Tax Law

Complexity as indeterminate and arcane

Tax complexity has attained peculiar characteristics in the ‘regulatory state’ that has grown out of the ‘Washington consensus’ of the 1980s (Moran, 2007; Steger and Roy, 2010: 19). Characteristic of the regulatory state, for sure, is the privatization of public services. Equally emblematic, though, is the ever tighter tying in of private sector forms of regulation to legislative endeavour (Picciotto, 2011: 9). Tax is no exception. Indeed, the fiscal creations of the neo-liberal settlement have proved surprisingly resilient to both the financial crisis of 2007–2009 and the ongoing vicissitudes of public finance (Crouch, 2011; Prabhakar, 2015). Not only has complexity become definitional, its characteristics have metamorphosised. The significance of those characteristics, moreover, has shifted.

Complexity might, indeed, almost be the defining characteristic of taxation in our ‘neo-liberal’ state (Adam et al., 2011: 480–494; Dodwell, 2013: 31; Houlder, 2008). So it is easy to forget that the kind of complexity it has tended to engender has not always been so prominent. An important element of neo-liberalism is the enlisting of government resources in the uncritical promotion of the ends of business. Complexity has garnered attention as the tax base has been built increasingly on measures of income, rather than on products, and as those measures of income have themselves become increasingly abstract. Tax law rules that were complicated because archaic, bureaucratic and remote were features, successively, both of the administrative state of industrial modernity and of the ‘embedded liberalism’, or ‘social liberalism’, that the post-war consensus grafted onto it (Briggenshaw v. Crabb, 1948; Great Western Rly Co Ltd v. Bater, 1920; Kunzlik, 2013: 286–287; Meade, 1978: 18–21; Monroe, 1981: 24; Re Kilpatrick’s Policies Trusts, 1966). Of course, they were. Learned Hand indeed suggested as much. He was accustomed to picking his way, often unsympathetically, through the intricacies of Roosevelt’s New Deal legislation (Gunther, 2010: 467). But the specialized complexity of elite professional disciplines was not then characteristic of the tax system in the way that our times have seen it become. A century ago, the system was characterized by some progressivity in return for the reduction of customs duties (Hepker, 1975: 20; Trentmann, 2008: 319, 353; Wicks, 2006: 84–89). Two centuries ago, the emblem of the tax system was its administrative disregard for the privacy of estate owners who had been nurtured in the Lockean constitutional fundamental linking privacy to property in land (Emory, 1965; Stebbings, 2009). Four centuries ago, the badge of taxation was parliamentary resistance to prerogatival levies (Hill, 1961: 55). Half a millennium ago, taxation was still largely about the duties owed to feudal overlords (Ibbetson, 2010). The further we go back, the simpler the taxes become and the more clearly they are related to physical items and to the persons exacting them. In postmodernity, taxes could hardly owe less to physical and intellectual propinquity. Tax systems are febrile, occluded. Private regulation is transformed into public law with the complex reasonings of specialized professional disciplines as its chief characteristic. These elements form the first thematic strand in this issue.

What the neo-liberal state fosters, it has been suggested above, is tax complexity of a particular kind. Neo-liberalism is not like 19th-century ‘classical liberalism’ (Frieden, 2006: 30–33). Whilst neo-liberalism may aspire to scale the state back, it nonetheless relies on the regulatory state to give legislative and coercive effect to essentially privatized forms of governance. In the tax sphere, income measurement under internationally converging accounting practice is one example. Bank capital adequacy under the Basel Concordat (Lowenfeld, 2008: 811–844) is another one. A third is the so-called ‘transfer-price problem’ (Picciotto, 1992, Chapter 8), namely, the appropriateness of prices at which goods and services are supplied between the arms of a transnational corporation. Tax analyses of all of these (even Basel III) involve income or liability measurement under what, since the 1990s, has become a weighty and arcane codification of national and international accounting practice (Picciotto, 2011: 272). Gone are the days when a great English judge, Alfred Thompson Denning, could assert that he might choose not to heed what an expert accountant had to say in a tax case (Heather v. P-E Consulting Group Ltd, 1972; but see de Cogan, 2015). The referential dimension of tax complexity, drawing in ways of thinking from across specialized disciplines, forms the second strand in what follows. Embedding specialized modes of thinking in public law is one thing: multiplying those modes is another. So you find that your seemingly innocuous question about the deductibility of expenses is even more difficult to answer where a further discipline is involved, for example, with interest payments by a company. It would not matter, perhaps, but each of these highly technical areas cloaks pressing political concerns, for example, the ways in which transnational corporations should be taxed (Picciotto, 2015), the ‘capital adequacy ratios’ of international banks (Snape, 2010: 112) and the transfer pricing challenge presented to the tax bases of all economies, but especially developing ones.

