TAX POLICY AND FUNDAMENTAL FREEDOMS

There appears in EU individual State publications from time to time, the idea that States can impose taxes without constitutional limit.

Some State taxation authorities claim that the law of fundamental rights and freedoms allows such a wide margin of appreciation, that no State impost will be found unconstitutional. Because any State impost can nominally be justified as being in the wider interests of society.

Thanks for reading! Subscribe for free to receive new posts and support my work.

EU law clearly points in the opposite direction.

The seminal case R.Sz. v. HUNGARY (2013) provides valuable signposts.

https://hudoc.echr.coe.int/eng#{%22itemid%22:[%22001-121958%22]}

· The applicant complained under Article 1 of Protocol No. 1 – read alone and in conjunction with Article 13 of the Convention – that the imposition of a 98% tax on part of his severance pay constituted an unjustified deprivation of property, with no remedy available.

Germany – Federal Constitutional Court

19. In a judgment of 22 June 1995, the Federal Constitutional Court held that, according to Article 14 of the Basic Law, the use of property served the purpose of private gain and the public good. In that sense, property tax, combined with other taxes, might take no more than 50% of the income from property (Halbteilungsgrundsatz). The overall tax burden should moreover not run counter to the principle of equality demanding the division of burden depending on the contributing capacity (BVerfG,2 BvL 37/91, 22.6.1995).

In its subsequent decision of 18 January 2006 (BVerfG, 2 BvR 2194/99,

18.01.2006), the Federal Constitutional Court found that even though tax load fell within the ambit of Article 14 of the Basic Law, that is, the protection of property, the overall burden through business and personal income tax, in the particular circumstances, did not infringe the complainant’s right to property. In the instant case the overall tax burden in business and personal income tax combined amounted to 57.58%. The Federal Constitutional Court noted in this regard that it was permissible to charge high income with higher tax burden, as long as the taxable person, after deduction of the relevant tax, disposed of a remaining income representing his private performance.

France – Conseil constitutionnel

20. In decision no. 2007-555 DC (16 August 2007; Act pertaining to work, employment and purchasing power), the Conseil constitutionnel held as follows1:

“24o The requirement deriving from Article 13 of the declaration of 1789 would not be complied with if taxation were to be of a confiscatory nature or subjected a certain category of taxpayers to an excessive burden in comparison with their ability to pay taxes. The principle of the capping of the proportion of a tax household’s income allocated to paying direct taxes, far from infringing the principle of equality before public burden sharing, is intended to avoid a patent infringement of this same principle;”

1. See also: n° 2005-530 DC du 29 décembre 2005; n° 2011-638 DC du 28 juillet 2011 and n° 2012-662 DC du 29 décembre 2012

Switzerland – Federal Supreme Court

21. The Federal Supreme Court held that a taxation scheme that is confiscatory in its effects and not limited in time would infringe the essence of the right to property (Decisions of the Federal Supreme Court, BGE 106 Ia 342, 349; BGE 128 II 112, 126). To date, the Federal Supreme Court has not found that any taxation scheme was confiscatory.

Decision no. BGE 128 II 112, 126 contains the following passage:

“10 bb) ... In taxation matters, however, it [the guarantee of property, as set out in Article 26 of the Federal Constitution] does not go beyond the prohibition of confiscatory taxation. Therefore, a tax to be levied may not damage the very essence of private property. It is the task of the legislative branch to preserve the substance of the taxpayer’s assets and to allow him the chance to create new ones. In fact, a tax rate expressed in percentages is not the only decisive criterion in order to determine whether a taxation scheme has a confiscatory effect. It is necessary to examine the burden of the imposition for a rather long period and by not taking into account extraordinary circumstances. In order to accomplish this, all specific facts must be taken into consideration: the length and the gravity of the interference as well as the accumulation with other taxes or charges and the possibility to shift the tax to another person ...”.

