Taxation
During the exam period
• Types of questions: multiple choice without correction for guessing
• Exam material allowed: legislation (Toledo/Ultra)
• Allowed: highlighting/underlining/cross-references to other articles (see also instructions
online)
• Examples: see article 10; → Article 5, etc.
• Not allowed: adding extra information in writing
Part 1: The fundamental Principles and questions of taxation
Chapter 1: What is a tax?
1.1 General characteristics
Definition of a tax and its importance = A tax is a compulsory payment that is usually made in
cash to support the functioning and activities of the government.
Note: The word “tax” has a negative connotation.
Irrespective of its formal name!
Certain principles only apply to taxes
Examples: income taxes (Taxes on wages, salaries, or business profits) and consumption
taxes (Taxes on goods and services (e.g., sales tax, VAT))
“In cash”:
Tithes (Latin: decima): is a historical form of taxation where individuals,
particularly farmers and landowners, were required to give a portion of their
earnings—often 10%—to a religious institution, such as the church.
Umuganda: is a traditional and modern Rwandan practice of community service,
where citizens contribute their time and labor to public works.
Every one of the ages 18–65 have to work 1 day for the government. Example:
clean the streets for 1 day. => It was very successful (gave also incentive to be
more careful about pollution through the rest of the year): want to introduce an
extra day.
Opera Publica: refers to a system where citizens contributed labor instead of
money to fulfill their tax obligations. Work for the government (physical labor).
, Common in ancient Rome and medieval Europe. Used for constructing and
maintaining public infrastructure like roads, bridges, and fortifications. Often
applied to lower-income citizens who lacked the money to pay taxes but could
provide physical labor.
Example Belgium: you can pay your inheritances taxes by transferring pieces of
arts to the state.
! Some rules exist to protect tax-payers of paying too much taxes.
Not all payments are to the government = taxes. Key distinctions between taxes and other forms
of government-related payments:
Contractual obligations = Payments made to the government as part of a legally binding
agreement (contract) between an individual or entity and the government.
Examples: A company leasing land from the government and paying rent.; A contractor
receiving government funding for a project and paying agreed fees.; Utility bills for
government-provided services (e.g., water, electricity).
Key difference from taxes: These payments arise from voluntary agreements, whereas
taxes are imposed by law without an individual contract.
Payments based on non-contractual liability (tort) = Payments made because of legal
liability for causing harm or damage, even without a direct agreement.
Examples: A company fined for violating environmental laws.; A driver paying a penalty
for causing damage to public property.; Compensation paid to the government for
polluting public water sources.
Key Difference from Taxes: These payments are penalties or damages, not general
contributions to government funding.
Voluntary payments = Payments given freely to the government without legal obligation.
Examples: Donations to government disaster relief funds.; Voluntary contributions to
state projects or public services.; Gifts to state institutions (e.g., museums, universities).
Key Difference from Taxes: Taxes are mandatory, while voluntary payments
are optional and usually not tied to government enforcement.
,1° A mandatory contribution
The taxpayer has no choice but to pay the tax, even when the taxpayer disagrees with the way the
government spends money. This obligation is justified by economic principles that explain why
taxation is necessary for a functioning society.
Why are taxes mandatory? Economic rationale
Risk of market failure for public goods:
Essential services like roads, defense, and public safety benefit everyone, but private
markets wouldn’t provide them efficiently due to the free-rider problem. Without
taxation, these services could be underfunded, causing market failure.
Economies of scale:
The government can deliver services more efficiently and at lower costs per person by
pooling resources for large-scale projects (e.g., healthcare, infrastructure). If left to
private businesses, these services might become too expensive for many citizens.
From the moment a taxpayer falls within the legal scope of application of the tax, the tax can be
imposed by force, the tax can be imposed by force.
The only way to avoid the tax from being due is to place oneself in a factual or legal
situation in which tax us not due.
Example car: Registration taxes + insurance tax+ traffic tax + Gaz (VAT)
How to avoid to pay taxes? Buy a bike
Note: Even if you don’t pay your tax, we can’t exclude you from public goods. (examples:
military, streetlights, clean air, public parks) + Taxes differ from states!
2° In accordance with the rule of law
A tax can only be levied in accordance with the rule of law, i.e., the tax needs a legitimate legal
basis = principle of legality, ensures that taxation is fair, transparent, and democratically
approved.
