work on Italy generally, now dated but with an incomparable perspective on the Anglo-American understanding and misunderstanding of the country, see Luigi Barzini, The Italians (1964). For an up-to-date popular perspective (in Italian), see Bruno Vespa, Storia d’Italia da Mussolini a Berlusconi (2004).

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Calabria (southern Italy) who succeeded in blocking a major rail line for a period of several days.12 A second, more subtle effect is that the concept of income redistribution, which was in theory favored by both Communist and Christian Democrat (i.e., Catholic) thinkers, tends to be seen as a quasi-constitutional provision rather than a mere public policy choice.

This is literally true,

in that the Constitution includes a requirement that the tax system be based on the twin concepts of progressivity and capacita’ contributiva (ability to pay or taxpaying capacity), although these provisions have only rarely been applied to void a specific provision of law.13

But it has

12 See generally Il Giorno, Oct. 28, 2004, http://ilgiorno.quotidiano.net/art/2004/10/28/5361280 (describing strikes and street protests against proposed fiscal reform which allegedly “rewards the rich” and results in unfair spending reductions). 13 The language of these provisions has been translated as follows: Art. 53 1. Everyone has to contribute to public expenditure in proportion to their capacity. 2. The tax system has to conform to the principle of progression. See Italy-Constitution, International Constitutional Law series, at website of the Universitat Bern, Institut fur Offentliches Recht, www.oefre.unibe.ch/law/icl/it00000_.html “Capacita’ contributiva’” has been alternately translated as “taxpaying capacity” or, somewhat more poetically, “ability to pay.” The effect of these provisions has been somewhat muted by the courts’ position that they apply to the overall tax system rather than any specific part of it; it has accordingly been fairly rare for a specific tax rule to be struck down for violation of these provisions. Nevertheless they state a clear policy of progressivity and respect for taxpaying capacity and as such retain at least an inspirational role in the Italian tax system. See generally Enrico de Mita, supra note 9, at 83-104;

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a symbolic significance that goes well beyond the written language.

Put simply, progressive taxation is one of a

number of Italian laws and institutions, including generous welfare and retirement benefits, aid to depressed (primarily southern) regions, the effective ban on firing anyone who works for a company that has fifteen or more employees (Article 18), and other similar provisions, that are viewed as essential elements of the postwar structure and without which, many Italians fear, the country would slip back into the fear and insecurity that made fascism possible.

The

philosophy of redistribution (and hence progressive taxation) is buttressed by the concept of solidarieta’, a rather vague notion of civic duty which has the advantage of finding support among both Catholic and Marxist thinkers and tends to emphasize the moral rather than the utilitarian side of the progressivity equation.14

It should be added

that Italy also has a large and vocal class of imprenditori

Pasquale Russo, supra note 9, Parte Generale at 48-50, 60-61; Francesco Moschetti (ed.), La Capacita’ Contributiva’ (1993). One noteworthy application of the taxpaying capacity rule was the constitutional court’s decision banning the use of joint married returns, on the grounds that they failed to base income taxes on the taxpaying ability of an individual rather than his or her spouse. This decision notably complicated tax progressivity since two-earner couples tend to be concentrated at the high end of the Italian income scale. Corte Costituzionale n. 179 (1976); see Enrico DeMita, supra note 9, at 90. 14 On the concept of solidarieta’ and tax policy relevance, see generally Serio Galeotti, Il valore della solidarieta’, Rivisto di Diritto Sociale (1996); Universita’ di Bergamo,

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(entrepreneurs) as well as increasingly vocal economists and public finance experts who see the postwar consensus as the source of Italy’s problems rather than their solution: the effect is not so much to turn the debate in favor of progressivity as to increase the stakes for the participants, and give the tax discussion a moral and political significance that might be less formidable in other societies. A third effect of Italian political culture relates to the impact of regionalism and the continuing inequality between north and south.

This issue is considered further

in the following section. Avoidance, amnesties, and life in the European Union: the peculiarities of Italian tax culture

Fondazione Antonio Uckmar, Giornate Europee di diritto costituzionale tributario, 5th ed.: Il Dovere di Solidarieta’ (conference proceedings Nov. 14-15 2003).

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If Italian political life is distinctive, the country’s tax culture is no less so.

Three factors are especially

important here: a high degree of perceived and probably real tax avoidance, sometimes with effective governmental complicity; a particular difficulty in the taxation of income from capital; and membership in the EU (European Union) and European currency (Euro), which provide significant advantages to Italy but also restrict its flexibility in tax and spending matters.

Together these

items have an equal or perhaps greater impact than the “deeper” differences discussed, above.15 Tax evasion is sometimes exaggerated and is probably greater for property, inheritance, and similar levies than for the income tax a very large portion of which is withheld at the source.

But it remains an important factor

particularly with respect to business taxes.

Tax evasion is

exacerbated by Italy’s tradition of “family capitalism” which makes it difficult to measure income and to police the boundary between business and personal expenses.

A series

of extraordinarily generous tax amnesties, some of which have allowed taxpayers to get off the hook by paying only a small fraction of tax liability, amount to a tacit

15 For an overview of Italian tax administration and taxpaying culture, see generally E.

28

recognition if not acceptance of this phenomenon.16

The tax

amnesties have also had a negative effect on taxpayer morale suggesting that it is somewhat foolish to pay tax honestly and (for opponents of Berlusconi) confirming what they see as the essentially corrupt nature of the overall fiscal system. Italy faces a particular difficulty in the taxation of income from capital owing to the presence of easily accessible tax haven countries (notably Switzerland and Luxembourg) and a more general fear of capital flight if taxes are strictly enforced.

Switzerland in particular is

closer to Milan, the principal financial center, than are most other Italian cities and has a reputation for financial stability as well as secrecy that may attract capital away from Italy even beyond the tax consequences.

Partly for

these reasons the Italian tax system provides a flat 12.5 percent rate on capital income which severely compromises the progressivity concept and increases the pressure for higher tax rates on remaining forms of income.