Decision of the Federal Supreme Court no. 2P.139/2004 contains the following passage:

“4.2 The Federal Supreme Court has held that it is not compatible with Article 26 of the Federal Constitution if an annuity for life, inherited by bequest, of initially CHF 2200 per month is – regardless of the ability to pay other taxes of the person in receipt of the pension –taxed at 55 % in total, in terms of inheritance and income taxes as well as other expenses, which (taking into account of the tax sum due for over CHF 200,000) were necessary for their financing (Decision P.1704/1984, published in: ASA 56 p. 439 et seq.). In that specific case the specific circumstances were relevant because the heir could not secure her own existence after paying the taxes for the annuity for life.”

United States – Supreme Court

22. In United States v. Lovett, 328 U.S. 303, 315 (1946) the Supreme Court dealt with the following problem: According to the provisions of the Urgent Deficiency Appropriation Act, after 15 November 1943 no salary or compensation was to be paid to certain individuals, who were then government employees, out of any moneys then or thereafter appropriated, except for services as jurors or members of armed forces unless they were prior to that date again appointed to jobs by the President with advice and consent of the Senate. In the background of the statute challenged lay the House of Representatives’ feeling that in the late 1930s many ‘subversives’ were occupying influential positions in the Government and elsewhere and that their influence must not remained unchallenged. In 1943 the respondents, Lovett, Watson and Dodd, were and had been for several years working for the Government. The Government agencies which had lawfully employed them were fully satisfied with the quality of their work and wished to keep them employed in their jobs. The Supreme Court held that the purpose of the provision challenged was not merely to cut off the plaintiffs’ compensation through regular disbursing channels, but permanently to bar them from government service and it was designed to force the employing agencies to discharge respondents and to bar their being hired by any other governmental agency. The Supreme Court reiterated that the Constitution barred such legislative acts by providing that “no Bill of Attainder or ex post facto Law shall be passed”. It found that the relevant provision was designed to apply to particular individuals and operated as a legislative decree of perpetual exclusion from a chosen vocation. It ruled that this permanent proscription from any opportunity to serve the Government was punishment of those individuals without a judicial trial and thus carried the usual characteristics of bills of attainder. The Supreme Court found that “legislative acts, no matter what their form, that apply either to named individuals or to easily ascertainable members of a group in such a way as to inflict punishment on them without a judicial trial, are ‘bills of attainder’ prohibited by the Constitution”.

The subject matter of the case Armstrong v. United States, 364 U.S. 40, 49 (1960) was as follows: The plaintiffs (Armstrong and al.) furnished various materials to Rice for use in construction of boats. Upon Rice’s default, the Government exercised its option as to ten of the boat hulls still under construction and removed these properties to out-of-state naval shipyards for use in the completion of the boats. When the transfer occurred, the plaintiffs had not been paid for their materials and they were not paid afterwards, either. Petitioners therefore contended that they had liens. The Supreme Court held “that there was a taking of these liens for which just compensation is due under the Fifth Amendment. It is true that not every destruction or injury to property by governmental action has been held to be a ‘taking’ in the constitutional sense. This case and many others reveal the difficulty of trying to draw the line between what destructions of property by lawful governmental actions are compensable ‘takings’ and what destructions are ‘consequential’ and therefore not compensable... The Fifth Amendment’s guarantee that private property shall not be taken for a public use without just compensation was designed to bar Government from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole. A fair interpretation of this constitutional protection entitles these lienholders to just compensation here.”

In Eastern Enterprises v. Apfel, 524 U.S. 498 (1998) the Supreme Court held that the Coal Industry Retiree Health Benefit Act 1992 amounted to an unconstitutional regulatory taking of property. It held that the economic impact of the Act was substantial as to Petitioner, in that it required Eastern Enterprises to contribute large sums of money to a pension fund for employees employed in the 1950s and 1960s solely because those payments could not be allocated to other coal companies that were currently operating in the coal industry. The retroactive effect of the Act imposed a substantial economic injury on Eastern Enterprises that could not have been anticipated. Moreover, the challenged statute interfered with Eastern Enterprises’ expectations in that in 1987 the company sold off its remaining holdings in coal operations and completely quit this industry. The statute’s requirement for Eastern Enterprises to undertake the obligation at issue clearly interfered with the expectations of Eastern when it sold off its interest in coal operations. Lastly, the nature of the government action was unusual because it retroactively applied a substantial economic burden on Eastern Enterprises. For the Supreme Court, the character of the government action was substantial and invasive. The balance of the factors resulted in the finding of an unconstitutional taking requiring just compensation.