None of the concepts just discussed, whilst crucial to countries’ tax bases, can easily be related to everyday experience. Business income measurement and liability levels, in the globalized economy and regulatory state, are decided almost exclusively by reference to accounting practice. With tax complexity, both definitional and idiosyncratic, the establishment of meaning is crucially important and ever more difficult. A third strand in this issue is concerned with how neo-liberalism has brought into focus the indeterminacy of regulatory language and the disconnection between it and everyday political debate. These issues are especially controversial. Some deny, as Herbert Hart would have had us believe, that words have ‘core’ and ‘penumbral’ meanings (Hart, 1994: 12–13). Instead, as Bourdieu maintains, nodding to Saussure and to Hans Kelsen (Bourdieu, 1986–1987: 814n), all are radically indeterminate and instead meaning is socially constructed (Bourdieu, 1986–1987: 814; Culler, 1976: 79). By parity of reasoning, it is denied too that the meanings of tax subjects once were clear or even that all citizens at one time shared in the construction of their meaning. Instead, so it is argued, it is that all are indeterminate and increased abstraction and greater ‘legal formalism’ has forced us to take indeterminacy seriously (Picciotto, 2007: 17, 23; Picciotto, 2015; Mumford, 2015). The corralling of public policy, and political debate, within specialized groups has highlighted the overlap of the three complexities with the concepts of salience and transparency. Not only do people fail to notice these things every day but they are unaware of them as policymakers and legislators go about their work (Schenk, 2011: 261; Snape, 2011: 114–118). Dodwell’s exasperation over the role of International Financial Reporting Standards, in income measurement, is revealing. He evidently regrets, as a thoughtful tax specialist, that corporate tax was ever tied to these accounting standards (Dodwell, 2013: 31). Yet his comments go unheeded by those, outside the community of tax specialists, who are concerned about the (under) taxation of corporate income (e.g. from derivatives or foreign exchange contracts) but have no inkling that parts of the tax code are constructed on the arcana of standards concocted well beyond the institutions of government. They would be worried too, if they only knew.

Social scientists and philosophers are left questioning how the power dynamics of a foundational, arcane and indeterminate complexity translate into the practice of politics. Not just that but whether tax complexity may even be the ultimate ‘unqualified human bad’ that ‘rule of law’ commentators so often decry (an allusion, of course, to Thompson, 1990: 269).

Complexity in politics and law

The first three thematic strands in this issue concentrate on facets of complexity as incidental to the indeterminacy of legislative language. Learned Hand knew, however, that there was more to complexity than syntax. The contributors’ concern, too, is not just how tax complexity is characterized but how it might take on a political significance.

Politics tends to be imagined in one of two ways. It might, in the ‘Machiavellian’ tradition, describe the elite science or art of governing. Alternatively, it might denote the ‘Aristotelian’ process of reaching deliberated solutions within an institutional framework (Elster, 1998; Eriksen and Weigård, 2003: 7; Snape, 2011: 111–114). With the former (what Benedetto Croce called ‘aristocratic’ government), decisions are taken and policy evolved by a select group (Croce, 1946: 17–18; Loughlin, 2003: 83). People are calculatingly manipulated like pieces on a chessboard. Today what the public expects is something more akin to the Aristotelian, more republican in format and content, less like a board game and closer to moral philosophy in practice. The importance of the individual is very different in each case. Deliberation is the essence of the Aristotelian, but it can be useful to the Machiavellian too (Snape, 2011: 31, 111). Each ideal allocates a different role to language, and in each, the mode of the discussion itself differs. It is no accident that a Rawlsian or Dworkinian normative political philosophy should originate in ‘a strong and virtuous republic’ (Brownlee, 1989). Nor, indeed, that a more pragmatic and calculating political philosophy should have found favour in Great Britain (Snape, 2011: 80–81). The Machiavellian alternative offers us interpretative tools and virtuosic solutions, the latter unlikely – perhaps – but nonetheless desirable in this way of thinking. Ironically, though, in the world of the ‘malaperte and pelting Town-clerk of Florence’ (quoted in Bobbitt, 2013: 11), individual counsels run the risk of mere impertinence.