DeMita, supra note 9, at 31-79; Price Waterhouse & Co., Doing Business in Italy (2006). 16 Perhaps the best single evidence of the role of condoni (amnesties) in Italian life is the existence of an entire commercial web address devoted exclusively to the subject. See IPSOAit: A Walters Kluwer Company, Speciale Condoni & Concordato 2004 www.ipsoa.it/condono/modulistica_0.asp (providing information on tax, building code, and other amnesties of interest to Italian business and professional readers).

29

Together with these items must be mentioned the role of the EU and of Italy’s participation in the Maastricht agreement which adopted the joint European currency or Euro. As part of Maastricht the participating nations agreed to keep their budget deficits below 3 percent of GNP which for Italy has historically been more difficult than for other countries.

Tax reductions must accordingly be met by equal

and offsetting reductions in spending and thus have an immediate and visible political impact greater than that in the U.S. where deficits may avoid or (more likely) postpone the more difficult fiscal choices.

The EU itself has a

lesser role in income taxation although there is increased pressure for harmonization at least of corporate taxes, and reduced tax rates for economically underdeveloped regions (i.e., the South) have been held to constitute impermissible subsidies under prevailing EU doctrine.

In this sense the

EU restricts tax competition, although by reducing the ability to fix separate national policy in other areas (tariffs, licensing, etc.) it may in a relative sense actually encourage it. Also relevant is the ban imposed by the Italian constitutional court on the aggregation of income of married couples and the corresponding reliance on an exclusively

30

individual basis.17

This is significant because it makes

progressivity between married couples more difficult to achieve, and may tend to exacerbate the inequity between two career couples and single earner families in which are concentrated the majority of Italy’s poor. Theory and practice: do the differences matter? Italy thus faces a situation in which its political culture encourages a relatively high level of at least nominal progressivity, while its tax culture and the realities of its economic situation make real progressivity difficult to achieve.

This is particularly true given the

effective exclusion of capital income from the progressive tax base which means that the impact of redistribution will be limited to wage earners.

Both the forces encouraging and

discouraging progressivity are thus exaggerated in the Italian case as compared to most First World countries. Do these differences matter?

It is striking that,

notwithstanding its special features, Italy recently adopted a tax reform program that has many features in common with earlier U.S. legislation: a reduction in marginal tax rates and in the number of tax brackets although perhaps with a greater effort than in the U.S. at softening the resulting

17 See supra note 13.

31

inequity with respect to poorer taxpayers.

Yet the response

to this legislation differed from that in the U.S. and the other countries studies.

While the U.S. and (to a degree)

Israel and India appear to have accepted tax changes rather quietly, in Italy the response has been highly polarized, with the Government and arguing that the changes are necessary to promote competition (and that progressivity is in any case illusory given the persistent failure to include capital income) while much of the public appears to remain attached to a more steeply progressive system.

The debate

in Italy is also more tied to general political trends, with Berlusconi’s admirers tending to support tax reform and his opponents tending to oppose it; the temptation to leave tax policy to the “experts,” so prevalent in some countries, appears to have made fewer inroads here. Italy thus presents a case in which both general and tax culture have an important impact on progressivity, but it is as yet unclear which will be decisive, or if either will be able to resist the impact of raw economic forces. The notion of a fiscal “life cycle,” in which steeply progressive tax rates become attractive at a certain phase of political and economic development but come to be seen (at least by the elites) as an unaffordable luxury at a

32

later stage, is an intriguing aspect of the Italian situation: the Berlusconi Government has indeed made a forceful effort to portray matters in this way.

But it is

not clear that a majority of Italians do or will soon accept this analysis, or how exactly they would behave if they did. III.

Israel: Zionism, Socialism, and the Politics of Ethno-

Religious Communities: Does “Distributive Justice” Have a Future? The second country, Israel, is the smallest and arguably the most Americanized of the three countries studied, but has many unique features that distinguish it from both the United States and the Italian example above.18

The discussion of Israel is based on similar sources to that of Italy, i.e., interviews conducted during recent trips to Israel as well as by telephone, e-mail, etc.; several years of following the issue though the on-line English edition of Ha’aretz, the most influential Israeli newspaper, together with numerous forays into the mass circulation Hebrewlanguage press; and a somewhat smaller but not insignificant number of written sources. For a brief general overview, in English, of the Israeli tax system, see Ariel Bin –Nun, The Law of the State of Israel 97-103 (2nd ed. 1992); for a more complete introduction, in Hebrew, see Amnon Raphael, Dine Mas Hachnasa (Income Tax Law) (2nd ed. 2005). For a more comprehensive survey of the nature and history of Israeli tax administration, now about a generation old, see Harold C. Wilkenfeld, Taxes and People in Israel (1973). An excellent collection of articles on the allocative effects of contemporary Israeli tax, spending, and other economic/social policy, in Hebrew, is Tzedek Khalukati Be’Yisrael (Distributive Justice in Israel) (Menachem Mautner ed.) (2000); the introduction by Prof. Mautner and articles by Yechezkiel Lein on the politics of stock market taxation, Tsilly Dagan on the “hidden” distributive implications of the Israeli tax code, and Yoram Margaliot on the concept of a negative income tax in an Israeli context are of particular interest. See also Adva Center, The Social Implications of Fiscal Policy: Looking at Israel’s 2005 Budget Proposal (presentation for Knesset (Parliament) Members, Nov. 16, 2004, available at www.adva.org . 18

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These differences concern partially political and social characteristics—the socialist tradition, ethnic conflict, and the prevalence of security concerns—for which the country is famous, but also more tax-specific features such as an unusual system of tax administration and a history of large, arguably illogical tax exemptions that make the achieving of real as opposed to nominal progressivity more difficult than it might otherwise be. As in the Italian case, the latter factors often threaten to overwhelm their former, better known counterparts; although both the nature of the factors and the balance between them is different here.

