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INTRODUCTION
The tax system has long been recognised by political scientists as one of the most important economic and political institutions in a liberal democracy. It has a quasi-constitutional character in the sense that it remains in force, usually with only minor changes, over a sequence of budgetary decision-making periods. The prevailing tax structure establishes the way in which the cost of public services is to be shared and, in combination with the transfer system, it has a crucial impact on the shape of the income and wealth distribution. Extremely controversial and potentially divisive issues of justice, fairness or equity are thus intrinsically of central concern in tax policy-making. Redistributive or zero-sum elements are accordingly very much to the fore in public discussion of tax reform issues.
The attitudes and considerations which should be brought to bear in a major tax reform exercise are, however, necessarily of a long-term or quasi-constitutional nature. Single-minded pursuit of short-term political benefits or sectional interest under a system of majority voting will not produce meaningful or durable reform. Primary emphasis needs to be placed on the positive-sum elements or possibilities for mutual gain. A more principled approach is therefore required in which the familiar politics of sectional self-interest must give way to wider considerations which go the heart of rational budgetary decision-making in a democracy. It is accordingly no accident that major reviews of the tax structure in modern democratic societies are infrequent and commonly assign an important role to an expert committee or Royal Commission which can be expected to take the broader and more principled approach required.
The achievement of a fair tax system in a democracy is rightly regarded as a matter of high economic and social importance. The tax system, and the taxpayer attitudes which go with it, can properly be viewed as a major item of public capital. If the tax structure is equitable and efficient and enjoys general public acceptance, sensible decision-making on public expenditure is promoted. If, by contrast, the tax system flagrantly violates basic principles of equity and efficiency, a collapse of taxpayer compliance and a breakdown of democratic budgetary decision-making must be expected.
The structure of the study is as follows. We shall begin with a review of fairness...