Mindy Herzfeld (Florida) presents What’s an Income Tax? at Toronto today as part of its James Hausman Tax Law and Policy Workshop Series hosted by Ben Alarie:
Developments in international taxation – including the substitution of accounting standards for tax laws — and tensions in the interaction between tax and trade and investment agreements and trends, mandate a renewed attempt to better define and provide a principled meaning to the term income tax, to distinguish income from other types of taxes, and to make sense of the use of other terminology – such as the distinctions drawn between direct and indirect taxes. Meanwhile, the U.S. Congress has mandated that the Treasury allow taxpayers a credit for foreign inome taxes paid, but has provided no guidance as to what an income tax means for this purpose, leaving the government struggling to apply decades old law to new types of foreign taxes. The exercise of trying to distinguish between taxes imposed on income and other types of taxes is inherently interdisciplinary, yet law, economics and accounting all come to the table with different principled approaches and objectives.
The law struggles to incorporate and adapt to changing economic theories as well as the ongoing evolution of accounting standards. To compensate, the law sometimes adopts an outcome driven approach not rooted in principle, but that approach creates challenges for the government writing the rules and for taxpayers applying them, while differences between legal definitions and accounting standards create opportunities for tax planning and earnings management.
The challenges involved in developing coherent rules in the cross-border tax space has prompted proposals for greater reliance on accounting standards and away from tax laws rooted in economic theory. While such a shift may perhaps help address the challenges associated with the ossification of economic standards in law, it may also portend other, future, challenges. Accounting standards are – at least with respect to the definition of an income tax – more principled based than the legal standard, but also leave more room for individual judgment in application to particular circumstances.