The combination of these factors ensures both that

tax reform in Israel will be a messy process, and that it will never be entirely separate from other, more prominent issues facing the country. The Israeli tax system: a general outline Israel is a parliamentary democracy with a per capita income of approximately $18,000-$20,000 per year.19

The

country has a progressive income tax with six tax rates ranging from 10 to 49 percent on incomes exceeding IS 424,441 (approximately $100,000).

There is also a

19 See The Economist: The World in 2005 at 92 (citing 1995 figure of $17,540). These figures include both Jewish and Arab citizens but not the populations of the West Bank and Gaza Strip nominally under control of the Palestinian Authority.

34

corporate income tax at a flat 31 percent rate; a flat 20 percent tax rate on capital gain in excess of inflation (although subject to various exceptions); and a 16.5 percent national VAT.

The effective tax bite has traditionally been

higher than income tax rates might indicate both because of the effect of social insurance and health charges and the fact that a rate of 30-40 percent is reached at a relatively modest level of income.

When phase-ins adopted in the 2005

tax reform are fully effective the maximum combined rate of income and social insurance taxes will be 44 percent as compared to more than 60 percent when the current wave of reforms began, along with further reductions in corporate and value added taxes. The present tax system reflects a rather extensive series of reforms, the most recent of which was undertaken in 2005 and included significant tax rate reductions (as described above) together with reform in interest and dividend taxation, taxation of trusts, and the treatment of foreign taxpayers.20 A previous reform, in 2003-04, was

20 A convenient English-language summary of the 2005 amendments may be found at www.pwcglobal.com/il/eng . Israeli tax reforms typically initiate with a report by a blueribbon commission, chaired by a well-known economist or other expert; depending upon political factors all or part of the commission’s proposals are then enacted into law. Given Israel’s small size and the well-traveled nature of its academic establishment, the reports often pay extensive attention to the treatment of similar issues in other countries,

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still broader and contained provisions including the taxation of capital gains which were previously exempt from tax; taxation of Israelis on worldwide rather than solely on Israeli income; and a reduction from still higher tax rates previously imposed.

The general pattern has thus been one

of reduced tax rates with a corresponding effort to expand and level the tax base, having the goal if not necessarily the result of revenue neutrality.

Several additional

changes have been proposed in recent years, with the goal of further reducing the aggregate tax burden and/or increasing tax equity, although not has yet been adopted. Zionism, socialism, tribalism: an Israeli perspective on distributive justice and progressive taxation The starting place for any discussion of Israeli taxation or fiscal policy is the country’s Zionist heritage, a rather unique ideology which mixed nationalism, socialism, and the “return to the land” of Israel in an effort to build a new nation and overcome what was perceived as the decadence or at very least the loss of physical vitality among Jews after almost 2,000 years of exile.

Although

there are numerous contradictions within this ideology,

giving its tax policy arguably the most “international” character of the countries studied. See, e.g., Riforma B’Mas Hachnasa: Hamlatzot Hava’adah L’Riforma B’mas

36

including an inevitable clash between socialism and nationalism and the uncomfortable coincidence between the Zionist critique and European antisemitic stereotypes, and although some observers have derided the entire ideology as lacking in intellectual or moral substance, it was central to the formation of the state and continues to exercise an important influence sixty years later.

Without question the

structure of the Israeli economy in the first forty years of statehood, which featured high taxes, an enormous state sector, and a relatively even distribution of incomes for an industrialized country, reflected this dominant ideology.21 In recent years the socialist ideology has been in headlong decline, resulting partly from its own internal failures as represented most noticeably by the relative decline of the Kibbutz (collective farm) movement, but also from pressure by economic reformers and ordinary Israelis

(Rabinowitz Commission Report) (2002); Duach Hava’adah Hatziborit L’Riforma B’Mas Hachnasa (Ben Bassat Commission Report) (2000). 21 Whether and to what extent Israel ever constituted a “socialist” state, as opposed to a capitalist state with large-scale public enterprises, is the topic of considerable discussion; the debate, as one might imagine, is difficult to separate from controversies regarding external relations and has important implications for contemporary policy issues. For a skeptical view of Israeli socialism, see Ze’ev Sternhell, The Founding Myths of Israel (1997) (arguing that nationalism took precedence over socialism in Israeli ideology and socialist goals were regularly compromised or abandoned when conflicting with national aspirations). For a somewhat more traditional viewpoint, see Howard M. Sachar, A History of Israel: From the Rise of Zionism to Our Time (2nd ed. 1996) (providing a generally sympathetic treatment of the Zionist enterprise and the rise of modern Israel).

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who seek a “better life” along an American or European model.

This change in focus expresses itself both in

specific governmental policies and in the allocation of benefits within the private sector, with a widely increasing gap between rich and poor that has raised concerns for tzedek khalukati (distributive justice) and indeed the fate of the entire Zionist enterprise.22

These concerns are

exacerbated by the reality, always present but previously overlooked, of a powerful correlation between ethnicity or social grouping and wealth, with not only the country’s Arab minority but also Jewish citizens of Middle Eastern/North African origin (edot hamizrakh) and in many cases religious Jews failing to share in the prosperity of the largely secular, European upper middle class.23

While setting the

context for the broader debate on social justice, ethnic or religious differences also reflect themselves in highly specific and focused policy issues.

For example, family and

child allowances in Israel, which actually increase the

22 See supra note 18. 23 On the correlation between ethnicity and economic status, see “The Ashkenazim Earn 36 Percent More Than the Mizrakhim,” Ma’ariv (daily newspaper), Dec. 13, 2005, at 1 (front-page headline for articles citing a study by Adva Center, finding Jews of European origin earn substantially more than those from North African and Middle Eastern families and that benefits of recent economic growth go disproportionately to upper income brackets). The full study is entitled “Israel: A Social Report” and is

38

greater the number of children, are theoretically available to all citizens, but in practice benefit overwhelmingly the religious (and to some extent the Palestinian Arab) communities who tend to have much larger families, and are subject to frequent criticism from various political parties on this basis. One result of these factors is that, while social justice in Italy tends to be perceived in class and perhaps regional terms, in Israel it is more likely to be viewed in terms of ethnicity, coupled with an ideological, quasireligious debate about the fact of socialist Zionism and the role of alternative ideologies.

