Abstract
Tax issues are, at times, buried in the WTO under different names or misleading labels, and may be mishandled or mischaracterized because of historical misunderstandings that no longer apply. One issue, which this author believes has been interpreted incorrectly, is that of the distinction between direct and indirect taxation, and the treatment of the two under the GATT, a problem that emerges because of the fragmentation and isolation between the two fields, tax and trade. The fact that tax issues are handled outside the WTO has left the WTO with old foundations and unexamined bases for allowing outdated concepts to continue living under the WTO. It is very safe to state that the differentiation between direct and indirect taxes is a disputed issue within the tax community. Yet, it seems undisputed within the WTO. If there were a tax agreement, tax department, and tax staff, more attention would have been given to this issue and would have been reasonably addressed. The isolation between the two regimes has led to this sort of distortion. After presenting the relation of direct and indirect taxes to the WTO, this chapter will offer an overview of the literature and theoretical foundation behind the distinction between direct and indirect taxes.
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Notes
- 1.
Staff analysis of issues raised by the General Agreement on Tariffs and Trade, 91st Congress, 2nd Session, prepared by the Staff of the Committees on Finance, US Senate, Russell B Long, Chairman (December 19, 1970), p. 5.
- 2.
Staff analysis of issues raised by the General Agreement on Tariffs and Trade, 91st Congress, 2nd Session, prepared by the Staff of the Committees on Finance, US Senate, Russell B Long, Chairman (December 19, 1970), p. 5.
- 3.
1970 Report of the Working Party on Border Tax Adjustments, BISD 18S/97.
- 4.
The issue was discussed among GATT members but was not decided. See the Border Tax Adjustment report, Report of the Working Party adopted on December 2, 1970, ¶ 22, stated in part, “The question was raised by some members why only indirect taxes should be eligible for adjustment since the economic basis for such a clear distinction between indirect and direct taxes for adjustment purposes has not been demonstrated. Most delegations stated, however, that in their opinion such a distinction was already justified by the fact alone that indirect taxes by their very nature bear on internal consumption and were consequently levied, according to the principle of destination, in the country of consumption, while direct taxes – even assuming that they were partly passed on into prices – were borne by entrepreneurs’ profits or personal income. On the other hand, some members stated that while forward shifting of selective excise taxes could take place under most circumstances according to micro-economic approach, forward shifting in the case of general consumption taxes was, according to macro-economic approach, not possible unless one assumes either a sufficient increase in money supply or in velocity of money. Some further argued that market conditions including, for example, monopoly or imperfect competition, influenced the degree to which the shifting of taxes both direct and indirect could take place. Other members expressed their doubts about this thesis. They pointed out that forward shifting of indirect taxes is the rule and that in any case the relative importance of the degree of forward shifting of these indirect taxes in the light of the economic conditions does not constitute a determining criterion for the application of tax adjustments.”
- 5.
Some would argue that the US system is not purely a worldwide tax system. See Goodspeed (2006, p. 143).
- 6.
Staff of Joint Committee on Taxation, 108th Congress, United States International Tax Rules: Background and Selected Issues Relating to the Competitiveness of US Business Abroad, p. 2.
- 7.
Staff of Joint Committee on Taxation, 108th Congress, United States International Tax Rules: Background and Selected Issues Relating to the Competitiveness of US Business Abroad, pp. 2, 10–11.
- 8.
Thanks to Professor Joel Trachtman for this note.
- 9.
Tax Board Adjustment Report, BISD § 18S/97-109 (1972), p. 6.
- 10.
Tax Board report (1969) p. 2, para 6. Repeated almost identically again in the 1972 report, BISD § 18S/97-109 (1972), p. 2, para 8.
- 11.
Working Party on Tax Adjustment meeting of October 8–11, 1968, p. 1.
- 12.
Working Party on Tax Adjustment meeting of October 8–11, 1968, p. 1.
- 13.
Report of 1968 meeting. At p. 21 the US delegation cited the US President.
- 14.
Report of 1968 meeting, p. 21.
- 15.
Report of 1968 meeting, p. 22.
- 16.
Report of 1968 meeting, p. 22.
- 17.
The VAT is defined as “a tax on the value added by a firm during the production and distribution process to the goods and services that it purchases from other firms.” See James (2002, p. 74). Oldman and Alan defined it as a tax “limited to the value added by the labor and capital.” See Oldman and Schenk (2001, pp. 3–5). Although the authors claim that consumption like-VAT tax existed previously, the VAT as we know it today is a French innovation in 1948; see Messere et al. (2003, p. 138). Oldman and Schenk (2001, p. 5), writes that the original idea was articulated by Dr. Wilhelm von Siemens, but other scholars claim otherwise. For example, in James (2002, p. 81), the issue is claimed to be raised and discussed by T.S. Adams, the father of US income taxation, who suggested as early as the 1920s that a VAT-like tax should be applied in the USA.
- 18.
- 19.
Buchanan (1999, Public Finance § 4.13.30). Retrieved September 5, 2006 from the World Wide Web: http://www.econlib.org/library/buchanan/buchCv4c13.html (Chap. 16 ’s discussion of Specific Excise Taxation).
- 20.
This is the well-known definition by J.S. Mill cited by Bastable (2003, p. 250).
- 21.
From George (1892, p. 79): “As much sugar is needed to sweeten a cup of tea for a working-girl as for the richest lady in the land, but the proportion of their means which a tax on sugar compels each to contribute to the government is in the case of the one much greater than in the case of the other. So it is with all taxes that increase the cost of articles of general consumption. They bear far more heavily on married men than on bachelors; on those who have children than on those who have none; on those barely able to support their families than on those whose incomes leave them a large surplus. If the millionaire chooses to live closely he need pay no more of these indirect taxes than the mechanic. I have known at least two millionaires – possessed not of one, but of from six to ten millions each – who paid little more of such taxes than ordinary day-laborers.”
- 22.
See Report of the Fiscal and Financial Committee in The EEC Reports on Tax Harmonization (1963).
- 23.
Staff analysis of issues raised by the General Agreement on Tariffs and Trade, 91st Congress, 2nd Session, prepared by the Staff of the Committees on Finance, US Senate, Russell B Long, Chairman (December 19, 1970).
- 24.
Staff analysis of issues raised by the General Agreement on Tariffs and Trade, 91st Congress, 2nd Session, prepared by the Staff of the Committees on Finance, US Senate, Russell B Long, Chairman (December 19, 1970).
- 25.
Report of the Working Party adopted on December 2, 1970, Border Tax Adjustments, GATT Doc. L/3464, reprinted in The Contracting Parties To The General Agreement On Tariffs And Trade, Basic Instruments and Selected Documents 97, 99 (18th Supp. 1972) [hereinafter “Report”] ¶ 8.
- 26.
Report of the Working Party adopted on December 2, 1970, Border Tax Adjustments, GATT Doc. L/3464, ¶ 15(b).
- 27.
Report of the Working Party adopted on December 2, 1970, Border Tax Adjustments, GATT Doc. L/3464, ¶ 16.
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Althunayan, T. (2010). Differentiation Between Direct and Indirect Taxes. In: Dealing with the Fragmented International Legal Environment. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-04678-0_1
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