Corporate Income Tax

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Mark Bowler-Smith, Corporate Income Tax: What Is It
Good for, 30 Austl. Tax F. 865, 898 (2015)
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Corporate income tax:
what is it good for?
Mark Bowler-Smith*
"Given that he is ignorant about his future position, what sort of tax
institutions would we expect the rational citizen-taxpayer to select as
elements in the constitution?"'
Geoffrey Brennan and James Buchanan
Abstract
This article attempts a top-down analysis of what corporate income tax is capable of
achieving in terms of the public good. It considers how well the current configuration
of the tax fares when weighed against the principles of equity, efficiency and
simplicity. These principles, if carefully defined, provide an invaluable opportunity to
think about the theoretical and practical imitations of any individual tax. Applying
these principles to the corporate income tax results in the inescapable conclusion that
it cannot be described as being an equitable, efficient or simple tax. However given
the need for incremental reform of our tax laws, the corporate income tax does have
at least one saving grace: it can be a useful instrument of social and economic policy.
1 G Brennan and J Buchanan, The power to tax: analyticalfoundations of a fiscal constitution

(Cambridge: CUP, 1980) p 2.
Senior Lecturer in Tax Law, University of Auckland.
This article was accepted for publication on 1 September 2015.
865
866 (2015) 30 AUSTRALIAN TAX FORUM
1. Introduction
Adam Smith made it quite clear that writing and enforcing laws is not like playing
chess. Unlike chess pieces, people have their own ideas about what they want to do
and how they want to live. He suggests, therefore, that the way to avoid misery and
disorder is to align our laws with the principles of each individual.2 A modern spin on
this idea is the doctrine of individual welfare maximisation - a canon of normative
welfare economics - which stresses that the wants and preferences of self-actuating
individuals should be taken account of when designing or reforming laws.3
The literature seems to agree that fully realising individual welfare maximisation
through a social welfare function is beyond present capabilities, given its problematic
nature from an implementation perspective.4 Kaplow notes that the standard
treatments of tax policy analysis have instead tended to focus on equity, efficiency
and simplicity, which serve "as loose, intuitive proxies for social welfare". This is
consistent with Bird's suggestion that the traditional litany of the tax designer is
equity, efficiency and simplicity.6 Accordingly, this article seeks to articulate the
theoretical and practical scope of the corporate income tax through the standard tax
2 A Smith, The theory of moral sentiments (Cambridge: CUP, 2002) p 275 ("The man of system
... seems to imagine that he can arrange the different members of a great society with as much
ease as the hand arranges the different pieces upon a chess-board; he does not consider that ...
in the great chess-board of human society, every single piece has a principle of motion of its
own, altogether different from that which the legislature might choose to impress upon it. If
those two principles coincide and act in the same direction, the game of human society will go
on eerily and harmoniously, and is very likely to be happy and successful. If they are opposite or
different, the game will go on miserably, and the society must be at all times in the highest degree
of disorder").
3 In the welfare economics literature, individual welfare maximisation relates to social (or
aggregate) welfare maximisation in the following way: one considers "how a particular policy
affects each individual's well-being and then makes an aggregate (distributed) judgement based
exclusively on this information pertaining to individuals' welfare" L Kaplow and S Shavell,
"Fairness versus welfare: notes on the Pareto principle, preferences, and distributive justice"
(2003) The Journal ofLegal Studies, 32(1), 331 at 332.
4 It is too difficult to systematically identify, let alone measure, individual preferences for a social
welfare function to be the basis of policymaking. See, for example, R Tresch, Publicfinance: a
normative theory, 2nd ed (London: Academic Press, 2002) p 43 (the practical significance of the
social welfare function for policy analysis is very much open to question and is "one of the more
problematic constructs in all of economic theory").
5 L Kaplow, The theory of taxation and public economics (Princeton University Press, 2008) p 38.
6 R Bird, Why tax corporations?(Ottawa: Technical Committee on Business Taxation, Department
of Finance, Working Paper 96-2, 1996) fn 20; and R Bird, "Why tax corporations?" (2002)
Bulletin for InternationalFiscal Documentation 56(5), 194 at fn 49.
CORPORATE INCOME TAX: WHAT IS IT GOOD FOR? 867
policy principles of taxation.7 Articulating the contribution of corporate income tax

to the summum bonum in this way might be construed as a top-down analysis.
2. Tax principles
Equity, efficiency and simplicity arguably constitute the core criteria by which tax
systems, individual taxes and other aspects of a tax system are commonly judged, if
for no other reason than they are the most frequently cited.8 However, other principles
have also been adjudged as being important for taxation. 9
. Administrative efficiency: minimising the waste of valuable resources in

the achievement of the functional objectives of the tax system (ie "reducing
unproductive state consumption"). 10
. Transparency and certainty: the time and manner of payment, as well as the
quantum, should be clear to the taxpayer and "every other person."
" Consistency: those transactions having the same economic result or social effect
should also have the same tax result.
* Coherency: tax law being fully in line with societal goals.
. Effectiveness: the capacity of the tax system to achieve its functional objectives.
. Enforceability: the ease by which the tax gatherer or other body can ensure the
rules are followed and the requisite amounts are paid.
. Flexibility: the tax system's responsiveness and capacity for change.
It is an open question why these principles have not also been regarded as "core
principles. One possibility is that they are not standalone principles; rather, they
form part of one of the three core principles. It is certainly arguable that many, if not
all, of the "non-core" principles outlined above form part of what we might today
understand as the principle of simplicity.
Thinking about the possibility that the principle of simplicity is a composite

principle raises the more general issue of the underlying nature of tax principles. A
first observation is that there is a tendency to mix up (perhaps even confuse) the
7 Whether these principles are fit for purpose in a resource-constrained world is a discussion best
saved for a future article.
8 See K Messere, F de Kam and C Heady, Tax policy: theory and practice in OECD countries
(Oxford: OUP, 2003) p 2.
9 For a brief outline of some of these principles, see European Commission, General tax principles
(Brussels: DG Taxation and Customs Union CCCTB Working Group, 2004).
10 Vogel, Brands and van Raad, Taxation of cross-borderincome, harmonization,and tax neutrality
under European Community law: an institutionalapproach (Kluwer: Netherlands, 1994) p 29.
1 043
11 A Smith, The wealth ofnations, (New York: Bantam Dell, 2003; first published 1776) p ,
.
"objectives" of the tax system (ie raising revenue, redistribution and regulation) with
these principles. 12
One of the more general meanings of "principle" in the Oxford English Dictionaryis a
"general law or rule adopted or professed as a guide to action; a settled ground or basis
of conduct or practice". Freedman suggests that John Avery Jones understands legal
principles as "something higher level than just a vague or broad rule" that can have
"different weights depending on the circumstances"3
Can simplicity, equity and efficiency even be considered to be legal principles? They
are definitely at a higher level than rules and clearly have different weights depending
on the circumstances. However, they are rarely prayed in aid by the legislature and
judiciary, which is what one would expect from a legal principle. There is, though, at
least some evidence that they form part of a legal hierarchy of norms. For example,
s 26G(1)(e) of the Public Finance Act 1989 (NZ) states that the New Zealand
Government must pursue its revenue strategy having regard to the principles of
efficiency and fairness."
It is nonetheless entirely possible that they are not legal but economic principles,
particularly given the close association of equity, allocative efficiency, administrative
efficiency, transparency and certainty with Adam Smith, the father of modern
economics. If they do, in fact, fall outside the legal sphere, it is quite tempting to
conclude that our core tax principles are, in fact, something akin to a Kelsonian basic
15
norm.
By way of a conclusion, the least controversial thing that can be said about the nature
of the principles of simplicity, equity and efficiency is that they constitute guides for
the design of taxes and tax systems. If even this much is true, then it must also be
true that they constitute a valid basis for evaluating those same taxes and tax systems.
That they are capable of being employed more operationally when determining or
interpreting tax law is, perhaps, a discussion for another time.
12 See, for example, Kaplow, Taxation, above fn 6.

13 J Freedman, "Improving (not perfecting) tax legislation: rules and principles revisited" (2010)
British Tax Review, 6, 720.
14 It is arguable that, in the context in which equity and fairness appear (ie one of mandated
government strategy), they are in fact political principles.
15 See, for example, H Kelson, "On the basic norm" (1959) CaliforniaLaw Review 47(1), 107 at 110
("The basic norm of the Pure Theory of Law is the reason of the validity of a democratic as well
as of an autocratic law, of capitalistic as well as of a socialistic law, of any positive law, whether
considered to be just or unjust").
3. Equity
The principle of equity concerns the spread of the economic burden of taxation. This
has both a theoretical and a practical dimension. The theoretical dimension is that
there must be an operative distributive norm that determines how much each taxpayer
should pay or sacrifice. The practical dimension is that it must be understood exactly
where the true economic burden (or final incidence) of a particular tax falls.
3. 1 The theoretical dimension

