Foundations of Fiscal Citizenship

Tax Fairness and The Budget Cycle

Lynne Oats, Till-Arne Hahn, Ralf Schenke, Angelika Mohr

With the right of governments to impose taxes on their citizens comes the need for justification. When is the tax burden justified and fair? German tax law has long had a clear answer to this question: Any tax imposed on German taxpayers must be compatible with the constitutional Principle of Equality.

To determine equality, German tax law has held a very narrow view: Only the “input side” of the budget cycle factors into this question. The question “Who must pay how much?” is answered by the Ability to Pay Principle, which states that the tax burden must correspond with the taxpayer’s income.

But for the ordinary taxpayer, fairness also raised the question of “what do I get in return?” (Beneficiary Principle). Although in a strictly legal sense, taxes are owed absolutely and without the state owing anything in return, taxpayers still reference the “output side” of the budget cycle when considering whether the tax burden imposed on them is fair.

Is the focus on the Ability to Pay Principle in German tax law too narrow and outdated? How is this considered in the other jurisdictions?

Principles of Taxation

Lynne Oats, Ralf Schenke, Angelika Mohr

Following Brexit, the rules governing fiscal subsidies in the UK must meet the requirements laid out in the Trade and Co-operation Agreement between the European Union and the UK (2020). The Agreement requires justifications for tax expenditures granted to UK companies by the government, detailing why they are not “specific”, namely because they are necessary to adhere to inherent “principles of taxation”.

Unlike in Germany, where tax principles such as Tax Equality and the Ability to Pay Principle are enshrined in the constitution and have long served as an explicit standard by which all tax laws must be justified, such principles have so far not played a major role in UK tax law.

They do become more relevant for the UK subsidy control system, which the UK must install in place of Art. 107 et seq. TFEU in order to fulfil its obligations under the TCA following Brexit. We aim to illustrate the role of “principles of taxation” in German tax law and consider how the requirements of the TCA may influence British tax law and practice in the future.