WHAT THE STATE SAID

25. The Government did not dispute that the contested deprivation of revenue had amounted to an interference with the applicant’s right to property.

However, in their view, this interference was prescribed by law and pursued the legitimate aims of satisfying society’s sense of justice and of protecting the public purse.

These aims of general interest were also recognised by the European Union which had initiated legislative steps (see paragraph 18 above) against excessive severance payments, as their amount often per se violated society’s sense of justice and the remuneration policy applied in the financial sector to executive officers had contributed to the international financial crisis of the past years.

26. The Government were further of the opinion that, in order to achieve the above aims of general interest, taxation can, in a democratic society, be regarded as the most suitable regulatory means. In so far as the impugned tax could be seen as modifying the contents of the applicant’s existing employment contract, they submitted that respect for contracts already concluded required that their modification or cancellation take place according to the laws, even if they contained seemingly lawful commitments at the expense of the State budget violating the society’s sense of justice.

THE COURT RULING IN THIS CASE

a. Whether there was an interference with the applicant’s “possessions” within the meaning of Article 1 of Protocol No. 1

31. In its judgment of 23 September 1982 in the case of Sporrong and Lönnroth v. Sweden, the Court analysed Article 1 as comprising “three distinct rules”: the first rule, set out in the first sentence of the first paragraph, is of a general nature and enunciates the principle of the peaceful enjoyment of property; the second rule, contained in the second sentence of the first paragraph, covers deprivation of possessions and subjects it to certain conditions; the third rule, stated in the second paragraph, recognises that the Contracting States are entitled, amongst other things, to control the use of property in accordance with the general interest (Series A no. 52,

§ 61). The Court further observed that, before inquiring whether the first general rule has been complied with, it must determine whether the last two are applicable (ibid.). The three rules are not, however, “distinct” in the sense of being unconnected. The second and third rules are concerned with particular instances of interference with the right to peaceful enjoyment of property and should therefore be construed in the light of the general principle enunciated in the first rule (see, among many other authorities, James and Others v. the United Kingdom, 21 February 1986, § 37, Series A no. 98).

Moreover, an interference, including one resulting from a measure to secure payment of taxes, must strike a “fair balance” between the demands of the general interest of the community and the requirements of the protection of the individual’s fundamental rights. The concern to achieve this balance is reflected in the structure of Article 1 as a whole, including the second paragraph: there must be a reasonable relationship of proportionality between the means employed and the aims pursued.

The question to be answered is whether, in the applicant’s specific circumstances, the application of the tax law imposed an unreasonable burden on him or fundamentally undermined his financial situation – and thereby failed to strike a fair balance between the various interests involved

(see M.A. and 34 Others v. Finland (dec.), no. 27793/95, 10 June 2003; Imbert de Trémiolles v. France (dec.), nos. 25834/05 and 27815/05 (joined), 4 January 2008; Spampinato v. Italy (dec.), no. 69872/01, 29 March 2007; and Wasa Liv Ömsesidigt, Försäkringsbolaget Valands Pensionsstiftelse v. Sweden, no. 13013/87, Commission decision of 14 December 1988, Decisions and Reports 58, p. 186).

b. Lawfulness of the interference

i. General principles

35. The Court reiterates that Article 1 of Protocol No. 1 requires that any interference by a public authority with the peaceful enjoyment of possessions should be lawful: indeed, the second sentence of the first paragraph of that Article authorises the deprivation of possessions “subject to the conditions provided for by law”. Moreover, the rule of law, one of the fundamental principles of a democratic society, is a notion inherent in all the Articles of the Convention (see Former King of Greece and Others v. Greece [GC] (merits), no. 25701/94, § 79, ECHR 2000–XII, and Broniowski v. Poland [GC], no. 31443/96, § 147, ECHR 2004-V).