The theoretical dimension may well have its origins in the naturalis rquitas of Roman
jurists, which concerned the recourse to general principles of justice to correct or
supplement the written law. In more general usage, equity signifies fairness and,
therefore, denotes what might be considered by some to be "right". Determining what
is right or fair requires a guiding norm, just as the naturalis rquitas required the
principles of justice to guide it. Identifying the need for a norm of distributive justice
for taxation, though, is a much simpler task than choosing one.
The contending norms of distributive justice to be found in the tax literature arguably
fit into one of three broad categories of theory:
. those advocating material equality (eg egalitarianism), where materiality involves

the state allocation or distribution of material or physical goods;
. those advocating wellbeing (eg welfarism), which go beyond (but do not exclude)
the state allocation or distribution of material goods; 16 and
. those advocating voluntary cooperation (eg libertarianism), which reject any
patterned, non-market allocative or distributive ideal and constrains state
interference to matters of commutative, rather than distributive, justice.
The current trend is for egalitarianism, which has meant the adoption of horizontal and
vertical equity for apportioning the tax burden." Both horizontal and vertical equity
are linked to the legal principle of non-discrimination, whereby like cases should be
treated alike (horizontal equity)18 and unlike cases should be treated in a way that is
16 Wellbeing recognises aesthetic fulfilment, feelings for others, and anything else that individuals
might value, however intangible. See L Kaplow and S Shavell, "Fairness versus welfare" (2001)
Harvard Law Review 114, 968. On equality of opportunity to participate fruitfully in the
democratic process as a distributive norm, see J Repetti, "Democracy and opportunity: a new
paradigm in tax policy" (2008) VanderbiltLaw Review 61 1130.
17 It is beyond the scope of this article to critique egalitarianism as a distributive norm.
18 See, for example, B Galle, "Tax fairness" (2008) Washington and Lee Law Review 65, 1323 at 1325
("... a fair tax is one that treats similarly situated individuals alike"); and D Elkins, "Horizontal
equity as a principle of tax theory" (2006) Year Law and Policy Review 24, 43 at 43 ("... similarly
situated individuals face similar tax burdens").
proportional to the relevant differences between them (vertical equity). Horizontal

equity provides that taxpayers with a similar ex ante pecuniary ability-to-pay1 9 should
have the same cash burden imposed on them. Vertical equity, on the other hand,
provides that taxpayers with a different ex ante pecuniary ability-to-pay should have a
cash burden imposed on them that is in proportion to that difference. 20
Establishing a case for the horizontal or vertical equity of the corporate income tax
is a cumbersome endeavour. It requires drawing an economic equivalence between
natural and legal persons. 21 Despite some notional similarities - both are right
holders that use up natural resources when they remove them from the common stock
- the differences are insurmountable in short order. Thus, we are left to consider
the extent to which the corporate income tax satisfies the practical dimension of the
principle of equity.
3.2 The practical dimension
The practical dimension of equity is about understanding where the true economic
burden or final incidence of a tax falls. The starting point with regards corporate
income tax is that corporates are persona ficta and only natural persons can suffer
the economic burden associated with the tax that they pay. Another way of thinking
about this is that corporates cannot forgo the enjoyment of wealth - such as leisure
or consumption - that taxation implies. Thus, it is ultimately some group of natural
persons upon whom the economic burden of corporate income tax falls. However,
precisely which group we are concerned with is, at best, debatable and, at worst,
simply unknown. This makes it impossible to establish the equity (or inequity) of the
corporate income tax.
The study of tax incidence has a long and rich history.22 In 1776, Adam Smith
wrote of taxes on wages that they "could not properly be said to be even advanced
19 See Kaplow, Taxation, above fn 6 ("notions of fairness (such as 'ability to pay') are notoriously
vague, subject to competing interpretations, and in some instances largely free of content").
20 See, for example, N Kaufman, "Fairness and the taxation of international income" (1998)
Law and Policy in InternationalBusiness 29, 145 at 164 (vertical equity "exists when the tax
distinguishes appropriately between taxpayers who are not equals - when the distribution of
the tax burden reflects the correct degree of progressivity, proportionality, or regressivity").
21 See Messere, de Kam and Heady, Tax policy, above fn 8, 112 (a "formal justification for the
corporate income tax is that a corporation has the status of a legal person and like physical
persons, should therefore be liable to income tax").
22 See, for example, E Seligman, The shifting and incidenceof taxation, 2nd ed (London: Macmillan,
1899) who begins his treatise: "The problem of the incidence of taxation is one of the most
neglected, as it is one of the most complicated, subjects in economic science. It has indeed been
treated by many writers; but its discussion in scientific literature, as well as in everyday life, has
frequently been marked by what Parieu calls the 'simplicity of ignorance'. Yet no topic in public
finance is more important".
by [the labourer]" and would "in different cases fall upon different persons'. 23 The
problem in respect of corporates, though, is much more pronounced: it can never
be the corporate body that suffers the tax. Therefore, the burden must always fall
elsewhere. The economics literature refers to the elasticities of the various tax bases
and there can be little doubt that the majority of direct taxes can, to some extent, be
passed on. However, it would appear that the corporate income tax is passed on in
its entirety.24 To suggest that the effective incidence is not strictly correlated under
all conditions with the final incidence, as with taxes on wages, is one thing; it is a
very different proposition to suggest that the effective incidence is necessarily and
absolutely divorced from the final incidence, as it is with corporate income tax.
The literature on the incidence of the corporate income tax is full of contradictions.
The questions that the literature has tried, and failed, to answer are: (1) whether
corporate income tax is shifted forward through higher consumer prices or backwards
onto workers and shareholders; and (2) whether corporate income tax is progressive
25
or regressive.
The prevailing view until 1979, due to Harberger, was that the incidence fell mostly on
shareholders. Harberger based his view on an early example of a general equilibrium
model with two sectors: corporate (capital intensive, such as manufacturing) and
non-corporate (labour intensive, such as agriculture). The assumptions underlying
the model were perfect competition, a closed economy, a fixed supply of capital 26 and
a classical system of taxation. 27 increasing the corporate income tax rate in the model
increased the cost of:
(1) capital in the corporate sector, thus discouraging the use of capital and
increasing the demand for labour (a substitution effect); and
(2) corporate goods relative to non-corporate goods, causing demand to shift
from corporates to non-corporates (an output effect).
23 Smith, The wealth of nations, above fn 11, 1095.

24 It is an open question the extent to which government policy might be able to control this shift.
See, for example, R Mooij, "Will corporate income taxation survive?" (2005) De Economist
153(3), 277 at 282 (corporate income should somehow be forcibly allocated to the households of
shareholders).
25 J Mintz, "The corporation tax" (1995) FiscalStudies 16(4), 63.
26 M Feldstein, J Green and E Sheshinski, "Corporate financial policy and taxation in a growing
economy" (1979) QuarterlyJournal of Economics, August XCIII(3), 411 (suggesting that this is
the key (implicit) assumption behind Harberger's conclusion).
27 A Harberger, "The incidence ofthe corporation income tax" (1962) JournalofPoliticalEconomy
70(3), 215.
As the corporate sector is more capital intensive,28 the shift in demand results in more
capital relative to labour being released from the corporate sector than the labour
intensive non-corporate sector could absorb. The result is a surfeit of capital. Large
amounts of uninvested capital means the rate of return has been depressed by the
increase in the corporate income tax rate. The impact of this is that shareholders
largely bear the burden of corporate income tax and, furthermore, corporate income
29
tax is progressive.
Around the same time as Harberger, Krzyzaniak and Musgrave used statistical analysis
to show a strong positive correlation between profits and the corporate tax rate.
Consequently, they argued that corporates pass their taxes on to consumers as higher
prices, lowering the effective income of those consumers. 0 The implication being that
corporate taxes have no impact on shareholder returns, the opposite conclusion to
Harberger. Shifting corporation tax forward in this way onto consumers can be either
progressive or regressive. If, for example, industries that produce staples are more
highly taxed than those that produce luxury goods, then the corporate income tax will
fall more heavily on people with low incomes and vice-versa. 1
In 1979, a paper by Feldstein, Green and Sheshinski marked the shift, in the incidence
debate, from considering states as closed to considering them as open economies.
They showed that if capital can be sourced internationally, shareholders would
not bear the economic burden.3 2 The logic being that if the interest rates faced by
corporations are determined by international markets and not by the domestic supply
or demand of capital, the corporate income tax cannot affect after-tax returns earned
by shareholders. Instead, given the relative immobility of labour, especially unskilled
28 Ibid pp 216-217, where Harberger explains the correlation between heavy industry and
incorporation.
29 Mintz, The corporationtax, above fn 25 (draws these specific conclusions in relation Harberger's
study).
30 Their main result was that for all manufacturing, the US corporate tax was 145% shifted forward
to consumers. That is to say, corporate profitability rose disproportionately after a tax increase.
See M Krzyzaniak and R Musgrave, The shifting of the corporation income tax: an empirical
study of its short-run effect upon the rate of return (Baltimore, Md: Johns Hopkins Press, 1963)
43. Krzyzaniak and Musgrave's results bear out the assertion of NB Kaldor, An expenditure tax
(Aldershot: Gregg Revivals, 1993; first published 1955) 169 ("provided that sufficiently long
periods are taken into account, the taxation of business profits does tend to get 'passed on, in the
form of higher profit margins, and thus its true incidence is shifted from the shareholders to the
general consumer").
31 There are some pertinent criticisms of Harberger's approach stemming from the work of
Krzyzaniak and Musgrave that have led some commentators to cast the incidence question in
the broader terms of market structure. See J Whalley, The incidence of the corporatetax revisited
(Ontario: Department of Finance, Technical Committee on Business Taxation, Working Paper
97-7, 1997) p 8.
32 See Feldstein, Corporatefinancialpolicy, above fn 26.
labour, at the international level, corporate taxes will be shifted back onto fixed factors
(labour and land).33 For a small open economy, this implies that the tax could be
regressive, especially if lower-paid unskilled workers must bear the brunt of it.
In 2006, Randolph used a general equilibrium model (two small open economies,
five sectors, perfectly mobile capital, fixed stock of capital and labour) to examine the
long-term incidence of a corporate income tax in an open economy. Although, as with
any simplified model, the analysis is silent about the effect of the corporate income tax
on savings, growth and other dynamics that may have important effects on incidence,
the model shows, in relation to the economic burden, that:
. domestic workers bear approximately 70%;

