Globally, there has been a revival of the social contract in both domestic and international fiscal matters. This is not surprising given the ongoing financial decline that stems from the financial crises of 2008 and now the COVID-19 pandemic in conjunction with the ongoing global phenomenon of tax base erosion linked to international corporate tax avoidance. In these times of financial hardship, there is an evident need to reduce public spending or at least spend public funds more wisely, while collecting tax revenues in the most efficient manner. In other words, reduce spending and maximise income revenues.
However, it became evident during the pandemic that this strategy was less reliable. During a crisis such as the COVID-19 pandemic, there was a dire need to increase public spending during long periods of strict lockdowns and invasive restrictions as a means to provide resuscitative assistance to businesses and the livelihoods of individuals. At the same time, there was a decline in tax revenues due to enforced state measures encompassing lockdowns and restrictions. Consequently, there was an extraordinary increase in public spending while tax revenues declined, or alternatively were postponed as part of the financial aid measures awarded during the pandemic.
This development reinforced the renewed interest in the social contract and several governments openly referred to a financial duty to society through the implied social contract when announcing their financial aid measure strategies. For instance, the European Commission encouraged member states to exclude corporate taxpayers registered in tax haven listed jurisdictions from receiving financial aid regardless of them having subsidiaries generally qualifying for financial aid within the European Union.
Relying on the social contract as a way of an underpinning insurance between parties is logical in times of crisis, to both the state and the taxpayer. For instance, in times of crisis, the state arguably acts as an insurance provider as public funds mitigate the unexpected economic losses that have occurred due to the crisis and the subsequent actions of the state. The recipient, corporate or individual taxpayer, on the other hand provides the premium payment either through previous tax payment or taking on partial responsibility for the financial losses incurred as the state does not (normally) cover the complete loss. This is why excluded taxpayers, as those in the above-mentioned EU case, were left distraught as they claimed to have paid the premium through previous tax payments yet left without financial support in an evident time of crisis where their fiscally paid insurance should be paid out.
Reviewing the relationship between state and taxpayer
My paper in Australian Tax Review explores when and how policymakers employed such social contract argumentation in connection to financial aid measures awarded to individual taxpayers amidst the COVID-19 pandemic in addition to the consequences experienced by taxpayers.
Consequently, two lines of inquiry are pursued in my study:
- To what extent has the identified relationship between state and taxpayer resulted in an inclusion or exclusion of individuals?
- To what extent has the relationship between state and taxpayer been employed when designing and awarding financial aid measures amidst the pandemic?
The article elaborates on what the social contract could concretely entail and how it can be invoked in fiscal matters. Australia, the United States, and the EU member states are employed as illustrative case studies, but the findings of the study are applicable in a more universal fashion given the nature of financial crises linked to the COVID-19 pandemic and recessions.
No criterion is perfect
For the benefit of clarity, the article reviews four eligibility criteria (tax payment/tax residence, employment, formal citizenship, and residence) and finds that no criterion alone can provide complete equality or equity. Some criteria are more favourable to vulnerable groups such as the unemployed and students; yet in all cases, undocumented workers have been excluded despite them working, contributing with taxes, and residing in the state.
Eligibility criteria based upon tax payment may be beneficial when considering state finances, but it also contradicts the underpinning principle of redistribution as it is in the risk of excluding groups of individuals in dire need and otherwise supported through redistribution provided by the state. However, this may be considered a controversial positioning when discussing international taxation and tax avoidance.
The American Rescue Plan was one of the most publicised financial aid schemes introduced in connection to the COVID-19 pandemic. One of the most prominent features of it was the overriding goal to effect social change to American society through historical anti-poverty measures targeting low-income families. While it has provided great relief, it has also revealed pre-existing problems within the US system, mainly that of how undocumented workers are left out of social expenditures and essential assistance despite contributing to the US economy and social security.
To award financial aid in accordance with a principle of residence does result, to some extent, in a greater inclusion of impoverished and vulnerable groups than would otherwise be the case. However, the Australian case in relation to Special Category Visa (SCV) holders originally from New Zealand taught us that, depending on the time limitations set forth when determining social insurance residency, this may not always be the case.
The case of Australia
In Australia, not all New Zealanders with SCVs are eligible to access social security. Only those who entered Australia before 2001 could access benefits; and those who entered after must first apply for permanent residency and fulfil a minimum residence period before they could. Otherwise, they are unprotected even though they could work and are liable for full taxation.
The pandemic had an evident compound effect on the nonprotected SCV holders. Many were only able to access limited parts of the pandemic financial aid schemes in place due to them being temporary visa holders or alternatively not having resided in Australia for a long enough period. One exemption to this exclusion would be the JobKeeper wage subsidy that was decided on at the federal level in March 2021 and included New Zealanders.
Awarding financial aid in accordance with a principle of residence (social insurance residence and not tax residence), rather than other principles such as tax payment or citizenship has the potential to strengthen equity as it would not exclude more vulnerable groups in society, for example students, pensioners, and unemployed. However, as in the case of unprotected SCV holders, some New Zealanders had issues receiving aid awarded on residence as they did not fulfill the rather high thresholds of the Australian social security residence criterion.
Critical reflection of the social contract needed
To summarise, from the perspective of the state and public funds it is useful to rely on social contract argumentation when awarding financial aid and restricting potential aid receivers. The preservation of financial funds is arguably in the interest of society and the taxpayers themselves. However, by applying such reasoning, it is evident from the study that more vulnerable societal groups such as unregistered residents or resident non-citizens, most notably those originating from New Zealand in the Australian case, may find themselves placed in an unfair situation when compared to other taxpayers with either citizenship or protected visa status.
Lastly, the aim of my paper is to raise awareness of how the application of social contract may impact taxpayers differently and yield unequal outcomes. This awareness is especially important in the times of global mobility we currently find ourselves in. The importance of citizenship and residence has been profoundly altered over time and this is an area in need of further consideration by tax scholarship given the growing numbers of immigrants, remote workers, and digital nomads.
Journal article
Yvette Lind, Reviewing the relationship between state and taxpayer in the light of the COVID-19 pandemic: A critical commentary done through a comparative lens, Australian Tax Review vol 51 2022, pp. 192-204
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