36. However, the existence of a legal basis in domestic law does not suffice, in itself, to satisfy the principle of lawfulness. In addition, the legal basis must have a certain quality, namely it must be compatible with the rule of law and must provide guarantees against arbitrariness.

37. It follows that, in addition to being in accordance with the domestic law of the Contracting State, including its Constitution, the legal norms upon which the deprivation of property is based should be sufficiently accessible, precise and foreseeable in their application (see Guiso-Gallisay v. Italy, no. 58858/00, §§ 82-83, 8 December 2005). The Court would add that similar considerations apply to interferences with the peaceful enjoyment of possessions.

As to the notion of “foreseeability”, its scope depends to a considerable degree on the content of the instrument in issue, the field it is designed to cover and the number and status of those to whom it is addressed (see, mutatis mutandis, Sud Fondi S.r.l. and Others v. Italy, no. 75909/01, § 109, 20 January 2009). In particular, a rule is “foreseeable” when it affords a measure of protection against arbitrary interferences by the public authorities (see Centro Europa 7 S.r.l. and Di Stefano v. Italy [GC], no. 38433/09, § 143, ECHR–2012). Similarly, the applicable law must provide minimum procedural safeguards commensurate with the importance of the principle at stake (see, mutatis mutandis, Sanoma Uitgevers B.V. v. the Netherlands [GC], no. 38224/03, § 88, 14 September 2010; Vistiņš and Perepjolkins v. Latvia [GC], no. 71243/01, §§ 96-98,25 October 2012).

38. The Court would, moreover, reiterate the finding in its settled case- law that the national authorities are in principle better placed than an international court to evaluate local needs and conditions. In matters of general social and economic policy, on which opinions within a democratic society may reasonably differ widely, the domestic policy-maker should be afforded a particularly broad margin of appreciation (see, for example, Stec and Others v. the United Kingdom [GC], no. 65731/01, § 52, ECHR 2006–VI).

39. In so far as the tax sphere is concerned, the Court’s well-established position is that States may be afforded some degree of additional deference and latitude in the exercise of their fiscal functions under the lawfulness test (see National & Provincial Building Society, Leeds Permanent Building Society and Yorkshire Building Society v. the United Kingdom, 23 October 1997, §§ 75 to 83, Reports of Judgments and Decisions 1997–VII; OAO Neftyanaya Kompaniya Yukos v. Russia, no. 14902/04, § 559, 20 September 2011).

40. Moreover, since in the present case the interference with the applicant’s peaceful enjoyment of possessions was incarnated by a tax measure, it is convenient to point out that retroactive taxation can be applicable essentially to remedy technical deficiencies of the law, in particular where the measure is ultimately justified by public-interest considerations. There is in fact an obvious and compelling public interest to ensure that private entities do not enjoy the benefit of a windfall in a changeover to a new tax-payment regime (see National etc., cited above, §§ 80 to 83).

c. Public interest

44. The applicant challenged the legitimacy of the aim pursued by the impugned measure. In this connection, the Court reiterates that, because of their direct knowledge of their society and its needs, the national authorities are in principle better placed than the international judge to appreciate what is “in the public interest”. Under the system of protection established by the Convention, it is thus for the national authorities to make the initial assessment as to the existence of a problem of public concern warranting measures of deprivation of property or interfering with the peaceful enjoyment of possessions. Here, as in other fields to which the safeguards of the Convention extend, the national authorities accordingly enjoy a certain margin of appreciation. Furthermore, the notion of “public interest” is necessarily extensive (see Vistiņš and Perepjolkins, cited above, § 106).

45. The Court further reiterates that the levying of taxes constitutes in principle an interference with the right guaranteed by the first paragraph of Article 1 of Protocol No. 1 and that such interference may be justified under the second paragraph of that Article, which expressly provides for an exception in respect of the payment of taxes or other contributions. However, this issue is nonetheless within the Court’s control (see paragraphs 31 and 34 above).

46. Moreover, it is naturally in the first place for the national authorities to decide what kind of taxes or contributions are to be collected. The decisions in this area will commonly involve the appreciation of political, economic and social questions which the Convention leaves within the competence of the States parties, the domestic authorities being better placed than the Court in this connection. The power of appreciation of the States parties in such matters is therefore a wide one (see Gasus Dosier- und Fördertechnik GmbH, cited above, § 60, and National etc., cited above, §§ 80-82).