. domestic shareholders bear approximately 30%
. domestic landowners receive a small benefit; and
. foreign shareholders bear approximately 70%, which is exactly offset by the
benefits received by foreign workers and landowners.
According to his model, as capital becomes less mobile internationally, the burden on
domestic workers falls but the burden on domestic shareholders increases. 34
According to Auerbach, in the short term, changes in the corporate income tax are
most likely borne by existing shareholders.35 This view can be contrasted with the
6
2008 conclusions of Devereux, Arulampalam and Mafini. 3
Deutsch and Jenkins complicate things further by suggesting that the introduction
of foreign tax credits means that host country corporate income tax is borne by the
home country's treasury.37 Yet more complexity is added when there is an attempt to
38
account for market structure.
33 S Bond et al, Corporate tax harmonisationin Europe: a guide to the debate (IFS, 2000) p 24 (this
is true of the incidence of a source-based capital income tax in a small open economy).
34 See W Randolph, International burdens of the corporate income tax (Washington, DC:
Congressional Budget Office, Working Paper Series no. 2006-09, 2006).
35 A Auerbach, "Who bears the corporate tax? A review of what we know" in Colloquium on Tax
Policy and Public Finance (NYU School of Law, 2006).
36 M Devereux, W Arulampalam and G Mafini, "The direct incidence of corporate income tax on
wages", paper presented at a meeting of the Oxford 258 University Centre for Business Taxation
on 14 May 2008 entitled "Who really pays corporation tax?" in London at the Apothecaries' Hall.
37 A Deutsch and G Jenkins, "Tax incentives, revenue transfers and the taxation of income from
foreign investment" in W Thirsk and J Whalley (eds), Tax policy options in the 1980s (Toronto:
Canadian Tax Foundation, 1979).
38 For a review of the literature on the incidence of tax crediting, see J Whalley, The incidence of
the corporate tax revisited (Ontario: Department of Finance, Technical Committee on Business
Taxation, Working Paper 97-7, 1997) pp 12-13.
It can be seen that with each study comes a different conclusion. It could be consumers,
shareholders, workers, landowners, foreign treasuries or even future generations that
bear the burden of corporate income taxes.39 In 1996, the US Congressional Budget
Office (CBO) concluded tentatively and reservedly that:
. in the short term, the incidence is borne unequally by shareholders and investors;
. in a closed economy, long-term incidence is borne by shareholders;
. in an open economy, long-term incidence moves to immobile factors;
. in the very long run, the burden is transferred to labour; and
. most studies overlook the possibility that the burden is passed to consumers. 40
Increasing international capital mobility and the fact that most economies are in
practice neither fully open nor closed means that even the CBO's tentative conclusions
create uncertainty.4 1 Ultimately, there is still no agreement on where the true
incidence falls.42 While some commentators are convinced that it washes through to
the consumer,43 the only thing that can be agreed upon is that the final incidence of
corporate income taxes does not fall upon the company itself.
"
In terms of the objective of this article, the conclusion must be that it is too difficult
to establish the equity of the corporate income tax. Being so unsure of where the final
incidence falls means that there is no knowing who suffers the true economic burden
of the tax. Without that knowledge, it is impossible to know whether the tax is fair
or not. If equity is considered to be as important as it is so often claimed, then there
are seemingly two options open to the policymaker. First, it might be "retired" and
replaced with a type of tax whose incidence is more certain. Second, and alternatively,
the policymaker might focus instead on more regulatory objectives, which are
themselves (by definition) an anathema to the principle of tax equity (in that it is
impossible to incentivise one of two otherwise economically equivalent activities
39 See, for example, W Vickrey, "The corporate income tax and how to get rid of it" in L Eden (ed)
Retrospectives on publicfinance(Durham, NC: Duke University Press, 1991) p 118 ("under some
not unreasonable assumptions it appears that the burden will be felt largely by future generations
rather than by present taxpayers").
40 CBO, The incidence of the corporateincome tax (Washington, DC: CBO, 1996) p 27.
41 The 1996 CBO study focuses on models. Thus, it ignores the Krzyzaniak and Musgrave empirical
study. This is consistent with the CBO's more recent disavowel of empirical studies. See
JC Gravelle, Corporatetax incidence: a review of empirical estimates and analysis (Washington,
DC: CBO Working Paper 2011-01) p 29 ("the various methodological limitations put the
reliability of those specific [empirical] estimates into question").
42 See JC Gravelle, Corporatetax incidence: a review ofempiricalestimates and analysis(Washington,
DC: CBO Working Paper 2011-01) p 29 ("it remains unclear where incidence will fall in an open
economy").
43 See Smith, The wealth of nations, above fn 11, 1079; and L Chipman, The very idea of a flat tax
(The Centre for Independent Studies, 2004) p 5.
44 See Messere, de Kam and Heady, Tax policy, above fn 8, 112.
while simultaneously preserving horizontal equity). Assuming that the corporate

income tax is here to stay for a while longer, it may well be better to adopt the latter
stance, at least for now.
4. Efficiency
Economic or allocative efficiency is concerned with the optimal allocation of
productive resources in the economy as a whole. While optimality could, in theory,
contain an ideological bias, the broad pluralist consensus is that it refers to the creation
of the greatest possible economic surplus. In other words, economic efficiency is about
allocating resources such that the maximum amount of wealth possible is created.
The issue to be addressed by this section is whether the corporate income tax, as
it is currently formulated, helps or hinders the optimal allocation of productive
resources. 45 The short answer is that it is inefficient for at least two related reasons.
The first is that it taxes, thereby diminishing, retained earnings, which can also be
thought of as potential investment capital. 46 In a world without other considerations,
it would seem ludicrous to suggest diminishing the store of homegrown investment
capital from a vehicle whose sole societal function is to use capital to create wealth
through the pooling of productive resources. 47
The second reason that the corporate income tax is inefficient is that, by reducing the
store of a company's homegrown investment capital in the way it does, it creates a
preference for debt financing (over equity financing) as an alternative source of funds.
Debt financing generates transaction costs that, in extremis, can lead to organisational
failure. 48 This situation is exacerbated when the loan facility in question contains
control clauses, which is not uncommon when the counterparty is a bank.
45 See R Boadway and H Kitchen, Canadiantax policy, 3rd ed (Toronto: Canadian Tax Foundation,
no.103, 1999) p 52 (the issue of efficiency involves the enquiry, "does the tax system interfere
as little as possible with the use of the competitive price mechanism to allocate the economy's
scarce resources?").
46 For an alternative formulation of the same basic idea, see J Mirrlees et al (eds), Tax by design:
the Mirrlees review (Oxford: OUP, 2011) p 416 (taxing the normal return on equity-financed
corporate investment raises the cost of capital thus lowering corporate investment).
47 The artificial entity view of corporations implies that wealth creation is the primary societal
function of private corporations. See M Bowler-Smith, The taxing road to sustainablegrowth:
resourceproductivity and corporatetaxation (Amsterdam: IBFD, 2013) p 157.
48 It may be that corporate income taxes have other elements that do the same but, in the interests
of brevity, they are not considered here.
4.1 Understanding efficiency

Allocative efficiency should first be distinguished from technical efficiency, which
describes the individual production processes of a firm in terms of the degree to which
they reflect best practice. 49 Rather than focusing on the individual firm, allocative
efficiency focuses on the economy as a whole.
In the literature, allocative efficiency has attracted a number of different formulations.

Pareto optimality is arguably the most famous. It holds that there is no alternative,
with regards the distribution of wealth, in which there is at least one person better
off and no one worse off. Unfortunately, Pareto optimality implies efficiency in some
rather unpalatable scenarios. For example, it would be efficient for a starving person to
stay starving as long as others garner more resources. 50 This flaw is exposed nowhere
better than in the formulation of Kaldor-Hicks efficiency, which is also sometimes
referred to as the compensation principle. It holds that an outcome is more efficient
if those that are made better off could in theory compensate those that are made
worse off and lead to a Pareto optimal outcome.5 1 In a similar vein, but introducing
an element of subsidiarity to the idea of efficiency, Nozick suggests that at any given
time, any group:52
"... contains exactly those allocations to consumers such that no subset of

consumers can improve each member's position by reallocating their own assets
among themselves, independently of the other consumers in the economy."
Marshallian efficiency is arguably a preferable formulation to Pareto, Kaldor-Hicks

and Nozickean efficiency. It focuses instead on the maximisation of total economic
surplus.53 Possible advantages that Marshallian efficiency has over these other
formulations include:
a focus on more productive resources rather than, for example, assets such as
consumer items;
49 See Bowler-Smith, The taxing road to sustainablegrowth, above fn 47, 55. For a discussion of a
kind of "tripartite" efficiency (ie allocative efficiency, administrative efficiency and effectiveness
combined), see JG Gravelle, The economic effects of taxing capital income (Cambridge, Mass.:
MIT Press, 1994) p 29.
50 For a general discussion of the unsuitability of the Pareto principle as a universal rule, see
H Chang, "A liberal theory of social welfare: fairness, utility, and the Pareto principle" (2000)
Yale Law Journal 110, 173 at 175.
51 N Kaldor, "Welfare propositions in economics and interpersonal comparisons of utility" (1939)
Economic Journal 49(195) 549; and J Hicks, "The foundations of welfare economics" (1939)
Economic Journal49(196) 696.
52 R Nozick, Anarchy, state, and utopia (Oxford: Blackwell, 1974) p 300.
53 Note that none of these formulations take account of the sustainability of the process being
discussed.
. no implicit or explicit reference to redistribution;

. the capturing of capitalism's dynamic (i.e. it is not static or a 'snap shot'); and
. more pluralism in that economic surplus is a more acceptable proxy for aggregate
54
welfare.
Other formulations of efficiency that have a similar bearing to that of Marshallian

efficiency include:
. a "measure of how well society meets - in quality and quantity - the material
wants of its members";5 5 and
. a normative principle that "favours the allocation of scarce resources to their
most highly valued uses in order to maximize aggregate welfare'. 5
4.2 Efficiency and the tax system

