Justice and taxation. A reconsideration of the social contract between State and Citizens

Term Paper, 2015

15 Pages




1. Introduction

2. Definition and characteristics

3. The advantages

4. Proposal and Conclusion


Justice and taxation:

A reconsideration of the social contract between State and Citizens


The Following paper was a revised version of an original work presented as contribute for the participation of the SMC Open Essay Contest Justice and Taxation opened until 15th December, 2010. Different parts are revised and integrated with the evolution of the fiscal policy. However, the scope is present a Key idea in a facilitated form.

1. Introduction

The problem of justice and taxation is an interesting theme not only as an economic question, which invested a lot of the best intelligence in the history from Smith to Hayek, but also a crucial argument for many different economic categories: firms, individuals, and investors who very often consider alternative scenarios including the fiscal option.

In general, the progressive taxation is considered morally correct and for this reason, it is recognized by the major economies as the best solution for the distribution of income (Rabushka, 2008).

The objective of taxation is to provide resources for financing public services, which are useful for the collectivity but not marketable. Which kind of public services include, depend on the role of the state or in philosophical terms on the contents of the social contract.

In strict terms, some of the tasks of the state are the following:

- Assuring its defense (which is strictly linked with the sovereignty of the state inside and outside).
- The administration of justice.

Public schooling, the health system, and many others services related to the welfare state may be included in the tasks of the state or alternatively satisfied by the market. It is evident that if the state includes more tasks, the costs proportionally increase and the amount of internal revenues must consequently increase in absolute terms.

Returning to the fiscal system our interrogative is:

What are the principles of functioning of flat taxation, compared to progressive taxation?

2. Definition and characteristics

In order to simplify the task we consider only income taxation which is part of the indirect taxation, in our argumentation; however many arguments are applicable to systems with similar mechanisms.

The key characteristic of flat taxation is that the rate applied to the gross salary, remains the same without considering the total income. If, for example, the government with the Fiscal Ministers or the fiscal agency fixes the taxation rate at 30%, this percentage is applied to all the incomes which are included in the taxation area. This kind of taxation was adopted initially in Estonia in 1994, in Lithuania in 1994 and then in Latvia in 1995 and Russia 2001. Today the great part of Eastern European Countries adopted the flat tax (Murphy, 2006).

The following table provides a view of the countries, which adopted this fiscal system:

illustration not visible in this excerpt

Sources: www.worldwide-tax.com .

As showed in this list the major Eastern European Countries starting from the 90s adopted the flat tax, with only one or in some cases two percentage.

On the contrary, the progressive taxation is founded on the principle that the tax percentage is variable and increases with the increase of the income. For example in my country, Italy, the progressive taxation is configured based on the following system:

illustration not visible in this excerpt

Sources: www.agenziaentrate.gov.it. , Fiscal Year 2010.

*The monetary data filled in the first and third column are referred in Euro.

Following this configuration, the amount of taxation is calculated considering different percentage of tax rate.

For example, if the Gross Annual Income is: 60,000 €, using the aforementioned rule the gross amount of taxation becomes:

17,220+ (60,000-55,000.01)*41% = 19,270 €

So the percentage of taxation, compared to the Gross Annual Income, becomes:

19,270 / 60,000 = 32%

Now, hypothesizing a gross annual income of 90,000 €, the gross amount of taxation become:

25,240+ (90,000-75,000)*43% = 31,870 €

31,870 / 90,000 = 35%

Starting from the same amount of taxation the corresponding flat tax rate, is:

(19,270+31,870) / (60,000+90,000) = 34%

Therefore to obtain the same amount of internal revenue the government has to apply the percentage calculated above.

From this simple calculation it is possible to deduce the following assertion:

Different kinds of taxation (progressive or flat) can produce the same internal revenue.

This is an important result because the flat tax rate can guarantee the same internal revenue for the government, significant differences are focused about other aspects.

Following our investigation other questions will be explored. In particular:

Is progressive taxation more efficient for the government?

Is progressive taxation more equal? Or in other terms does it reflect the ethical principles more adequately?


Excerpt out of 15 pages


Justice and taxation. A reconsideration of the social contract between State and Citizens
Swiss Management Center University
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ISBN (Book)
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innovation, technological change, technological unemployment, employment
Quote paper
Andrea Vicini (Author), 2015, Justice and taxation. A reconsideration of the social contract between State and Citizens, Munich, GRIN Verlag, https://www.grin.com/document/315554


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