Citizens play an important role in the democratic process
‘No taxation without representation’: This famous principle means that only elected
representatives should have the power to create or approve taxes.
Part of the history of taxation is the history of how to give this collective consent (=the
history of democracy) If there is a new tax that you don’t like => new elections you will
vote for someone else
, 3° Imposed by the public authority
= The power to impose taxes ultimately lies with the public authority, meaning the government
has the right to levy taxes on its citizens and entities under its jurisdiction
The ultimate foundation of imposing a tax is the authority which a government exercises
over its subjects. This authority is established through law and governance structures, and
it gives the government the right to demand taxes in exchange for public services,
infrastructure, and societal order.
The government can only tax subjects (or situations) that have a sufficiently close
connection (or ‘nexus’) to its territory. Examples: tax for a dog, air space (bees); resident
tax, tourist tax.
The rise of the digital economy creates new challenges for establishing a "nexus" because
transactions can happen across borders without any physical presence in a country. For
example, an online service can be accessed by customers in different countries, raising
questions about where and how taxes should be applied.
Example: A digital company based in one country may provide services to users in
another country, but without a physical presence or infrastructure in that country. This
makes it difficult for that second country to impose taxes based on traditional “nexus”
rules. To address this, many countries are introducing digital taxes to capture the revenue
from international online services.
4° In the public interest
Taxes are not only levied by authority but must also be spent in the public interest, meaning that
the revenue generated should benefit society and serve the common good.
Allocation of tax revenues = difficult
Evolving needs of society (e.g., climate change): The needs of society are constantly
evolving, and the government must adapt how it spends taxes accordingly. Issues
like climate change, public health, and technological advancements may require new
forms of spending.
Spending of taxes is a discretionary decision by the government
While governments have discretion over how tax revenues are spent, they must still
operate within the legal and constitutional boundaries. => Respect certain boundaries
5° Mandatory payment without personal compensation
A tax is a unilateral payment, meaning it is imposed by the government without a direct quid
pro quo (a reciprocal exchange). In other words, when a person pays taxes, they are not directly
entitled to specific goods or services in return based on the amount they paid. This distinction
During the exam period
• Types of questions: multiple choice without correction for guessing
• Exam material allowed: legislation (Toledo/Ultra)
• Allowed: highlighting/underlining/cross-references to other articles (see also instructions
online)
• Examples: see article 10; → Article 5, etc.
• Not allowed: adding extra information in writing
Part 1: The fundamental Principles and questions of taxation
Chapter 1: What is a tax?
1.1 General characteristics
Definition of a tax and its importance = A tax is a compulsory payment that is usually made in
cash to support the functioning and activities of the government.
Note: The word “tax” has a negative connotation.
Irrespective of its formal name!
Certain principles only apply to taxes
Examples: income taxes (Taxes on wages, salaries, or business profits) and consumption
taxes (Taxes on goods and services (e.g., sales tax, VAT))
“In cash”:
Tithes (Latin: decima): is a historical form of taxation where individuals,
particularly farmers and landowners, were required to give a portion of their
earnings—often 10%—to a religious institution, such as the church.
Umuganda: is a traditional and modern Rwandan practice of community service,
where citizens contribute their time and labor to public works.
Every one of the ages 18–65 have to work 1 day for the government. Example:
clean the streets for 1 day. => It was very successful (gave also incentive to be
more careful about pollution through the rest of the year): want to introduce an
extra day.
Opera Publica: refers to a system where citizens contributed labor instead of
money to fulfill their tax obligations. Work for the government (physical labor).
, Common in ancient Rome and medieval Europe. Used for constructing and
maintaining public infrastructure like roads, bridges, and fortifications. Often
applied to lower-income citizens who lacked the money to pay taxes but could
provide physical labor.
Example Belgium: you can pay your inheritances taxes by transferring pieces of
arts to the state.
! Some rules exist to protect tax-payers of paying too much taxes.
Not all payments are to the government = taxes. Key distinctions between taxes and other forms
of government-related payments:
Contractual obligations = Payments made to the government as part of a legally binding
agreement (contract) between an individual or entity and the government.
Examples: A company leasing land from the government and paying rent.; A contractor
receiving government funding for a project and paying agreed fees.; Utility bills for
government-provided services (e.g., water, electricity).
