Structural Flaws of Income as a Base for Taxation

Abstract

This article discusses Ross Parsons’s influential Wilfred Fullagar Lecture “Income Taxation – an Institution in Decay” (1986) 3 Australian Tax Forum 233, in which Parsons opined that the considerable analytical shortcomings of the concept of income stem from income tax adopting the concept of income from the law of trusts, which is based on principles that are different from and irrelevant to the policies and imperatives of income tax law. An exploration of the history of income tax shows that the origin of the judicial concept of income as a tax base in fact stems from the income tax of 1799, which inherited the concept of income as a regular flow that is measured annually. However, the author agrees that the concept of income is fundamentally flawed. The ectopia of tax law comes about because tax law generally taxes the results of legal transactions rather than their underlying economic effects. Furthermore, the law must make a number of assumptions that are not in fact correct, which removes the base that the law taxes even further from the economic reality of the case.