The social contract, fair share taxes and other myths
31 May 2012
Posted by: SAIT Technical
The Eurozone crisis reached a new emotional "high" at the weekend when Christine Lagarde, executive director of the International Monetary Fund, used her Facebook page to insist she is "very sympathetic to the Greek people”, while reiterating that its elite must pay their fair share of taxes.
Ms Lagarde's post followed the publication of an interview with the Guardian newspaper where she said children in Africa needed more help than the Greeks and that many in the country were "trying to escape tax all the time". She said that an important part of the effort to assist Greece, is that everyone should carry their fair share of the burden, especially the most privileged and especially in terms of paying their taxes.
Ms Largarde’s argument would have been more balanced if she also included the question "why should citizens pay for the sins of big banks and bad governments”.
The underlying assumption of Ms Lagarde is that a social contract exist between the state and the citizenry. This theory, best developed by John Locke, states that human beings are born free and may take whatever actions necessary to "live and let live”. Individuals are also allowed to join together to create an agency – the state- for mutual protection. In essence this can be characterised as a principal/agency relationship. Individuals act as principles and appoint the state to act as their agent. The rationale for the modern state is therefore that the state is subordinate to the individual.
The severity and violent nature of the current economic crises may lead some to believe that, at least for the short term, this relationship between the state and the individual should be circumvented. The risk therefore is that the the state becomes the "principal," and individuals the "agents."
This is a dangerous game. It will lead to the assumption that individuals must pay ever more taxes, even though the need for higher taxes is the direct result of wrongful actions and maladministration by the state.
Everybody agrees that taxes should be paid for the delivery of services. Everybody agrees that tax evasion is wrong and should not be condoned. This is certainly the position of al responsible tax practitioner.
However the call to "pay your fair share of tax” should not be used to flog the tax base to subsidise bad decisions of big banks or inefficient and ill-conceived state actions.
The social contract does not give the state the right to disregard its responsibility towards the citizenry. If a government is inefficiently managed and tainted by corruption, taxpayers rightfully start questioning the fairness of the system and the social contract.
In South Africa we have our own examples. The recent e-tolling saga, constant reports of corruption being unearthed and service delivery protests will lead many to question the concept of fairness. Others may consider opting-out of the social contract. This is something that South Africa can ill afford.
It is therefore incumbent on the state to rethink its own role in society. Does it still adhere to the social contract? Is it still an agent acting for the benefit of citizens? Who determines the content of the social contract and the meaning of fairness?