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.
