Tax system (tax law)

A tax system in the sense of tax law comprises the entirety of all taxes of a state. A tax system is based on taxable amounts. Income and consumption are the two possible tax rates .

Income-oriented tax system

Georg Schanz is often cited as a pioneer in the systematic taxation of income. Schanz defined income as “net asset growth measured in monetary units over a certain period”. This definition takes into account all labor and capital income. Schanz found the origin or source, the point in time at which the income was realized, and any one-off income additions (e.g. inheritance ) to be irrelevant . This theory differs from the source theory that goes back to Bernhard Fuisting , according to which only recurring income is to be regarded as income.

Based on Schanz's basic idea of an income orientation based on non-regular income, Robert Haig and Henry Simons developed an income tax for the United States . This system is therefore also known as the Schanz-Haig-Simons system (SHS).

As much as the SHS system enables systematic taxation, it is not based on pure economic principles. Since Joseph Schumpeter , various economists have repeatedly pointed out the shortcomings of the SHS system. The income taxation in the SHS system requires the taxation of all net wealth additions in a year. This means, however, that the resulting taxation of interest, which actually represents compensation for earlier renunciation of consumption , would be a “punishment” for savers. As a result, the SHS system distorts consumption decisions on a temporal level by increasing the price of later consumption and providing incentives to consume now rather than later. This impairment of the saving decision leads to a reduction of the savings capital and thus also means that are available for investments.

Consumption-oriented tax system

Under the premise that consumption equals labor income and capital income minus savings, two different ways of consumption-oriented taxation can be illustrated:

the concept of savings adjustment
the concept of interest adjustment

The concept of savings adjustment states that only expenditures for current consumption should be taxed, but not the part that is saved. The portion saved becomes taxable when the savings are released for consumption. At company level, the savings in the form of retained earnings would also be tax-free and would only be taxed when they were used for consumption, which would be ensured by a creditable distribution tax. This distribution tax was first introduced in India and Sri Lanka by Nicholas Kaldor in the 1950s , but was soon abolished due to administrative inadequacies. In Austria, tax law currently provides for income taxation that is partially adjusted for savings, namely for statutory and company old-age pensions.

For administrative reasons, however, the concept of interest adjustment is often simpler. With this concept, the income is first fully taxed, i.e. including the savings portion, but the subsequent interest income is then tax-free. From an economic point of view, it is irrelevant which of these two methods is used, as they lead to an equally high level of consumption. The only difference is that the tax's temporal access is different. In a comparison between consumption-oriented and income-oriented tax systems, the following can be stated. Assuming that capital wealth arises when people consume or save less, this wealth can be viewed as something like the “coagulated efficiency” or as an individual's “renunciation of consumption” in the course of their life. The accumulated capital generates profits and interest. The traditional income tax actually carries out double taxation through the additional taxation of these profits and interest, which represent the renunciation of consumption for a certain period or periods.

A comparison of the interest and savings-adjusted method in the consumption-oriented tax system

The example below of a saving worker shows that both the savings adjustment and the interest adjustment of a consumption-oriented tax system lead to the same wealth that would be available for consumption. Due to the double taxation in the traditional tax system, the wealth available for consumption would of course be lower.

	year ${\ displaystyle t = 0}$			year ${\ displaystyle t = 1}$
	Income for savings purposes	Tax (assumption 40%)	available for consumption	Interest (assuming 5%)	Savings capital	Tax (assumption 40%)	available for consumption
Savings-adjusted income tax	10,000	-	10,000	500	10,500	4,200	6,300
Income tax adjusted for interest	10,000	4,000	6,000	300	6,300	-	6,300

Source:

swell

↑ Georg Schanz: The concept of income and the income tax rates. In: Financial Archives. vol. 13, 1896, pp. 1-87.
^ Bernhard Fuisting: The Prussian direct taxes. Volume 4: Fundamentals of Taxation. C. Henmanns, Berlin 1902.
^ N. Kaldor: An Expenditure Tax. Unwin University Books, London 1955.
↑ M. Rose, FW Wagner, E. Wenger: Proposals for a consumption-oriented reform of income and profit taxation. Klaus Tschira Foundation, 2003.

[1] Georg Schanz: The concept of income and the income tax rates. In: Financial Archives. vol. 13, 1896, pp. 1-87.

[2] Bernhard Fuisting: The Prussian direct taxes. Volume 4: Fundamentals of Taxation. C. Henmanns, Berlin 1902.

[3] N. Kaldor: An Expenditure Tax. Unwin University Books, London 1955.

[4] M. Rose, FW Wagner, E. Wenger: Proposals for a consumption-oriented reform of income and profit taxation. Klaus Tschira Foundation, 2003.