Assuming, therefore, that we are referring to Marshallian efficiency when we refer to
"efficiency', the next step is to consider the relationship between efficiency and the tax
system. The way one conceptualises that relationship depends, in the broadest terms,
on whether one thinks that competitive markets are capable or incapable of optimally
allocating resources. This is because a tax is a non-market event (ie it does not involve
voluntary exchange) that nevertheless affects market prices.
If competitive markets are considered to be incapable of optimally allocating

resources, then taxes start to look like a possible means of correcting market failures
and producing greater efficiency.57 If the opposite position is taken, taxes look to be at
58
their best when they are neutral with regard to resource allocation.
54 For a similar observation, see B Ben-Amitai, Wealth maximisation as a political conception

of justice (University of Cambridge PhD thesis, 2007) p 6 (wealth maximisation is a pluralist
ideal that is neutral in respect of so many competing ideologies). If practicable, a social welfare
function would offer more granularity in that it would accommodate individual welfare.
55 C Schultze, The public use of private interest (Washington: Brookings Institution, 1977) p 1.
56 D Duff, "Benefit taxes and user fees in theory and practice" (2004) University of Toronto Law
Journal54(4), 391 at 396.
57 See B Greenwald and J Stiglitz, "Externalities in economies with imperfect information and
incomplete markets" (1986) Quarterly Journal of Economics 101(2), 229 at 230 (there "exist
government interventions (eg taxes and subsidies) that can make everyone better off"). See
also C Bastable, Public Finance, 3rd ed (London: Macmillan, 1917), III.VII.13 ("First and most
important of the principles that should guide the practical financier is that which declares that
'taxation should be productive').
58 On the different meanings of tax neutrality, see Bowler-Smith, The taxing road to sustainable
growth, above fn 47, 90.
Whether or not competitive markets are considered to be optimal with regards to

resource allocation rather depends on the theoretical perspective of the observer. For
example:
. liberal theory holds that it is the principal task of government to secure and
distribute fairly the liberties and economic resources individuals need to lead
59
freely chosen lives;
. libertarian theory limits the role of government to "the narrow functions of
protection against force, theft, fraud, enforcement of contracts, and so on";60 and
. communitarian theory suggests that engaged communities oversee a government
that in turn oversees a strong, judiciously contained market.6 1
Thus, it is those theoretical perspectives more closely associated with the libertarian
viewpoint that deem competitive markets to be optimal in the allocation of productive
resources. With regards to both liberal and community-based theory, as well as what
can be observed in the real world, it is government intervention in competitive
markets that is the norm.
Despite the weight of theory and practice that favours some kind of government
intervention, it is nonetheless difficult to understand the mechanism whereby a tax
might help allocate resources better than competitive markets. This is one of the
messages to have emerged from the optimal taxation literature and is nicely captured
by this Winston Churchill quote:
"... for a nation to try to tax itself into prosperity is like a man standing in a
62
bucket and trying to lift himself up by the handle."
It is perhaps for this reason that the principle of tax neutrality - the idea that a tax
should not affect the allocation of resources - had enjoyed, almost by default, such
63
dominance as a criterion of corporate taxation in the literature.
59 See, for example, J Rawls, A theory ofjustice (London: OUP, 1973).

60 See, for example, R Nozick, Anarchy, state, and utopia (Oxford: Blackwell, 1974) p ix. See also
M Rothbard, Man, economy, and state with power and market (Alabama: Ludwig von Mises
Institute, 2004) (Coasian bargaining leads to efficient solutions, even with regards externalities).
61 See, for example, A Etzioni, Next: the road to the good society (New York: Basic Books, 2001).
62 See M Mainelli, "Corporation tax or income tax: which is the greatest con?" 22 January 2007.
Available at http://gresham.ac.uk/event.asp?Pageld=4&Eventld=515. Accessed 19 March 2015.
63 P Sorensen, "The theory of optimal taxation: what is the policy relevance?" (University of
Copenhagen, EPRU Working Papers Series, 06-07) p 4. See also R Bird and J Mintz, "Future
developments in tax policy" (1994) Federal Law Review 22, 402 at 412 ("[t]ax 'neutrality', which
for several decades has been the Holy Grail of tax reformers, seems likely to fade away in favour
of an approach that sees taxation as just one of a broad set of public policies attempting to secure
particular objectives and constraints").
4.3 Competitive markets

Rawls posits that competitive markets are a "major social institution" and, as such,
they are able to "distribute fundamental rights and duties and determine the division
of advantages from social cooperation". 64 Major social institutions are as close as
Rawls comes to identifying the fundamental building blocks of a free and fair society.
Given that even his harshest critics concede that others "must now either work within
Rawls's theory or explain why not",65 it seems reasonable to hold out the existence
and importance of competitive markets as both a starting premise and an underlying
assumption of an analysis of efficiency.
A number of related consequences flow from the existence of competitive markets in

a capitalist economy.
(1) They promote economic growth. 66 They serve to allocate resources to

the place in the economy where their return is greatest. They facilitate
this allocation through price signals and other information that they
provide.6' Adam Smith's "invisible hand" embodies the idea that the
individual pursuit of maximum profit guides capitalist markets to greater
effectiveness in the creation of wealth.6 8
(2) They organise economic activity better than uncompetitive markets.
Thus, they create more wealth than uncompetitive markets. This has
sometimes been taken to mean that competitive markets organise
economic activity more efficiently than any other alternative.
(3) They stimulate innovation. 69 Competition drives out less effective
production processes through a combination of Darwinian selection and
adaptive imitation by means of a self-correcting price mechanism (an
idealisation of this function is "productive efficiency").
64 J Rawls, A theory ofjustice (London: OUP, 1973) p 7.

65 R Nozick, Anarchy, state, and utopia (Oxford: Blackwell, 1974) p 183.
66 G Firebaugh and F Beck, "Does economic growth benefit the masses? Growth, dependence, and
welfare in the Third World" (1994) American SociologicalReview 59(5), 631 (defining growth as
"an increase in the total value of goods and services produced per person").
67 See J Greenwood and B Smith, "Financial markets in development and the development of
financial markets" (1997) Journal ofEconomic Dynamics and Control 21(1), 145.
68 J Stiglitz, "The role of government in economic development" in A Bagchi (ed) Readings in public
finance (Oxford: OUP, 2005) p 157 (that the modern incarnation of the invisible hand doctrine
is one of the "fundamental theorems of welfare economics").
69 UK Government, "UK progress report on economic reform: product and capital markets",
December 2002, [161].
Beyond these core functions, there is a concern that competitive markets are not a
complete solution when it comes to the economic organisation of society.70 This is
partially because, in practice:
(1) competitive markets do not exist within a vacuum and it falls to

government to define the institutional framework within which they
operate; 7 1 and
(2) real markets fail - and, under current institutional arrangements, it is
government that must correct for that failure by either altering incentives
72
or institutional rules.
Howsoever institutional and regulatory frameworks reduce or impair the ability of

market players to maximise their returns, the result is inefficiency. Furthermore, if one
accepts the idea that a competitive market cannot be separated from its institutional
and regulatory frameworks, inefficiency becomes inseparable from market failure.
From this perspective, not only is it possible to show a tax is inefficient if it impedes
wealth creation, but it is also inefficient if it can be shown to create those outcomes
commonly associated with market failure.
4.4 Opportunity cost

An early statement of the principle of efficiency in relation to taxation is that taxes
73
should not:
"... obstruct the industry of the people, and discourage them from applying to
certain branches of business which might give maintenance and employment
to great multitudes. While it obliges the people to pay, it may thus diminish,
or perhaps destroy, some of the funds which might enable them more easily to
do so."
This is arguably an early reference to the idea that a tax can have a high opportunity
cost: that it is the foregone alternative that is more important than the revenue
collected. A tax with a high opportunity cost restricts the ability to create the wealth
from which future revenue is raised. First, a tax might diminish the personal gain
70 See J Stiglitz, "John Kenneth Galbraith understood capitalism as lived - not as theorized', The
Christian Science Monitor, 28 December 2006 ("Smith's 'invisible hand' ... is so invisible because,
quite often, it's just not there").
71 See Boadway and Kitchen, Canadian tax policy, above fn 45.
72 See J Stiglitz, "Distinguished lecture on economics in government: the private uses of public
interests: incentives and institutions" (1998) Journal ofEconomic Perspectives12(2), 3 (fn 1); and
P Diamond and J Mirrlees, "Optimal taxation and public production I: production efficiency"
(1971) The American Economic Review 61(1), 8.
73 Smith, The wealth of nations, above fn 11, 1044-1045.
available from otherwise wealth-creating activities, thus disincentivising such activity

in the future. This can occur when the "right" base is taxed too highly (an idea
embodied by the Laffer curve, which illustrates the disincentive effect of higher tax
rates on work, output and employment, with the result that the state enjoys lower
74
aggregate tax revenues).
Alternatively, a tax might diminish existing stores of capital that would otherwise be
put to good use creating wealth were it not for the levy. This can occur if the wrong
base is taxed, which is arguably the case when retained corporate profits are taxed.
By taxing retained earnings (or undistributed profits), extant stores of investment
capital are necessarily diminished. All other things being equal, this means that future
returns are reduced and the state will enjoy lower aggregate tax revenues.
There are those who argue that taxing retained earnings is not a levy on the "wrong"
base. They argue that corporate income tax is efficient insofar as it only attaches to
economic rent: that it is acceptable to tax investment capital, so long as the stores
of capital available for investment are not diminished beyond their ability to yield a
profitable rate of return. What this view fails to account for is the fact that efficiency
concerns wealth maximisation - economic surplus - not acceptable rates of return.7 5
A possible rejoinder by those in favour of an economic rent tax is that corporates have
other alternative sources of finance: they can either sell more equity or borrow money.
However, replacing lost capital through debt or equity entails extra business costs and,
from a wider economy perspective, other transaction costs.
In conclusion, part of the opportunity cost of the corporate income tax is the future
economic surplus lost through discouraging companies from reinvesting their profits
in the business. In terms of stark choices, corporate managers might decide either
not to invest in new projects or to do so via equity or debt finance. Therefore, the
opportunity cost of the corporate income tax includes:
74 See A Laffer, The Laffer curve: past, present, and future (Heritage Foundation report, 1 June
2004). See also K Hassett and A Brill, Revenue-maximizing corporate income taxes: the Laffer
curve in OECD countries (American Enterprise Institute Working Paper No. 137, 2007) who
find robust statistical evidence of a corporate tax Laffer curve in OECD countries ("the revenue
maximizing point has dropped over time, and is about 26 percent").
75 It is also arguable that an economic rent tax falls more heavily on knowledge-based capital
(KBC) than physical capital, given that most physical inputs are deducted from the tax base.
This is important because KBC is the only guarantor of long-term economic growth. On
the importance of KBC, see OECD, Supporting investment in knowledge capital, growth and
innovation (Paris: OECD, 2013).
(1) lost opportunities for company growth (or increases in corporate