Taxation and fiscal policy

are also constrained by the country’s somewhat unusual tax culture (see below) and by the prevalence of security concerns, which make higher taxes appear almost patriotic and at least until recently made it difficult to propose changes that might result in the loss of even short-term revenues.

Perhaps as a result of these factors,

redistribution in Israel has traditionally been accomplished more by spending than tax measures, and only recently if at all have taxes come to occupy center stage in the country.

available at www.adva.org . Arab families in Israel have lower incomes than either category of Jews although somewhat higher than neighboring countries.

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Informality, confrontation, and an overreliance on withholding taxes:

Israel’s unusual tax culture

A further result of Israel’s founding ideology, together with its British colonial heritage, is what most Americans would probably consider to be a somewhat unusual tax culture.

Taxation in Israel has historically been

characterized by several factors, including extraordinarily high taxes on wages, with income tax rates until recently peaking at over 50 percent (higher when social insurance taxes are included) and the maximum rate reached at a lower relative income than in most industrialized countries; a heavy and at times exclusive reliance on salary or wage withholding, with a small number of deductions and credits and many or most individual taxpayers not filing tax returns, at all; and a correspondingly leaky taxation of unearned income, with outright exclusion of all capital gain income until recently, and subsequent full or partial exemption of more specific categories of income and inconsistent enforcement as applied to business taxpayers. The tax system is further characterized by a high degree of informality and (some would argue) inconsistency, with many rules unwritten, business taxes often negotiated between the revenue service and business owner, and high-priced or in

40

any event well-connected tax advisors, many of them former tax officials, frequently hired by better-off taxpayers in an effort to reduce tax liability.

One result is that non-

wage or in any event unreported income tends to be rather highly prized in Israel, being worth at least twice as much on the dollar as the taxable wage variety, a situation which leads to substantial economic distortion and a widespread perception of abuse.

A further consequence is that tax

reform in Israel typically begins with a discussion of the country’s tax base, and particularly the allocation of taxes between earned and unearned income, rather than the nominal tax rates.24 There is no equivalent to the EU or similar regional organization in Israel, although the country’s small size and geographic isolation make it unusually suspect to external political or economic pressure.

24 For an assessment of Israeli tax culture and institutions, paying particular attention to the colonial (i.e., British mandate) origins of the Israeli tax administration, see generally Harold C. Wilkenfeld, supra note 18, at 43-81 (tax administrative structure), 177-208 (dispute resolution mechanisms), and 209-251 (responses to tax evasion). For a more recent treatment of the tax evasion issue, including several fascinating insights into Israeli attitudes generally, see Assaf Likhovski, “Formalism and Israeli Anti-Avoidance Doctrines in the 1950s and 1960s” in John Tiley ed., Studies in the History of Tax Law (2004).

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Reaction and counter-reaction: the Netanyahu reforms Even more than Italy, Israel has recently been involved in a series of tax reforms with a distinctly American stamp. This process involves a tradeoff of reduced tax rates for a somewhat expanded tax base and is part of a larger series of reforms, which were pushed aggressively by (until recently) Finance Minister Binyamin Netanyahu and a largely Americantrained cadre of advisors, that had the specific intent of reversing Israel’s socialist heritage and building a more competitive, U.S-style economy.

The tax reforms were

accompanied by significant reductions in welfare payments, especially to large families, and other spending reductions. (Isral’s Government is presently headed by the centrist Kadimah Party, founded by Prime Minister Ariel Sharon before his current illness; the opposition Labor Party has criticized the Government’s tax and spending programs but at the moment appears unlikely to achieve power.) Yet the reforms and their fate differ significantly from either an American or an Italian context.

This is true

both of the changes themselves, which still leave a relatively large part of the population paying tax at a 35 percent or higher rate, and of the public response to them. While neither as broad-based or effective as in Italy, the

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opposition has been vociferous in raising the banner of distributive justice, i.e., of the socialist tradition, although it has to this point emphasized reduction of family and child support payments—a nontax issue in Israel although an equivalent function is filled by the earned income tax credit in the U.S.--rather than specifically tax matters. (One of the leading personalities in Israeli newspapers over the past two to three years has been Vickie Kanfo, who led widely covered demonstrations on behalf of single parent families and others hurt by the reduced allowances, although her credibility was somewhat damaged when she announced her support for conservative parties and posed naked in a popular magazine.)

That the spending rather than tax side

has been emphasized appears to result both from the particular features of Israeli society, notably the disproportionate number of large families, and (perhaps) the recognition that high tax rates were being avoided by the use of nonsalary or foreign income, in any event.

For

these reasons the link between tax and spending policy appears to be somewhat weaker than in an Italian or perhaps an American context.

The force of the tax issue is further

weakened by the tendency to rely on “nonpartisan” experts and the sheer weight of other, especially security, issues.

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Israel demonstrates the tension between global and local forces that lies at the heart of the progressivity problem.

Although there is enormous pressure for the

country to conform itself to a low-tax, reduced services model—and although American trained experts aggressively encourage this view—there is an equally strong resistance that emphasizes the uniqueness of the country and seeks alternate models.

The debate itself takes place against a

backdrop of ethnic and cultural rivalry, not to mention political and administrative factors, that have no precise parallel in the other nations studied.

As in Italy, whether

these “particular” factors outweigh the “universal” forces pushing toward convergence in tax matters is hard to say. But the Israeli experience cautions against ignoring the effect of local, even quirky national characteristics, or assuming that the pattern followed in one country will necessarily be followed in all. IV.

India: Class, Caste, and the Gandhian Legacy: Progressivity Meets Economic Reform

India is the “outlier” in the project, being both much larger and poorer (median income of approximately $600-700

44

per year)25 than the other three countries that I studied, although possessed of a rather sophisticated tax policy debate owing to its colonial history and native ingenuity.26 The difference in size and wealth means that income taxes are paid by a small fraction of the population, but also that they must be kept relatively simple, given the lack of administrative resources and the more informal nature of the economy, in order to have any serious chance of enforcement.27 Questions of administration and compliance, which in the U.S. are often secondary concerns, are thus the starting point for Indian tax policy debates.

