CLASH OR COEXISTENCE OF PRINCIPLES OF EFFICIENCY AND EQUITY IN TAXATION IN LIGHT OF THE (EUROPEAN) SOCIAL CONSTITUTIONALISM

Abstract

The framers of the Croatian Constitution envisioned the modern Republic of Croatia as a social state founded on the principle of social justice. The Croatian Constitutional Court has further emphasized the importance of this social dimension as an integral part of the broader concept of European social constitutionalism. The idea of social justice, however, does not exist in a theoretical legal vacuum; rather, it is operationalized through various social provisions of the Constitution and a wide array of regulations aimed at their concretization. One of the key manifestations of this constitutional concept is the principle of fairness (equity) in taxation, which represents an emanation of the social state and the principle of social justice in the field of taxation. As a constitutional principle, tax equity encompasses both vertical and horizontal equity and implies the establishment of a fair tax system based on the taxpayer’s economic capacity. Such an understanding of tax equity presupposes a progressive tax system, which challenges the prevailing economic notion of equity founded on the principle of proportionality. This divergence raises the question: can the constitutional and economic concepts of tax fairness as well as the request for efficiency in taxation be reconciled? The paper argues that such reconciliation is indeed possible. The constitutional principle of tax equity requires the progressivity of the tax system as a whole, but it does not mandate that every individual tax or tax rate be progressive. Nor does it require the exclusive use of progressive tax rates, allowing the legislator to employ alternative mechanisms to mitigate the regressive effects of certain taxes and to achieve overall system progressivity. This approach affords the legislator a wide margin of appreciation in designing tax policy and does not exclude the economic understanding of tax equity based on proportionality. In this context, compliance with constitutional principles of taxation is subject to restrained constitutional review. The following research is conducted using methods of legal analysis, including both the textual interpretation of the constitutional text, as well as the legal argumentation adopted in the practice of the Croatian Constitutional Court. Additionally, the analysis of the secondary (scientific) sources is used. This way, the substance of the constitutional principle of tax equity is deduced and brought in connection with the constitutional principles of social state and social justice and then compared with the economic request for achieving efficiency in taxation.