48. Nevertheless, given the above margin of appreciation regarding the determination of what is “in the public interest”, granted to general measures interfering with the peaceful enjoyment of possessions, the Court accepts that the “sense of social justice of the population”, in combination with the interest to protect the public purse and to distribute the public burden satisfies the Convention requirement of a legitimate aim, notwithstanding its broadness. The Court has no convincing evidence on which to conclude that the reasons referred to by the Government were manifestly devoid of any reasonable basis (compare and contrast Tkachevy v. Russia, no. 35430/05, § 50, 14 February 2012).

However, serious doubts remain as to the relevance of these considerations in regard to the applicant who only received a contractually stipulated compensation and could not have been made responsible for the fiscal problems which the State intended to remedy. While the Court recognises that the impugned measure was intended to protect the public purse against excessive severance payments, it is not convinced that this goal was primarily served by taxation. As the Constitutional Court noticed, there was a possibility to change severance rules and reduce the amounts which were contrary to public interest, but the authorities did not opt for this course of action. However, it is not necessary for the Court to decide at this juncture on the adequacy of a measure that formally serves a social goal, since this measure is in any event subject to the proportionality test.

d. Proportionality

i. General principles

49. Even if it has taken place subject to the conditions provided for by law – implying the absence of arbitrariness – and in the public interest, an interference with the right to the peaceful enjoyment of possessions must always strike a “fair balance” between the demands of the general interest of the community and the requirements of the protection of the individual’s fundamental rights. In particular, there must be a reasonable relationship of proportionality between the means employed and the aim sought to be realised by the impugned measure (see Scordino v. Italy (no. 1) [GC], no. 36813/97, § 93, ECHR 2006-V, and also paragraph 31 above).

50. In determining whether this requirement is met, the Court reiterates that the State enjoys a wide margin of appreciation with regard both to choosing the means of enforcement and to ascertaining whether the consequences of enforcement are justified in the general interest for the purpose of achieving the object of the law in question (see Chassagnou and Others v. France [GC], nos. 25088/94, 28331/95 and

28443/95, § 75, ECHR 1999-III, and Herrmann v. Germany [GC], no. 9300/07, § 74, 26 June 2012). Nevertheless, the Court cannot abdicate its power of review and must therefore determine whether the requisite balance was maintained in a manner consonant with the applicant’s right to the peaceful enjoyment of possessions, within the meaning of the first sentence of Article 1 of Protocol No. 1 (see Jahn and Others v. Germany [GC], nos. 46720/99, 72203/01 and 72552/01, § 93, ECHR 2005-VI). In the determination of the proportionality of the measure, the Court did in the past also consider the personal situation of the applicants, including their good faith (see Vistiņš and Perepjolkins, cited above, § 120).

THE COURT’S CONCLUSION

60. Against this background, the Court finds that the measure complained of entailed an excessive and individual burden on the applicant’s side. This is all the more evident when considering the fact that the measure targeted only a certain group of individuals, who were apparently singled out as having been paid, directly or indirectly, out of the public purse. Assuming that the impugned measure served the interest of the State budget at a time of economic hardship, the Court notes that the majority of citizens were not obliged to contribute, to a comparable extent, to the public burden.

61. The Court concludes that the specific measure in question, as applied to the applicant, even if meant to serve social justice, cannot be justified by the legitimate public interest relied on by the Government. It affected the applicant being in good-faith standing and deprived him of the larger part of an acquired right (statutorily guaranteed to a large extent), serving the special social interest of labour-market reintegration. In the Court’s opinion, those who act in good faith on the basis of law or contracts should not be frustrated in their expectations without specific and compelling reasons. Therefore the measure cannot be held to be reasonably proportionate to the aim sought to be realised.

62. The foregoing considerations are sufficient to enable the Court to conclude that there has been a violation of Article 1 of Protocol No. 1.

EU and even US State taxation is not immune from application of fundamental rights and freedoms law.