India also

25 See The Economist” The World in 2005 at 95 (citing 2005 figure of $640). The figure rises to almost $3,000 if purchasing power parity is used. See supra note 10. 26 This section is based upon interviews conducted during a visit to India in March 2004, together with Indian on-line newspapers (notably the Times of India) and a variety of written sources as indicated below. For an overview of the Indian income tax system, see M.M. Sury, Income Tax in Theory and Practice (2002). For statistical background, including income and other taxes, see India Tax Foundation, Indian Tax Statistics 19502001 (2001). Up-to-date tax rates may be found at www.madaan.com/taxrates.htm . 27 Two recent authors have argued that, because of administrative costs and the availability of alternate tax and spending measures, the progressive income tax may be a relatively poor way to redistribute income in developing economies. See Richard M. Bird & Eric M. Zolt, Redistribution via Taxation: The Limited Role of the Personal Income Tax in Developing Countries, 52 UCLA L. Rev. 1627 (2005). Although I believe that there is a great deal of merit to this argument—and indeed aspects of Indian experience confirm it—I believe that it remains useful to study the comparative progressivity of income taxes and that a representative study ought to include some developing countries as well as the more traditional First World nations. I also believe that Bird and Zolt’s arguments, although frequently persuasive, may be (or at the very least, may become) somewhat less relevant to India which, although remaining on average a poor nation, retains an unusually large middle class sector and a tradition of sophisticated, if not always effective, tax policy, see infra.

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has several quirky institutional factors, notably a ban on federal taxation of any agricultural income, which impact upon progressivity and tax reform in various ways.

The

country thus provides an interesting test case of the effects of both large- and small-scale cultural differences on tax and fiscal policy formation. The Indian tax system: a general outline India has a federal system so that taxes are imposed at both the national and state level.

At the national level

there is an income tax imposed at rates of 10, 20, and 30 percent, with the 10 percent rate being imposed on incomes exceeding Rs 100,000 or approximately $2,000 per year (this amount is increased to RS 125,000 for women and Rs 150,000 for senior citizens) and the 20 and 30 percent tax rates being reached at Rs 150,000 ($3,000) and 200,000 ($4,000) respectively.

An additional 10 percent surcharge is imposed

on incomes exceeding RS 1,000,000 (about $20,000) resulting in an effective 40 percent marginal rate.

There is also a

flat, 20 percent tax on adjusted capital gains; a company (corporation) having a maximum rate of 30 percent for Indian and varying rates depending on the type of income for foreign companies; a 10 percent tax on various services; and a wealth tax although the latter is reported to be

46

easily avoided. A uniform value added tax having a 12.5 percent standard and several reduced rates replaced previous state sales taxes in April 2005.

Additional taxes

are imposed at the state level. One of the more unusual features of Indian taxation is the ban on federal taxation of agricultural income—hardly a small exception in a country 60 percent of whose population remains agriculturally based.28

This provision, which dates

from the colonial era, is politically sacrosanct and efforts to tamper with it have so far met with little success.

As

one might expect, this provision protects many wealthy landholders as well as India’s poor peasant class, most of whom would be below the income tax threshold in any event. Indeed a large number of Indian tax shelters involve the shifting of income from urban to “agricultural” sources, by purchasing property in a nominally rural area on the edge of a city, or by means of rental or other monetary payments from urban to rural entities.29

The tax system has further

28 See India Constitution art. 270 (“Taxes on income other than agricultural income shall be levied and collected by the Government of India and distributed between the Union and the States . . .”) 29 Tax evasion generally appears to be something of an obsession in India, at least among the salaried classes. A volume purchased in a Mumbai bookshop has on its cover a drawing of a large arm, dressed in a sleeve bearing the colors of the Indian flag, at the end of which extends a hand from which a man in a suit is dangling upside down while money is being shaken from his pockets; the inside of the book contains numerous

47

wrestled with the problem of taxing small cash businesses at various times trying a flat percentage of revenues or even a flat annual payment by all shop owners in lieu of a computation of actual profits, and no system yet proving entirely successful.

As a result of low wages, the

exemption for agricultural income, and enforcement problems a relatively small portion of the Indian population actually pays the income tax. Since 1991 India has been engaged in a process of economic reforms designed to reverse the Gandhi-Nehru concept of economic self-sufficiency and enable the country to compete more effectively on world markets.30

This

process, which is supported by both major political parties, has been paralleled by an ongoing series of tax reforms, designed to rationalize the tax system and increase the share or revenues from direct (i.e., income) taxes which had generally fallen throughout the first half century of Indian independence.

The reform process began with the Chelliah

Commission in 1991 and involved numerous changes including a reduction of marginal tax rates, which reached an

suggestions for deductions and other items which may serve to reduce taxable income. Raghu Palat, Tax Planning for Salaried Employees: Incorporating Latest Amendments in the Finance Act 2003 (2003).

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astronomical 95 percent-plus in the 1970s, together with an increase in the exemption amount; assertive efforts to streamline tax administration and identify prospective taxpayers; and (less successful) efforts to tax the small business and services sector as well as to reduce the dependence on import duties which was consistent with the opening to foreign investment.