wealth); 6 and
(2) negative outcomes that result from the adoption of funding alternatives,
one of which is discussed in the next section.
4.5 The differential taxation of debt and equity
Corporate income tax creates a preference for debt financing over equity financing. It
does so by allowing an interest deduction from corporate profits but disallowing any
kind of deduction in relation to dividends paid to shareholders. The policy rationale
for this differential tax treatment between debt and equity stems from the fact that
interest payments are the de jure cost of debt finance, whereas dividends are only
a de facto cost of raising equity finance. In other words, debt interest is a necessary
business cost as it results from an underlying legal obligation to pay that interest,
whereas a company is under no legal obligation to pay out dividends to its ordinary
shareholders. Thus, dividends constitute purely discretionary payments.7 7
The fact that the "tax bias in favour of interest appears to encourage borrowing" raises
the question of "whether it encourages too much borrowing"' 8 In other words, given
the present focus on efficiency, does the encouragement of borrowing help or hinder
companies when it comes to the creation of wealth?
Debt has stronger control effects than equity. In certain circumstances, it can be
argued that these control effects are positive. For example, in Jensen's view, the control
effects of debt reduce the agency costs of free cash flows (ie "cash flow in excess of that
required to fund all projects that have positive net present values when discounted at
the relevant cost of capital") as long as the firm does not become too highly leveraged.
In a nutshell, his argument is that there is a point where it is better for corporate
managers to disgorge "spare" capital rather than spend it wastefully. However, not
all firms are in the position of having free cash flows (or spare capital), particularly
businesses that are growing or struggling. 79 Indeed, it is with such businesses that the
control effect (ie the de jure obligation to pay interest) becomes a potential millstone.
76 See G Donaldson, Managing corporate wealth (New York: Praeger, 1984) (concludes that
managers of large firms are not driven by firm value maximization but by corporate wealth
maximization).
77 For a more in-depth analysis, see Bowler-Smith, The taxing road to sustainablegrowth, above fn
47, 154.
78 A Auerbach, M Devereux and H Simpson, "Taxing corporate income" in J Mirrlees et al (eds),
Dimensions of tax design: the Mirrlees review (OUP: April 2010) p 858.
79 M Jensen, "The agency costs of free cash flow: corporate finance and takeovers" American
Economic Review (1986) 76(2), 323.
The Mirrlees review panel has discussed the potential negatives of the control effect of
debt from a tax perspective. Their suggestion is that, given the inherent uncertainty of
future project investment returns, using "more debt finance and less equity finance"
means an increased "risk that lenders will not be repaid in full". In practice, this might
mean "more firms are likely to default in an economic downturn than would otherwise
be the case".8 Therefore, debt financing may increase the risk of organisational failure.
The risk of default may also trigger another of the negative control effects of debt.
Some loan agreements place quite strong constraints on corporate managers when
there is a risk of default. In the words of Alces, once a corporation is:8 1
"... at risk of defaulting on major bank loans, an effective change in control

occurs, and the mechanisms that tied the managers' interests to those of the
corporation through the interests of shareholders fail."
Such constraints or "pre-emptive control" provisions may affect the redeployment of

firm-specific assets, either when there is a risk of default or in anticipation that such
a risk might arise. It may be felt that these assets should be utilised such that the
continuing obligation to service the debt be honoured, rather than being put to other,
possibly more profitable, uses.
Both the need to service the debt in full (and the associated increased risk of
organisational failure) and the loan covenants, arguably promote risk aversion (or
constrain the risk profile of a firm) at crucial times in the life of that firm. For example,
but for the debt, a firm that failed might have developed a successful strategy to
weather the economic downturn. As Alces suggests, deference to creditors is not "the
82
path to corporate wealth maximization"
The US Joint Committee on Taxation adjudged the "differential taxation of debt and
equity" to be sufficiently serious so as to constitute what it once called a "tax-induced
structural distortion; which they defined as a structural element ofa tax that materially
83
affects economic decisions in a manner that imposes substantial efficiency costs.
80 "Taxing corporate income" in J Mirrlees et al (eds), Tax by design: the Mirrlees review (OUP:
April 2011), [17.2].
81 K Alces, "Strategic governance" (2008) Arizona Law Review 50(4), 1053 at 1054.
82 Ibid. She went on to suggest that "adopting the course of action preferred by either the
shareholders or creditors will not necessarily guarantee that the managers will make the decision
or adopt the level of risk that is best for the firm. Neither constituent can be relied upon to
advocate consistently for positions that would lead to wealth-maximizing behavior. The best
way to address this problem is to balance the amount of influence each group can exert over
corporate managers throughout the life of the firm".
83 See US Joint Committee on Taxation, A reconsiderationof tax expenditure analysis (12 May 2008,
JCX-37-08) pp 10, 41.
The Mirrlees review panel also considered this "distortion" to be sufficiently serious
that it recommended rebalancing the corporate tax base by granting corporations a
tax allowance in respect of the equity in the corporation.
In conclusion, debt interest deductibility is inefficient. Its control effects can negatively
affect the risk profile of firms and even contribute to organisational failure. Taken
together with the fact that it diminishes retained earnings, the corporate income
tax, in its current form, cannot be said to help the optimal allocation of productive
resources. Thus, the corporate income tax is not an efficient tax.
Of course, that does not mean that there is not scope for it to be a more efficient tax,
particularly if it can generate positive externalities. One can see, for example, just such
a general intention behind R&D tax incentive regimes.8 4
5. Simplicity
As a normative tax principle, simplicity is arguably about freedom from elements of
limited utility, which includes not multiplying functional elements beyond necessity. 85
Thus, not only should each element of a tax system be beneficial, effective and scalable,
but there should also be as few elements as possible with the same functionality.86
From a functional perspective, while it makes no show of redistributing wealth, the

corporate income tax undoubtedly does a good job of raising revenue and regulating
some aspects of corporate conduct. Thus, it cannot be said that the corporate income
tax is of no functional utility. Where the corporate income tax falls down is from
the perspective that, in its current form, it has limited utility given that: (1) other
taxes raise revenue more efficiently and equitably; and (2) it can be shown that, as
a regulatory instrument, some of its reliefs conflict with each other from a policy
perspective.
84 See, for example, Div 355-5 of the Income TaxAssessmentAct 1997 (Cth), which provides that the
object of the regime "is to encourage industry to conduct research and development activities
that might otherwise not be conducted because of an uncertain return from the activities, in
cases where the knowledge gained is likely to benefit the wider Australian economy."
85 See A Baker, "Simplicity" in EN Zalta (ed) The Stanford encyclopedia of philosophy (2013) [2]
("Entities are not to be multiplied beyond necessity"); and E Kant, Critiqueof pure reason (CUP,
1998) 595 or A652/B 680 ("the familiar scholastic rule that one should not multiply beginnings
(principles) without necessity").
86 E Kant, Critique of pure reason (CUP, 1998) 597 or A656/B684 ("Entium varietates non temere
esse minuentias" or "[t]he variety of entities should not be rashly diminished").
5.1 Understanding simplicity

In ordinary usage, simplicity is a state or quality of being simple in form or structure.
It implies the absence of duplicity, dissimulation, guile, elaboration or artificiality.
It connotes something open, straightforward, unpretentious, plain and unadorned.
Thus, simplicity is the very opposite of complexity. One might expect, therefore, to
find the inclusion of the following qualities in a simple or uncomplicated tax:
ease of comprehension and conformity;

ease of calculation and assessment;
. minimisation of resources wasted in payment or collection;
ease of enforcement;
. freedom from elements of limited utility;
. little scope for contentious litigation;
. little scope for the exploitation of loopholes, arbitrage opportunities and other
tax avoidance opportunities; and
. little scope for manipulating the time or manner of payment.
If this is a credible list, it becomes arguable that simplicity as a tax principle is a proxy
for a whole host of other desirable qualities or principles.8 8 For example, many of
these qualities would help minimise the waste of resources in administering the tax
system. Thus, administrative efficiency would appear to be an important component
of simplicity. 89 Certainty and transparency also emerge from this list, particularly in
relation to there being little scope for manipulating the time or manner of payment.
Accordingly, simplicity may well be viewed as a core tax principle because of the fact
that it represents or embodies these other qualities and principles. Kaplow offers a
similar conclusion when he suggests that simplicity is a proxy for other criteria. 90 in
the same vein, the European Commission has suggested that simplicity implies the
87 See Smith, The wealth of nations, above fn 11, 1044 (discussing the power of an official to
"aggravate the tax upon any obnoxious contributor, or extort, by the terror of such aggravation,
some present or perquisite to himself").
88 For suggested definitions of these other tax principles, see p 867 above.
89 Some argue that administrative efficiency is the main constituent of simplicity but others go
further and argue that they are one in the same thing. See, for example, J Mintz, "The U.K.'s
conflicting principles for international tax policy" (2007) Tax Notes Int'l 47, 667.
90 Kaplow, Taxation, above fn 6. He also suggests that simplicity forms a subset of other criteria,
which is a much less certain proposition (simplicity "is not a good in itself, but bears on
efficiency and fairness"). See also A Agindez-Garcia, The delineation and apportionmentof an
EU consolidated tax basefor multi jurisdictionalcorporate income taxation: a review of issues
and options (Brussels: European Commission Taxation Working Paper, No. 9/2006) pp 4 and 32
(simplicity is one of the efficiency criteria).
minimisation of compliance and administrative costs linked to the operation of a tax