Key difference from taxes: These payments arise from voluntary agreements, whereas
taxes are imposed by law without an individual contract.
Payments based on non-contractual liability (tort) = Payments made because of legal
liability for causing harm or damage, even without a direct agreement.
Examples: A company fined for violating environmental laws.; A driver paying a penalty
for causing damage to public property.; Compensation paid to the government for
polluting public water sources.
Key Difference from Taxes: These payments are penalties or damages, not general
contributions to government funding.
Voluntary payments = Payments given freely to the government without legal obligation.
Examples: Donations to government disaster relief funds.; Voluntary contributions to
state projects or public services.; Gifts to state institutions (e.g., museums, universities).
Key Difference from Taxes: Taxes are mandatory, while voluntary payments
are optional and usually not tied to government enforcement.
,1° A mandatory contribution
The taxpayer has no choice but to pay the tax, even when the taxpayer disagrees with the way the
government spends money. This obligation is justified by economic principles that explain why
taxation is necessary for a functioning society.
Why are taxes mandatory? Economic rationale
Risk of market failure for public goods:
Essential services like roads, defense, and public safety benefit everyone, but private
markets wouldn’t provide them efficiently due to the free-rider problem. Without
taxation, these services could be underfunded, causing market failure.
Economies of scale:
The government can deliver services more efficiently and at lower costs per person by
pooling resources for large-scale projects (e.g., healthcare, infrastructure). If left to
private businesses, these services might become too expensive for many citizens.
From the moment a taxpayer falls within the legal scope of application of the tax, the tax can be
imposed by force, the tax can be imposed by force.
The only way to avoid the tax from being due is to place oneself in a factual or legal
situation in which tax us not due.
Example car: Registration taxes + insurance tax+ traffic tax + Gaz (VAT)
How to avoid to pay taxes? Buy a bike
Note: Even if you don’t pay your tax, we can’t exclude you from public goods. (examples:
military, streetlights, clean air, public parks) + Taxes differ from states!
2° In accordance with the rule of law
A tax can only be levied in accordance with the rule of law, i.e., the tax needs a legitimate legal
basis = principle of legality, ensures that taxation is fair, transparent, and democratically
approved.
Citizens play an important role in the democratic process
‘No taxation without representation’: This famous principle means that only elected
representatives should have the power to create or approve taxes.
Part of the history of taxation is the history of how to give this collective consent (=the
history of democracy) If there is a new tax that you don’t like => new elections you will
vote for someone else
, 3° Imposed by the public authority
= The power to impose taxes ultimately lies with the public authority, meaning the government
has the right to levy taxes on its citizens and entities under its jurisdiction
The ultimate foundation of imposing a tax is the authority which a government exercises
over its subjects. This authority is established through law and governance structures, and
it gives the government the right to demand taxes in exchange for public services,
infrastructure, and societal order.
The government can only tax subjects (or situations) that have a sufficiently close
connection (or ‘nexus’) to its territory. Examples: tax for a dog, air space (bees); resident
tax, tourist tax.
The rise of the digital economy creates new challenges for establishing a "nexus" because
transactions can happen across borders without any physical presence in a country. For
example, an online service can be accessed by customers in different countries, raising
questions about where and how taxes should be applied.
Example: A digital company based in one country may provide services to users in
another country, but without a physical presence or infrastructure in that country. This
makes it difficult for that second country to impose taxes based on traditional “nexus”
rules. To address this, many countries are introducing digital taxes to capture the revenue
from international online services.
4° In the public interest
Taxes are not only levied by authority but must also be spent in the public interest, meaning that
the revenue generated should benefit society and serve the common good.
Allocation of tax revenues = difficult
Evolving needs of society (e.g., climate change): The needs of society are constantly
evolving, and the government must adapt how it spends taxes accordingly. Issues
like climate change, public health, and technological advancements may require new
forms of spending.
Spending of taxes is a discretionary decision by the government
While governments have discretion over how tax revenues are spent, they must still
operate within the legal and constitutional boundaries. => Respect certain boundaries
5° Mandatory payment without personal compensation
A tax is a unilateral payment, meaning it is imposed by the government without a direct quid
pro quo (a reciprocal exchange). In other words, when a person pays taxes, they are not directly
entitled to specific goods or services in return based on the amount they paid. This distinction