The Kelkar Commission in

Fall 2002 proposed still further changes including the doubling of the previous Rs 50,000 exemption to Rs 100,000; changes in business, excise, and value added taxes; and additional improvements in tax administration, with a general purpose of creating a broader, more efficient, less distorting tax base.

and

Following a change of Governments

(Congress Party replacing the BJP or Indian People’s Party) in 2004 many of these provisions were ultimately included in the 2005 Budget Act although action was delayed on a number of other proposals and many underlying issues—notably the complete integration of the Union and State VATs and the persistent problem of agricultural income exemption--remain to be dealt with.31

30 See generally Bimal Jalan, India’s Economic Policy: Preparing for the Twenty-First Century (1992); Vijay Joshi & I.M.D. Little, India’s Economic Reforms 1991-2001 (1996). 31 See PriceWaterhouseCoopers, Flash on Budget 2005-2006, Feb. 28.2005, available at www.pwcglobal.com. As in Israel, Indian tax reforms have typically originated with reports

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Gandhi, the G-8, and the politics of caste and region: the context for Indian tax policy The issue of tax progressivity must be seen in the broader context of poverty and inequality and the correction of these evils which is a large part of the Indian national project.

India’s founder Mahatma Gandhi believed that the

caste system and resulting inequality were, together with colonialism, the chief source of India’s backwardness and encouraged policies—some of them symbolic but others more substantive in nature—designed to reverse these tendencies. These included the outlawing of the caste system, together with a policy of affirmative action for the lower castes; enactment of high tariffs and attempted economic autarky; and strict economic regulation that encouraged the rise of the so-called “license raj” under which government approval was required for various and sundry forms of economic activity. Gandhi and Nehru also believed that excessively high incomes were inappropriate for a poor country like India and supported a policy of near-confiscatory taxes (at

that invariably become known by the names of their chairmen or dominant figures, most notably the Reports of the Tax Reforms Committee (Chelliah Committee) in 2003 and 2004 and the Reports of the Task Forces on Direct and Indirect Taxes (Kelkar Committee) in 2002. The tax reform process has proceeded simultaneously with a more general process of deregulation and economic reform, described below; indeed the current

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one point marginal rates exceeded 90 percent) although enforcement of both income and wealth taxes remained inconsistent at best. This system achieved significant results most notably in agricultural development (the socalled “Green Revolution”) but left the country relatively poor and, following the collapse of the Soviet Union and the coming of a new generation to power, a new or at least modified course was chosen for the Indian economy, as described in previous sections.32 Given India’s historical commitment to equality between economic and social classes, one might expect that the country’s tax reforms would attract a higher degree of political attention.

Instead they appear to have at least

the public support of both major parties and—with the exception of the repeated and unsuccessful proposals to repeal the exemption for agricultural income—have attracted relatively little opposition at the national level.

This

appears to result from a number of factors. First, tax

Prime Minister, Manmohan Singh, first came to public attention as a bureaucrat who supervised the early reform efforts. 32 For an argumentative but fascinating history of modern India, emphasizing the successes (largely political) and failures (largely economic) of the country’s first fifty years of independence as well as the never fully resolved issues of religion and caste (including but not limited to the India-Pakistan problem), see Ranabir Sammadar, A Biography of the Indian Nation 1947-1997 (2001). On Gandhi and his philosophy, see

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reforms are but one part of a large series of changes including repeal of the license raj, reductions in direct interference in the economy, and other adjustments affecting far larger numbers of people than the income tax, never paid by more than a small fraction of the population.

Second

there is the brokered nature of Indian politics, where a large number of regional parties compete with the Congress and BJP (Indian National Party) and tend to focus on local rather than national issues.

Finally, and more cynically,

there is the suspicion that people are not particularly upset about tax changes because many of them are not paying their taxes, anyway.

It is also possible that there is more

opposition to India’s changes in economic direction than are commonly revealed in conversations with the Delhi and Mumbai elites: on a 2004 visit to India, I was repeatedly assured that the BJP (generally the more conservative of the parties) would thrash Congress in the upcoming elections whereas in fact the latter, campaigning against several aspects of the country’s reform program, won a resounding and almost wholly unanticipated victory.33

generally The Essential Gandhi: An Anthology of His Life, Work, and Ideas (Louis Fischer ed.) (2002). 33 For a somewhat contrarian view of the politics of India’s tax, budget, and financial reforms process, see N. Chandra Mohan, Politics of Economic Liberalization in India, 7 Harvard Asia Quarterly (Spring 2003) (arguing that politics rather than economics has

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The colonial legacy and its aftermath: assessing the Indian tax culture In addition to the macroscopic features above it is important to consider some of the peculiar characteristics of the Indian tax culture.34

First, one must consider the

large gulf between tax (and other) policy-makers and the bulk of the Indian population.

This is a matter not only of

wealth and education but even of language, with most tax and other legal business being conducted either in English or an English-Hindi patois that is quite different from the way most Indians, even in major cities, speak.

Second, there is

the rather strict line drawn in India between the government and private sector, with most tax policy made by career civil servants and most private tax lawyers engaged in litigation of individual cases rather than tax policy or even big-picture tax planning work.

(The current Prime

Minister, Manmohan Singh, was a career bureaucrat when he was first called upon to run for political office.)

Finally

there are the limited administrative resources referred to

determined the pace of Indian reforms and in particular made tax reform, notably in the agricultural sector, difficult to achieve). See also Arvind Panagariya, Have the reforms failed India, The Economic Times, Dec. 31, 2003 (“Reforms have not failed India . . . India has failed to reform enough.”) 34 On tax administration/tax culture in India, see M.M. Sury, supra note 25, at 67-150.

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above, which hamper tax enforcement and severely restrict the Government’s options in designing and enacting tax laws. The Indian tax culture affects the debate on progressivity and tax reform in contradictory ways.

On a

political level, the Indian bureaucracy is probably freer to ignore popular sentiment and even the opinions of the practicing bar than their counterparts in Italy, Israel, or the United States.

On a technical level, however, Indian

policy-makers are probably more constrained than those in their sister countries: indeed the starting point of their discussions is typically not “what system would be theoretically fair and efficient” but “what is it realistic to accomplish with our existing resources, and will it be better or worse than what we have now?”