system, as well as linking simplicity to certainty, effectiveness and transparency.91
Given both the range of the constituent elements of simplicity from a tax perspective
and a desire to understand what it is about 'simplicity' that means it works as a proxy
for these other desirable ends, philosophy provides some useful ideas.92 The idea of
simplicity as an "inherently worthy quality" has been the subject of much philosophical
debate and reflection, arguably beginning with William of Occam (circa 1287-1347).
It would appear that the literature has sought to find that quality of simplicity which,
when considering the inherent value of things, makes simplicity a core guiding
principle. A strong candidate for this "inherent value', which has emerged from the
literature, is that simplicity is the absence of unnecessary duplication.93
Taking the idea that simplicity is the absence of unnecessary duplication back a step,
there is arguably an assumption that the elements that should not be duplicated need
to be of adequate utility in the first place. From a tax perspective, it would seem useful
to state this explicitly. Therefore, a simple tax system is one that has few elements of
limited utility, which implies inter alia no unnecessary duplication.
Utility can be measured both in general terms and in relation to the functional
objectives of a tax system. The idea of a functional objective relates to the fact that
all taxes have a job to do in society. The widest and most frequently articulated
summation of this "job" is the idea that tax systems have at least three core functional
objectives: raising revenue, redistributing wealth and regulating behaviour.94 Thus,
for an element of the tax system to have utility means either that it can be shown to
contribute to the common good or - as a proxy for the common good - that it is
directed towards revenue-raising, redistribution or regulation.
91 European Commission, Staff working paper: company taxation in the internal market,
(SEC(2001)1681) p 28. See also European Commission, Implementing the community Lisbon
programme: progress to date and next steps towards a common consolidated corporate tax base
(CCCTB) (COM(2006)157) pp 3 and 14 (linking administrative efficiency and simplicity).
92 On the tax literature's approach to defining tax complexity, see G Jones, P Rice, J Sherwood and
J Whiting, Developinga tax complexity index for the UK (Office of Tax Simplification. Available
at www.gov.uk/government/publications/tax-complexity-project) p 3 ("Typically, writers do not
define tax complexity but list and categorise factors that contribute to complexity").
93 See fn 86 above.
94 For a discussion of these "functional objectives", see Bowler-Smith, The taxing road to sustainable
growth, above fn 47, 95.
5.2 Function analysis

Corporate income tax has no utility from a redistribution perspective. 95 This stems
from the idea already discussed that the final or effective incidence of the corporate
income tax remains at best ambiguous and at worst unknown. 96 In other words, if you
don't know who ultimately bears the burden of a tax, it becomes very hard to say that
you are "taking from the rich, to give to the poor'.
Corporate income tax clearly has utility from a revenue-raising perspective. The
Meade report of 1978, which took "a fundamental look at the UK tax structure", 97
suggests that one purpose of corporate income taxation was to continue to provide
a good source of revenue. And it continues to be a good source of revenue. 98 In the
OECD, the corporate income tax raises an average of 3% of GDP.99 In 2012, as a
percentage of GDP, it raised 5.2% in Australia, 4.7% in New Zealand, 2.7% in the UK
and 2.5% in the US.
However, the failure of corporate income tax is that it raises this revenue less efficiently
and less equitably than other forms of taxation. Personal income taxes are arguably
more equitable given that at least some proportion of the economic burden must fall
on the payer. Consumption taxes, such as the VAT/GST, are arguably more efficient
given that the tax base is, by definition, confined to funds that cannot be used for
future investment. This means that despite being a good revenue-raiser, the corporate
income tax is ultimately sub-optimal and therefore of limited utility in this regard.
The next functional objective that comes under the microscope is regulation. In
theory, as a price-based market instrument, the corporate income tax makes for a very
effective regulatory tool.1 00 Regulation, for present purposes, can be subdivided into
macroeconomic and microeconomic regulation. As to the former, Meade suggests
that one of the purposes of corporate taxation is "short term demand management
for the macro-economic control of economic activity'.10 1 The idea being that a hike
95 This does not mean that the redistributional consequences can be ignored; rather, because those
consequences are unknowable, other policy instruments must address inequality "after the fact".
96 See section 3.2 above.
97 J Meade, The structure and reform of direct taxation: report of a committee chaired by J.E. Meade
(London: Allen and Unwin and Institute for Fiscal Studies, 1978) p xi.
98 See, for example, M Devereux, R Griffith and A Klemm, "How has the UK corporation tax raised
so much revenue?" (2004) Fiscal Studies 25(4), 367.
99 More precisely, according to OECD data, the average is 3.18% from 2003-2012.
100 For a discussion as to why it is such an effective regulatory instrument, see Bowler-Smith, The
taxing road to sustainablegrowth, above fn 47, 97.
101 See Meade, The structureand reform of direct taxation, above fn 98, 5.
in corporate income tax rates would slow the economy, whereas a reduction would
102
speed it up.
Microeconomic regulation is clearly in evidence in corporate income tax, given the

existence of the many targeted reliefs. The UK Office of Tax Simplification (OTS)
estimated in July 2014 that the UK corporation tax has 119 reliefs. 103 These reliefs
include 21 tax reliefs that the OTS has classified as "targeted".104 The following five
regimes represent examples of these targeted reliefs:
(1) accelerated depreciation;1 05

(2) environmental protection;10 6
(3) research and development (R&D); 107
1 08
(4) patent box;
(5) employee share schemes; 109 and
(6) film production.110
In order to show that elements of the corporate income tax are of limited utility from a
regulation perspective, it can be argued that the first three of these targeted reliefs are
inconsistent with each other and, therefore, incoherent in relation to societal goals.'
Oil and gas extraction vs environmental assets
The first relief, listed above, relates to what the UK call capital allowances
(ie depreciation relief). Businesses in the oil and gas sector with carefully defined
"ring-fence trades', get 100% depreciation relief in the first year for expenditure on
plant or machinery for use wholly in that ring fence trade. The main point to note
102 For an alternative conceptualisation of macroeconomic regulation, see R Avi-Yonah,

"Corporations, society and the state: a defence of the corporate tax" (University of Michigan:
Public Law and Legal Theory Research Paper No. 40, 2006) p 42 ("corporate tax is justified as
a way for a liberal democratic state to limit excessive accumulations of power in the hands of
corporate management").
103 See www.gov.uk/government/publications/tax-reliefs-review.
104 The remainder are classified as "special case", "threshold" or "structural" For a discussion of
tax incentive classification, see Bowler-Smith, The taxing road to sustainablegrowth, above fn
47, 119.
105 See, for example, s 45F of the Capital Allowances Act 2001 (UK) (CAA 2001) (100% first-year
depreciation allowance for plant or machinery used in a ring-fence oil trade).
106 See, for example, Sch 1A CAA 2001.
107 See, for example, Pt 13 of the CorporationTax Act 2009 (UK) (CTA 2009).
108 See, for example, Pt 8A of the CorporationTax Act 2010 (UK).
109 See, for example, Pts 11 and 12 CTA 2009.
110 See, for example, Pt 15 CTA 2009.
111 For a definition of "coherency" in a tax context, see p 867 above ("tax law being fully in line with
societal goals").
here is that this relief relates exclusively to physical capital. It is clearly an incentive
to the oil and gas sector, particularly in relation to the extraction of oil and gas. Not
only has it been argued that the careless and rampant extraction of oil and gas can be
environmentally damaging, it has also been argued that focusing on physical capital
and natural resources as a means to produce sustainable economic growth is a non-
viable strategy (so-called "total factor productivity" or "a change in output to all types
of inputs").112
The second relief also relates to capital allowances. An environmental assets tax credit
is available to companies for any investments in specific, environmentally beneficial
plant or machinery. Companies can surrender a loss attributable to a claim for 100%
capital allowances for investments in these so-called "environmental assets'. The
credit is a refundable credit and is worth 19% of the loss. While the credit has certain
advantages over a deduction, it should be clear that this relief is more restrictive than
the first relief due to the fact it only concerns resulting losses, as opposed to any
current year expenditure.
The disconnect between these two reliefs is that one has an environmental objective,
in that it encourages the acquisition of environmentally friendly physical capital; the
other relief does nothing to encourage environmentally friendly physical capital and,
arguably, encourages the consumption of limited resources for the sole purpose of
consuming other limited (and environmentally damaging) resources. It is, therefore,
arguable that these two reliefs are incoherent from a policy perspective in that one
seeks to regulate behaviour so as to promote environmental objectives, while the
other brings about just the opposite.
Knowledge-based capital vs oil and gas extraction
R&D incentives, the third of our reliefs, are widely recognised to be concerned with
113
promoting the creation of new scientific knowledge and technological innovation,
which are variants of knowledge-based capital (KBC). The importance of KBC is
114
apparent from the following passage taken from a 2013 OECD report:
112 See C Jones and P Romer, The new Kaldorfacts: ideas, institutions,population, and human capital
(NBER Working Paper 15094, 2009) p 4 ("[i]deas, institutions, population, and human capital
are now at the center of growth theory. Physical capital has been pushed to the periphery"); and
M Porter, "The competitive advantage of nations" (1990) HarvardBusiness Review, 68(2), 73
("[n]ational prosperity is created, not inherited. It does not grow out of a country's natural
endowments").
113 See Bowler-Smith, The taxing road to sustainablegrowth, who fn 47, 120. The same is arguably
true of patent box regimes.
114 OECD, supporting investment in knowledge capital, growth and innovation (OECD Publishing,
2013) p 17.
"Innovation is a key to business success, but where innovation comes from is

