Abstract:
Fifteen years ago Ross Parsons published his Wilfred Fullagar
Lecture in the Australian Tax Forum. His subject was
“Income Taxation–an Institution in Decay”. His lecture was
influential. Scholars cite it regularly. This evening I shall
consider Parsons’s thesis and evaluate it from several points
of view: factually, historically, philosophically, and as a
prophecy that society would abandon income taxation.
Parsons’s fundamental position was that, “The analytical
fabric of the income tax … had congenital and … incurable
defects, born as it was of a union of institutions which had no
common policies”. The institutions to which he referred were
first the income tax itself, and secondly the concept of
income. In Parsons’s opinion, income tax adopted the concept
of income from the law of trusts, which, he explained, is
based on principles that are different from and irrelevant to
the policies and imperatives of income tax law. Parsons chose the Simons definition as the appropriate
benchmark against which to test the judicial concept of
income that has developed in Australian and United Kingdom
law. Essentially, Simons said that the tax base should embrace
all economic gains, but that it should embrace only economic
gains. Parsons explained that the Australian tax base fails on
both counts.
There are several fundamental problems with the judicial
concept of income, that is, the concept of income that the
courts employ for tax purposes. First, the judicial concept sees
income as a flow, rather than as a gain. Secondly, as a
consequence, it taxes some apparent flows that do not entail
gains. Thirdly, it omits gains that we call capital gains.
Australia attempted to remedy that shortcoming by bolting a
capital gains tax onto the income tax in 1986. Fourthly, it
relies on legal transactions rather than on underlying
economic movements. I shall return several times to this
fourth point during this lecture.
Ross Parsons would agree with me that the shortcomings
that I have just listed are not stand-alone defects of income
taxation but symptoms of the analytical shortcomings of the
concept of income. I shall continue from here in a moment,
after considering some history.