Conversations about

progressivity thus tend to turn quickly away from theoretical issues such as redistribution or diminishing marginal utility or even political issues such as wealthy vs. poorer taxpayers, and toward raw technical considerations like the difficulty of withholding on taxpayers outside the major cities or whether businesses can be relied upon to compute percentages in a dependable way.35

35 Perhaps for these reasons, administrative issues seem to take up an unusually large portion of Indian tax reform studies: for example, reform of tax administration occupies 36 pages of the Kelkar Committee Report on Direct Taxes and appears to constitute the

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This does not mean that vertical equity is unimportant in an Indian context, but rather that it must be filtered through a range of less lofty considerations before evaluating its impact on the actual taxwriting process.

An alternate way

to say this is that India is at an earlier stage of its tax development than the other countries studied: it must first make the progressive income tax work reliably before deciding how much progressivity it really wants. The Indian tax reforms: globalization or a new “Third Way?” Given the above, it is a fair question whether Indian tax reform really has very much in common with that in more “advanced” countries or whether we are dealing with superficially similar but substantively different processes. The superficial outline of the Indian tax reform—a gradual reduction in the maximum tax rates coupled with equally gradual attempts at expansion of the country’s income tax base—is indeed similar to that in other nations (whether this results from voluntary convergence or economic and ideological imperialism on the part of the U.S. and its allies remains an open question.)

Yet the underlying logic

of the Indian tax reforms appears to be rationalization of

starting point for many other initiatives. Academic Foundation (New Delhi), Reports on India’s Tax Reforms 46-83 (2003) (Chapter Three of the Report of the Task Force on Direct Taxes (2002).

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the existing system rather than reduction of tax rates for its own sake: as one policy-maker put it, to reduce the costs of compliance and correspondingly increase the costs of its opposite, so that the country actually brings in more and more reliable revenue than it has in the past.

Put more

pithily, the change may be less from a progressive to a flat (flatter) income tax than from a symbolically reassuring but practically ineffective form of progressivity to a more modest, but also a more realistic, version.

Yet India

increasingly operates in a global marketplace and the pressure to conform to “first world” tax norms remains very powerful.

This issue of real as opposed to superficial

convergence between countries is an important one in tax policy and the broader, globalization process, and we shall have occasion to revisit it. V.

Conclusion: On the Prospects for Progressivity in a Globalized World The pages above have taken us on a veritable tour of

tax reform and progressivity, in which we have observed both similarities and differences between the "playing fields" in three or four countries.

What lessons can we learn from it

regarding the likely future of progressive taxation, in a world of globalization and increasing competitive pressures?

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What broader lessons can we learn about the role of culture in taxation, and the future of comparative law? The first point to be noted is the similarity in the issues facing each country.

Italy, Israel, and India are

different in many respects, but all are currently enmeshed in tax reform programs that involve a mixture of reduced marginal tax rates in return for at least some broadening of the existing income tax base.

All three processes are

influenced by, and share essential characteristics with, the 1986 U.S. tax reform which serves as a partial model for later efforts.

In particular there seems to be an emerging

consensus that "punitive" levels of taxation--let us say, in excess of 50 percent--are counterproductive in a contemporary economy, but that some measure of progressivity is worth maintaining and even protecting at this point.

To

this rather limited extent, there appears to be some degree of convergence between tax systems, at least where the very broad outlines of fiscal policy and the tax rate structure are concerned. Yet if the issues are largely the same, both the nature of the debate and the details of its outcome vary significantly between different countries.

Everywhere, we

have seen, the tax debate reflects a broader discussion of

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social and economic inequality. There is a pronounced tendency for the tax argument to become an argument about something else; but what that "something else" is, and how it impacts the tax process, differs substantially between different countries.

Thus in Italy, the debate about tax

progressivity has become part of a larger debate about the Resistance legacy and Berlusconi's alleged assault on it, framed by allegations of corruption and a long history of amnesty provisions; in Israel, it has become part of a debate about "distributive justice" and, particularly, the fate of poor Sephardic and (to a lesser extent) Israeli Arab families who are said to suffer economically while large sums are spent on settlement projects; and, in India, it is intrinsically tied to the repeal of tariffs, privatization of Government enterprises, and other aspects of post-1990 economic reforms.

These differences in public discourse

also impact on outcomes: while significant rate reductions have for a time taken place in Israel and India, they were until very recently hamstrung in Italy and the progress of future reforms in the first two countries remains very much in doubt.

Differing conceptions of equality and social

justice thus affect both the nature of progressivity

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discourse and (so far as one can tell) the actual political results of that discourse. So political differences plainly affect progressivity; but that effect is often indirect and unpredictable in nature.

This phenomenon directs our attention to an

intermediate level of institutions and processes that translate broad cultural preferences into specific policy outcomes--what we have called the "tax culture" or "tax anthropology" of a given country rather than its overall national culture.

Many of these factors are specific in

nature, relating to the training and career paths of tax professionals, the structure of the legislative and administrative processes, and the links (formal and informal) that exist with equivalent groups in other nations; others are historical or even quirky in content. Thus, the Italian experience is plainly colored by the Resistance legacy and the constitutional requirement to maintain a progressive tax system; but the country’s historic difficulties in taxing capital income, the history of recurrent tax amnesties, and even the constitutional court’s ban on aggregation of family income have no less important influence.

Indian tax policy is influenced by the

Gandhian legacy, but also by the English-style training of

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its lawyers and accountants and by essentially quirky features, like the effective exemption for agricultural income, that result from historical accident rather than any deep-seated national characteristic.

Israeli tax policy is

similarly influenced by institutional factors (the historic reliance on wage taxation, the absence of widespread tax returns, the aggressive, quasi-colonialist attitudes of many tax administrators) as well as by broader, more national concerns.

This sort of feature is, almost by definition,

incapable of generalization: there is no substitute for detailed, "thick" description of various national tax systems in narrow and well-defined comparative projects.36 Future research—whether on progressive taxation or other tax policy matters--should emphasize detailed, local studies. One fascinating aspect of any comparative study is the light that it sheds on one's own country.

A study of

comparative tax progressivity cannot help but notice that the concept is on the defensive in foreign countries no less than in the U.S. itself.