The relationship between foundational tax complexity and the political order of the regulatory state is the collection’s fourth theme. A feudal society is not a political one, that is, taxes are essentially tribute (Picciotto, 2011: 207). There is no need for complexity, and what is foundational is coercion. Even Machiavelli is likely irrelevant (Bobbitt, 2013: 27–28; Gammie, 1997: 182–183). Neo-liberal societies are not like that. But nor are they much like the social welfare state of industrial modernity. Although complex, the tax rules of a social welfare state are principally the work of functionaries and sanctioned after deliberation by the majority of the elected representatives of the people (Loughlin, 1992: 236). In the regulatory state, coercion has its place, but successful tax legislation is sustained by its broad conformity to the neo-liberal consensus. This, together with electoral apathy, the inevitably ‘economistic’ character of political debate and the restrictive character of tax policy discussion, means that even complex legislation tends to work. In such a system, if not exactly a human good, tax complexity may not be the legislator’s main worry either (Mumford, 2015). Subtle distinctions are made between taxpayers differently placed, minimally cementing allegiance to the system (Snape, 2011: 15, 176), and legislation directed at tax avoidance is designedly complex in order to trap the ill-advised (Mumford, 2015). Elite calculation, not public deliberation, is the essence of such an economistic and technocratic system. Bradley (2015) provides startling evidence of this logic. If all goes well, no one worries too much (Prabhakar, 2015), not even the judges, who have certainly retreated from their aloofness to the accountant’s art (Revenue and Customs Commissioners v. William Grant Ltd, 2007).

Thus far, this approach to tax policy has worked well. But it might not always do so. If a regime or corporation is in trouble, then people wonder whether to stay loyal to it, to opt out or to mobilize to transform things (Hirschman, 1970; Kay, 2012: 20). Increasingly, where tax is concerned, people want to follow the last of these. A fifth strand in the collection is thus the gap between legal formalism and wider political and public policy debate. A closely related question is how the two elements might be reconnected and how the former might be informed by context and latter by greater technical awareness. In political debate, the seriousness with which individual contributions are treated functions differently according to the type and quality of the politics on offer (Bradley, 2015; Freedman, 2013: 380). There are good reasons, as has been shown, for emphasizing the Machiavellian quality of neo-liberal politics. Picciotto and Bradley (2015) wonder how the legal formalism of tax specialists might be mitigated, so that policy might be formulated on a broader basis (see Adam et al., 2011: 18; Wales, 2010: 1301–1304). Prabhakar (2015) turns the issue on its head with a subtle political calculation for cutting through the complexity of current inheritance tax law.

If a more republican debate is a rather remote prospect, there is meantime the question of who can be trusted to construct definitive meaning dispassionately in the public interest. The genie is already out of the bottle and the monster has escaped into ‘the infinite morning’. Fairness, it has been well said, is the key value in political debate (Loughlin, 2010: 396, 450). Custody of definitive interpretation is the sixth main strand in the present collection. Sectional interests operate in each version of politics mentioned above. ‘Much of the law is now as difficult to fathom’, Judge Hand continued, in the extract at the beginning, as were parts of Hegel’s prose. Indeed the situation was going to get worse rather than better. He had ‘little doubt’ in 1947 that societies were ‘entering a period of increasingly detailed regulation’, with only the judiciary ‘to thread the path … through these fantastic labyrinths’ (Hand, 1947: 169). But Learned Hand uttered these words in the era of the administrative state. What even he could not have envisaged was the neo-liberal entangling of the private in the public discussed above. It is, of course, possible to be flat wrong but the potential for gameplaying, or ‘creative compliance’, is enormous (McBarnet, 2003; McBarnet and Whelan, 1999: 269). The tax authority’s ‘instrumental view of law’ induces the taxpayer to match that instrumentality with an instrumentality of its own (Picciotto, 2007: 11–12; 23; Gribnau, 2015). This gameplaying seems to be the inevitable consequence of ‘liberal legality’. Gribnau suggests that strengthening the ‘inner morality of the law’ might allow the construction of a durable corporate social responsibility that might make the tendency to game the system less prevalent. One problem, as analysed by Frecknall Hughes and Kirchler, is that there is no single professional body of tax specialists and no one taxation ethos. de Cogan draws out the pivotal role of the judges in holding the balance between these specialists groups and wider society. He recognizes Picciotto’s point about the instability of the language of tax legislation. What de Cogan contributes is the argument that the judiciary has a constitutional role in stabilizing the meaning of tax legislation. He tentatively advances a basis on which judges might approach this task, so as to balance democratic values and administrative virtues.

In 1902, Justice Holmes, one of Learned Hand’s intellectual mentors, wrote to Lady Pollock. Holmes was pushing what she would have thought a familiar literary theme, namely, his preference for the delicacy of Shakespeare, Sterne and Goethe over the ‘simplicity’ of the ancients. ‘How odious a virtue the much praised simplicity [he wrote] … The only simplicity for which I would give a straw is that which is on the other side of the complex—not that which never has divined it’ (de Wolfe Howe, 1942: 109; Snape, 2011: 176). In other words, we need to be conscious of sometimes submerged incoherencies and inconsistencies before we try to ‘simplify’ them. Justice Holmes’ letter resonates because it suggests a need for a fundamental reappraisal of tax law consistent with Picciotto’s comments (2015) on the incoherence and inconsistency of the original transfer pricing rules. To paraphrase Holmes, people must see themselves seeing. Simplistic answers to complex problems will be the wrong ones.