changing. Today's firms are looking beyond [R&D] to drive innovation. They
invest in a wider range of intangible assets, such as data, software, patents,
designs, new organisational processes and firm-specific skills. Together these
non-physical assets make up [KBC]."
Thus, the third relief is tasked with promoting innovation, the key to which lies with
non-physical assets. The World Economic Forum (WEF) holds that technological
innovation represents the pinnacle of competitiveness and suggests that: 115
"Although substantial gains can be obtained by improving institutions, building

infrastructure, reducing macroeconomic instability, or improving human
capital, all these factors eventually seem to run into diminishing returns. The
same is true for the efficiency of the labor, financial, and goods markets. In the
long run, standards of living can be enhanced only by technological innovation.
Innovation is particularly important for economies as they approach the
frontiers of knowledge and the possibility of integrating and adapting exogenous
technologies tends to disappear."
Once again there is arguably a disconnect between our first and third reliefs. The
first relief seeks to promote total factor productivity, while our third relief seeks
to promote resource productivity."' These very different types of productivity are
underpinned by very different views of what kind of economic growth best serves the
common good. It is once again submitted, therefore, that at least these two elements
of the corporate income tax are at odds in terms of serving societal goals.
6. Conclusion
The ultimate aim of this article has been to try and understand what the most
prevalent direct tax on corporations, the corporate income tax, might best lend itself
to practically and theoretically.
115 K Schwab (ed), The Global CompetitivenessReport2010-2011 (Geneva: World Economic Forum,
2010) p 8.
116 Total factor productivity can be defined as the "change in output to all types of inputs", whereas
resource productivity can be defined as "the money value of outputs relative to the money value
of material resource and non-renewable energy inputs" See Bowler-Smith, The taxing road to
sustainablegrowth, above fn 47, 223 and 224.
Compared to personal income tax, corporate income tax is a relatively recent

development. It is therefore unremarkable that there is still a lot of confusion as to the
true nature of corporate income taxation. In the unambiguous words of Gammie: 1 7
"... corporate taxation has no clear theoretical basis, no agreed form and an
uncertain jurisdictional basis - both in terms of the basis for claiming tax
and the amount of the claim. And there is no legal framework within which to
attempt to resolve any of those issues."
This article has attempted to bring together ideas that are, for the most part, already
in the literature so as to begin the process of better understanding corporate income
tax. By adopting a framework that depends on what are, quite unarguably, the core
principles by which all taxes should ultimately be judged, it is hoped that some clarity
has been brought to our collective understanding of the true nature of corporate
income tax.
While there appear to be some strong arguments that corporate income tax fails
to satisfy the basic requirements of equity, efficiency and simplicity, there is also a
glimmer of hope to be found in the foregoing analysis. I have argued elsewhere that
corporate income tax is potentially a flexible, cost-effective and administratively
efficient regulatory instrument.1 18 It, therefore, has tremendous scope for helping
society to reach its goals. This is particularly important given the context in which the
corporate income tax currently operates. Not only do corporations create the lion's
share of societal wealth, but also there can be little doubt that their activity dispersal
(function shifting) has caused no end of problems for domestic tax authorities (profit
shifting).
It is the author's view that corporate income tax, in its current form, has no future in
the long term. However, given that it provides policymakers with a pre-existing legal
framework, which makes it a cost effective regulatory instrument, there is a lot to be
said for its regulatory utility in the short to medium term.
117 See M Gammie, European communities - fifteenth report (Select Committee on the European
Communities, House of Lords, London, 1999) [225].
118 See Bowler-Smith, The taxing road to sustainablegrowth, above fn 47, 97.
INDEX 893
Index Re:think: tax discussion paper,

March 2015 .............. 667,675,737,747,
765, 784-786,840,847
A
Review of Taxation, A tax system
Annual exempt amount ............ 741,742,
redesigned, 1999
746-749;
J T Ralph(Chair)...............740,811
751-755, 757
Tax expenditure statements, 2013 ....... 755
Asprey Report
Tax expenditure statements, 2014 ....... 773
Report of the Taxation Review
Women's Budget Statement ............ 7667
Committee, 1975..........743,829,840
Australia Treasury Working Paper
Association of Superannuation
Understanding the economy-wide
Funds of Australia ............. 778, 779
efficiency and incidence of major
Australia
Australian taxes, 2015 .......... 715,717
Reform of the Australian tax system:
Australian Bureau of Statistics
draft white paper, June 1985............ 738
Average weekly earnings, Australia
Reform of the federation:
Nov 2014 ..... ... ............... 774
discussion paper, 2015 ........ 716,717,720
Census of the Commonwealth of
Report of the Taxation Review
Australia 1911 ..... ............... 764
Committee, 1975
Employee earnings and hours,
Asprey Report................... 743
May 2014 ..... ... ............... 821
Australia Board of Taxation
Gender indicators 2015.................. 770
Identification and possible repeal of the
Household income and wealth,
inoperative provisions of the1936 and
Australia, 2013-14 ................. 842
1997 Income Tax Assessment Acts
Labour force, Australia: labour force
-
report to the Treasurer, 2005............ 788

status and other characteristics
Australia Committee on Uniform Taxation of fam ilies, June 2012................... 821
Report of the Committee 1942, Population projections, Australia,
R. S. Mills (Chair)..............698,701 2012 (base) to 2101, 2013............... 774
Australia National Commission of Audit Australian National University
Towards responsible Crawford School of Public Policy
government, 2014................ 717 Tax and Transfer Policy
Australia Parliament Joint Parliamentary Institute........ ............. 667
Committee on Social Security Australian Taxation Office
Second interim report, March 1942 ...... 700 Taxation statistics 2012-2013 ........ 744, 758
Australia Royal Commission into Taxation
Report of the Royal Commission into B
Taxation together with appendices: Bracket creep
second report, 1921-1923 goods and services tax .............. 851
W. Kerr (Chair)...................694
Australia Royal Commission on Taxation C
Third Report,1934 Canada
W. Fergusson (Chair) ............... 696 tax harmonisation..............721, 724
Australia Treasury Canada Revenue Agency
Australia's future tax system, Canadian income tax rates for
Final report, 2009 individuals - current and
K. Henry (Chair)..........765, 770, 778, 820 previous years, 2015.................... 721
Capital gains L
personal Labour supply........................... 854
taxing ................................. 735 gendergap ............................. 859
reform proposals........................ 735 household saving ....................... 858
Capital gains tax .......... 671,735,790,798 Legislation
Com pany tax ............................ 676 incompatible regimes................... 804
Corporate income tax ................... 865 multiple parallel regimes................ 810
efficiency ............................... 875 omission and inference.................. 812
function analysis........................887 parallel regim es......................... 803
sim plicity ............................... 884 taxation
Crawford School of Public Policy drafting ........ .............. 783
Tax and Transfer Policy Institute
Australian National University.......... 667
M
D Minimum wage ................ 674,819
Depression
taxation............................ 689-694 N
Drafting National Welfare Fund 1944 ............. 683
taxation legislation...................... 783
F 0
Fisher, Andrew .......................... 668 Oil and gas extraction ........... 888,889
Fringe benefits tax ............. 790, 791,813

P
G Personal income tax
Gender discrimination .............. 845 sharing ......... ................ 713
Gender impact statements ......... 766-772
Gender responsive budgeting...... 766-769 R
Goods and services tax Residency
bracket creep .... ................ 851 income tax sharing...................... 724
Re:think tax discussion paper,
H March 2015....................667,675,737
Henry Tax Review 2009............. 765, 770, Retirement savings
778, 834 gender im pact .......................... 765
Hughes, William (Billy)........ ...... 667 taxation................................. 763
Revenue sharing .................... 720,722
I residency definition ..................... 724
Income tax
personal ........ ................ 845 S
Income tax sharing Social security
distribution consequences Australia
Australian federation .............. 726 history ............................ 680,700
Intergovernmental transfers paym ents............................... 819
taxation........ ................ 716 Superannuation
taxation................................. 763
K Superannuation retirement
Knowledge-based capital ............... 889 provision....... ................ 671
INDEX 895
T Federated Clothing Trades of Australia

Tax and Transfer Policy Institute v JA Archer & Others (Clothing
Crawford School of Public Policy Trades case) (1919) 13 CAR 64 ........... 764
Australian National University.......... 667 Heavy Minerals Pty Ltd v FCT
Tax Law Improvment Project ............ 784 [1966] HCA60..... ............... 793
Tax transfer payments................... 819 Hepples v FCT [1991] HCA 39............. 793
Taxation HR Sinclair & Son v FCT
Australia [1966] HCA 39..... ............... 802
history ................................ 667 In the matter of the Conciliation and
state ......................... 679,685,686 Arbitration Act 1904-1949 and In the
of fam ilies............................... 856 matter of applications by organizations of
intergovernmental transfers............. 716 employers for award and variation of
transfer payments...................819,832 awards made and agreements certified
Taxation of financial under the said Act by increasing the basic
arrangements rules.................790, 798 wage for adult males and females thereby
Transfer payments .................. 819,832 prescribed - Basic Wage Inquiry
1949-1950 (1950) 68 CAR 698............ 826
U National Wage Case 1974 (1974)
Uniform Income Tax 157CAR293 ..... ................ 826
Plan 1942............. 669,679,681,698 National Wage Case and Equal
Pay Cases 1972 (1972) 147 CAR 172...... 826
W Reseck v FCT [1975] HCA 38 .............. 789
World War II Uniform Tax case [1942] HCA 14;
taxchanges..... ................. 681 (1942)65... ................... 719
Cases Legislation
Applications by various organisations L
to vary awards and agreements to Capital Allowances Act 2001 (UK)
increase basic wage - Basic Wage Inquiry s 45 ..................................... 888
(1941) 44 CAR 41 ..... ............. 825 Sch IA .................................. 888
Australian Meat Industry Employees Corporation Tax Act 2009 (UK)
Union &Others v Meat and Allied Pt ll........... ................ 888
Trades Federation of Australia Pt 12........... ................ 888
&
Others (Equal Pay Cases) (1969) Pt 13........... ................ 888