Indeed when enforcement is taken

into account there may well be a higher level of real tax progressivity, and a stronger political consensus in its favor, in the U.S. than overseas.

This phenomenon casts

36 See Clifford Geertz, Thick Description: Toward an Interpretive Theory of Culture, in

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doubt on the image of the U.S. as inherently "conservative" and its competitors as inherently "liberal" or “redistributionist” in tax policy.

Indeed one reason for

our supposedly greater anti-tax sentiment may be the simple fact that U.S. taxes are actually enforced, whereas progressive taxes in many foreign countries—especially where capital or other unearned income are concerned—are historically much easier to avoid.

The question also arises

whether the attempt to de-politicize U.S. tax policy, for example by the creation of nonpartisan tax staffs and extensive participation of the tax bar in the legislative process, may not be more successful than is usually perceived by academics critics.

Rather than weakening

progressive taxation, it is possible that these institutions have helped to preserve an effective consensus in its favor, arguably more so than in other countries. The latter point also has interesting implications for globalization, perhaps the most overused term in contemporary international discourse but also the most important.

Globalization is frequently described as the

export of an American-style capitalism and individualism to other countries with more collectivist, socialist

The Interpretation of Culture: Selected Essays (1973).

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traditions.37

This study suggests that the U.S. may in

reality not be quite so individualist, and foreign countries as genuinely collectivist, as the rhetoric suggests.

Indeed

one problem with globalization--particularly where Third World countries like India are involved--is that it may entail the export of the negative side of capitalism (economic inequality, pollution, and so forth) before the affected countries have a chance to develop those institutions--social security, health insurance, at least some measure of effective tax or nontax income redistribution--that are simply taken for granted in Western societies.

The historic answer, that one must first

develop an economic base and then worry about distribution, is unlikely to satisfy countries that see the West fail to live by its own policy prescriptions.

(Try running for

President on a platform of no social security and full taxation of health benefits and see what happens).

This

view of globalization as the selective rather than

37 For a sample of the large and growing literature on globalization and its effects, pro and con, see Jagdish Bhagwati, In Defense of Globalization (2004); Martin Wolf, Why Globalization Works (2004); Thomas L. Friedman, The Lexus and the Olive Tree: Understanding Globalization (2000); Joseph Stiglitz, Globalization and Its Discontents (2002); Anthony Giddens, Runaway World: How Globalization is Reshaping Our Lives (revised ed. 2002); Amy Chua, World on Fire: How Exporting Free Market Democracy Breeds Ethnic Hatred and Global Instability (2002). For an insightful study of taxation and globalization, see Vito Tanzi, Tax Policy in an Integrating World (1994).

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systematic export of American ideals is increasingly widespread in the developing countries, particularly among left-wing critics:

our study of comparative tax systems

suggests that, for all its fashionable anti-global character; there may be something to it. Beyond the political rhetoric of the pro- and antiglobalization forces, a comparative study inevitably raises the question of whether tax systems are converging or “harmonizing” and whether this is indeed a desirable goal in the first place.

The pages above suggest a measured

response to this inquiry.

While on a superficial level

there is a remarkable degree of convergence around the ideals of the 1986 U.S. tax reform—lower income tax rates, fewer brackets, and at least some effort and base-broadening and improved enforcement—on a deeper level we have observed substantial differences in the implementation of these concepts and their likely political viability.

These

differences are moreover not random, but relate to underlying differences in both the national and tax-specific cultures of the countries in question.

In theory

differences of tax culture should be easier to reconcile than those at the national level, since they relate largely to historical or institutional factors rather than deeply

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held values: the European Union is an obvious example of this process. intractable.

In practice however they may be no less In Europe itself, there appears to be a

reasonable degree of harmonization on corporate tax issues, as well as on the VAT and other nonincome taxes, but relatively little regarding even the technical aspects of individual income taxation, not to speak of broader issues like progressivity or the underlying goals of the tax system; in less unified regions, or those that span a larger variety of peoples and cultures, the problem is that much greater. Related to the convergence question is the matter of the “life cycle” of progressivity and its likely historical fate.

We noted that tax reform in India, which is at a

relatively early stage of economic development, emphasized a more effective if less flashy brand of progressivity, while in Italy and perhaps Israel, which were at a somewhat later phase of development, progressivity appeared to be stuck in a more receding posture.

Even in countries like the United

States, which have relatively well-established income taxes, these taxes are rarely much more than a hundred years old, and the progressive element has been under attack almost from the beginning.

The question arises whether, in the

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sweep of history, a progressive income tax is but a single phase, which becomes attractive at a certain level of economic development, but less so once that phase has passed. This is particularly true given the increasing difficulty of imposing the tax on capital income and its resulting degeneration, especially in smaller- and mediumsized economies, into effectively a high-rate wage levy. Of course, as George Harrison (who knew perhaps a thing or two about India) put it, “all things must pass,” and this observation does not tell us how long the income tax will be around, much less what will replace it.

But it is quite

possible that the income tax (and most especially its progressive element) will prove less permanent than both now seem to most observers, and that even many “progressive” thinkers will ultimately arrive at a somewhat less enthusiastic view about it.38 Comparative tax progressivity is one part of a broader process, in which an international or comparative perspective supplants national chauvinism as the principal

38 The experience of several East European countries, who have recently adopted some form or other of the flat tax, has been cited as evidence of the terminal decline in progressivity although the experience of these nations is unique in many respects. See Ken Dilanian, Derided in U.S., flat tax a winner in E. Europe, Philadelphia Inquirer, Oct. 31, 2005, at A1 (reporting experience of flat tax in Estonia and neighboring countries); cf.

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paradigm for approaching tax issues.

The adjustment is

likely to be traumatic, especially for Americans, who are used to thinking of their country and the world as synonymous; but the potential rewards are very great and the process is, in any event, inevitable.

It is hoped that the

instant project will be a modest but useful contribution.

George Trefgarne, Whatever Brown says, the flat tax is coming, Daily Telegraph Aug. 29, 2005 (assessing possibilities for implementation of flat tax in the UK).