127 CAR 1142 ................. 826,827 Pt 15........... ................ 888
Awards of the Court binding upon the Corporation Tax Act 2010 (UK)
Australian Railways Union & Others Pt8A .......... ................ 888
Basic Wage Inquiry (1931) 30 CAR 2...... 825 Excise Tariff Act 1906
Ex Parte HV McKay (Harvester s 2(s)........... ................ 822
case) (1907) 2 CAR 1.................764,822 Fair Work Act 2009
Fairfax v FCT [1965] HCA 64 .............. 764 s284........... ................ 822
FCT v Myer Emporium Ltd Fringe Benefits Tax Assessment
[1987] HCA 18................808,809 Act 1986........ ................ 790
FCT v Whitfords Beach Pty Ltd s 136(1)..................791,796,815
[1982] HCA 8..... ................ 800 s 137........... ................ 816
Fringe Benefits Tax Assessment Act 1986 s 160ZC ................................. 79 1

s 164....................................8 14 s 160ZO ................................. 79 1
Income Tax Assessment Sch 2E .................................. 810
Act No 34,1915.....................667,764 ITAA97 .............................. 672,750
Income Tax Act No 41 1915.....667,673,676 D iv 20 .................................. 802
Income Tax Assessment Act 1922........672 D iv 40 .................................. 803
Invalid and Old Aged Pensioners D iv 100 ................................. 790
Act 1908............................764,765 D iv 115 ................................. 736
ITAA15 .............................. 667,764 D iv 118 ................................. 80 1
s 1(f).................................... 764 D iv 149 ................................. 800
s 14(4) .................................. 67 1 D iv 152 ................................. 750
s 18(j)................................... 764 Div 230 ........................ 790,793,803
s 8 1(g) .................................. 764 D iv 240 ................................. 803
ITAA23 D iv 242 ................................. 810
s 5(e) ................................... 672 D iv 243 ................................. 803
ITAA35 Div 250 ............................. 803,810
Pt IIIA ................................... 796 D iv 328 ................................. 807
ITAA36 .................................. 672 Div 355-5 ............................... 884
23AG ................................... 812 D iv 974 ................................. 803
D iv 16D ................................. 810 s2-5 ................................ 787,804
D iv 16E ................................. 809 s6-5..................794,795,797,808,809
Pt X I .................................... 786 s6-5(2) to (3)............................ 812
s 2 1A ................................... 80 1 s6-10(4) to (5)........................... 812

s 23L.................................... 796 s6-25 ................................... 797
s 25(1) .................................. 789 s 8-1 .................................... 794
s 26(a) .............................. 736,791 s 15-2(d) ................................ 797
s 26(d) .................................. 789 s 15-10(2)(b) ............................ 795
s 15-10(b) ............................... 736
s 26(e) .................................. 789
s 15-15.................................. 736
s26A ............................... 736,791
s15-15(20)(a) ........................... 787
s26AAA ....................... 736,791,792
s 15-20(1) ............................... 797
s 51A K .................................. 80 1
s 15-25(d) ........................... 795,797
s62AAM ................................ 806
s 15-30(b) ............................... 795
s62AA S................................. 806
s20-20(1)......................795,797,802
s62AAU ................................ 806
s20-40.................................. 802
s102CA ................................. 809
s25-85..................................804
s128....................................803
s26-25.................................. 803
s 159G Z ................................. 809
s26-26..............................803,804
s160A .............................. 792,793
s160APHQ .............................. 786 s40-40.................................. 811
s 160L(3) ............................ 792,796 s40-115(3) .............................. 809
s 160M (6) ........................... 792,793 s53-10.................................. 800
s 160M (7) ........................... 792,793 s70-115 ................................ 797
s 160Z .................................. 792 s 104-35 ................................ 793
s 160ZA (4) .............................. 791 s 104-245 ............................... 807
INDEX 897
s 110-40(3).............................. 802 Authors

s 110-45(3).............................. 802
s 112-25(1).............................. 809 A
s 118-5..................................792 Apps, P
s118-20 ....................... 798,800,801 The central role of a well-designed income
s118-24 ............................ 807,808 tax in "the modern economy"........... 845
s 118-25 ............................ 792,796 Austen, S
s 180-5..................................792 Gender impact analysis and the taxation of
s230-20(4) .............................. 798 retirement savings in Australia.......... 763
s230-70(4).............................. 809
s 230-445(2) to (4) ....................... 809
B
Bowler-Smith, M
s 240-10(a) .............................. 812
Corporate income tax:
s328-225 ............................... 807
what is it good for?..................... 865
s820-90 ........ ................ 786
Bray JR
Subdiv 28-C............................. 786
100 years of the minimum wage and
Subdiv 28-D............................. 786
the Australian tax and transfer
Subdiv 28-E ............................. 786 system: what has happened, what
Subdiv 28-F ............................. 786 have we learned and what are
Subdiv 42-L............................. 807 the challenges? .................. 819
Subdiv 328-D ........................... 807
New Business Tax System C
(Capital Allowances) Act 2001 .......... 811 Cooper, G S
Tax Law Improvement The defective jigsaw............... 783
Act (No.1) 1998 ..... ............. 792
Taxation Administration Act 1953 E
s 12-10 .................................. 8 15 Eccleston, R
s 12-35..................................8 15 The devil is in the detail: the distributional
Sch 1 consequences of personal income tax
Div 12.............................803,815 sharing in the Australian federation..... 713

Evans, C
D iv 14 ................................. 8 16
Taxing personal capital gains in
Taxation Laws Amendment
Australia: an alternative
Act (No.4) 1992 ........................ 810
way forward.... .. ............... 735
s23-26..................................793
Taxation Laws Amendment
H
Act(No.1)2001........................801
Hodgson, H
Taxation of Chargeable Gains
Gender impact analysis and the taxation
Act 1992 (UK) of retirement savings in Australia ....... 763
s 16A .................................. 753
L
Rulings, determinations etc Lim, Y
Australian Taxation Office Taxing personal capital gains in Australia:
TR 2008/1..................... 753 an alternative way forward ............. 735
M Stewart, M
Minas, J Looking forward at 100 years:
Taxing personal capital gains in where next for the income tax? ......... 667
Australia: an alternative
way forward... ................. 735 W
Warren, N
S The devil is in the detail: the
Sharp, R distributional consequences of
Gender impact analysis and the income tax sharing in the
taxation of retirement savings Australian federation .............. 713
in Australia.... ................. 763
Smith, J P
Australian state income taxation:
a historical perspective................. 679

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Geoffrey Brennan and James Buchanan

1 G Brennan and J Buchanan, The power to tax: analyticalfoundations of a fiscal constitution

Senior Lecturer in Tax Law, University of Auckland.

This article was accepted for publication on 1 September 2015.

policy principles of taxation.7 Articulating the contribution of corporate income tax

. Administrative efficiency: minimising the waste of valuable resources in

Thinking about the possibility that the principle of simplicity is a composite

12 See, for example, Kaplow, Taxation, above fn 6.

3. 1 The theoretical dimension

. those advocating material equality (eg egalitarianism), where materiality involves

proportional to the relevant differences between them (vertical equity). Horizontal

3.2 The practical dimension

23 Smith, The wealth of nations, above fn 11, 1095.

. domestic workers bear approximately 70%;

while simultaneously preserving horizontal equity). Assuming that the corporate

4.1 Understanding efficiency

In the literature, allocative efficiency has attracted a number of different formulations.

"... contains exactly those allocations to consumers such that no subset of

Marshallian efficiency is arguably a preferable formulation to Pareto, Kaldor-Hicks

. no implicit or explicit reference to redistribution;

Other formulations of efficiency that have a similar bearing to that of Marshallian

4.2 Efficiency and the tax system

If competitive markets are considered to be incapable of optimally allocating

54 For a similar observation, see B Ben-Amitai, Wealth maximisation as a political conception

Whether or not competitive markets are considered to be optimal with regards to

59 See, for example, J Rawls, A theory ofjustice (London: OUP, 1973).

4.3 Competitive markets

A number of related consequences flow from the existence of competitive markets in

(1) They promote economic growth. 66 They serve to allocate resources to

64 J Rawls, A theory ofjustice (London: OUP, 1973) p 7.

(1) competitive markets do not exist within a vacuum and it falls to

Howsoever institutional and regulatory frameworks reduce or impair the ability of

4.4 Opportunity cost

available from otherwise wealth-creating activities, thus disincentivising such activity

(1) lost opportunities for company growth (or increases in corporate

4.5 The differential taxation of debt and equity

"... at risk of defaulting on major bank loans, an effective change in control

Such constraints or "pre-emptive control" provisions may affect the redeployment of

From a functional perspective, while it makes no show of redistributing wealth, the

5.1 Understanding simplicity

ease of comprehension and conformity;

minimisation of compliance and administrative costs linked to the operation of a tax

5.2 Function analysis

Microeconomic regulation is clearly in evidence in corporate income tax, given the

(1) accelerated depreciation;1 05

Oil and gas extraction vs environmental assets

102 For an alternative conceptualisation of macroeconomic regulation, see R Avi-Yonah,

Knowledge-based capital vs oil and gas extraction

"Innovation is a key to business success, but where innovation comes from is

"Although substantial gains can be obtained by improving institutions, building

Compared to personal income tax, corporate income tax is a relatively recent

Index Re:think: tax discussion paper,

report to the Treasurer, 2005............ 788