This blog has sometimes noted the contribution that legal philosophy can make to understanding matters of tax law and policy: for instance, using Hart’s “Core and Penumbra” analogy to understand how the limits of language can result in tax avoidance, or how Tony Honore and Joseph Raz can help us to understand why people pay taxes. To this end, the collection Philosophical Foundations of Tax Law edited by Monica Bhandari of UCL is a must read for those interested in the insights in to tax that can be gleaned from legal philosophy. In that collection, Professor David Duff has written about Dworkin’s conception of equality and redistributive taxation – using Dworkin’s work to argue for progressive income and wealth transfer taxes as essential elements of a just tax system. It could also be said that Dworkin’s conception of equality could be used to explain the approach of UK tax law to the deductibility of expenses and the “wholly and exclusively” rule and also point out a flaw.

Duff writes as follows about Dworkin (footnotes omitted):

“For this purpose, Dworkin relies on two principles of what he calls “ethical individualism”: (1) a principle of “equal importance” that requires any political community that exercises dominion over and demands allegiance from its citizens to treat them with equal concern; and (2) a principle of “special responsibility” that regards individuals as having a particular responsibility for the choices that shape their lives. While the first principle “requires government to adopt laws and policies that insure that its citizen’s fates are, so far as government can achieve this, insensitive to who they otherwise are – their economic backgrounds, gender, race, or particular sets of skills and handicaps,” the second principle “demands that government work, again so far as it can achieve this, to make their fates sensitive to the choices that they have made.” Together, these principles define a conception of distributive justice that distinguishes between a person’s circumstances and their choices, making the justice of distributive outcomes as insensitive as possible to people’s circumstances and as sensitive as possible to their choices.”

It is this idea of insensitivity to circumstance as against sensitivity to choice that can help us to understand the “wholly and exclusively” rule. By way of brief background, in the case of a trade that is carried on, expenses will be deductible if they are of a revenue and not capital nature and “wholly and exclusively” incurred for the purposes of the trade. There have been many battles over the years about the meaning of “wholly and exclusively”, with the cases themselves being highly fact sensitive and at times difficult to reconcile. However, one can see a trend of ignoring circumstance and respecting choice in deciding whether expenses are deductible: if the expense is incurred ordinarily in a trade, the courts will respect this, applying this equally to all in those circumstances, but where the expense instead a matter of personal choice, then the courts will reject its deductibility.

For instance in the case of a barrister purchasing a “wig and gown” will be an inevitable expense incurred wholly and exclusively for practising at the bar. The purchase of dark clothes however is not a cost that only relates to the trade, as the clothes can be worn more generally. The decision not to do so might be a personal choice, but that should not be a concern of the tax rules (see Mallelieu v Drummond). If a personal is ill and decides to go to a private hospital where she or he may conduct business, again this is a personal choice given that healthcare is free generally in this country (see Murgatroyd v Evans-Jackson). So too is the personal choice to live in a different town to where one permanently works necessitating the incurrence of travelling costs – these should not be deductible (Newsom v Robertson).

But therein lies the problem: the two principles of Dworkin’s ethical individualism, equal importance and special responsibility, are intimately linked and at times inseparable– the choices that we make may be dictated by our circumstances. Some choices are only open to certain people, and some people will never be required to make certain choices. In the context of deductibility of expenses we can see this playing out perversely in that some trades provide significant freedom as to how expenses should be incurred and yet still remain whole and exclusive. Though all engaged in trades may deduct expenses wholly and exclusively incurred (“equal importance”), some trade expenses de facto allow for personal choice, even though such choice should otherwise be respected (“special responsibility”). A plumber cannot deduct lunch expenses generally, but what about a barrister having a client meeting over lunch at work? A painter cannot deduct the cost of a holiday to Spain, but an academic conference could well take place there.

Thus fundamental rules of the tax system, such as those concerning the deductibility of expenses, might seem facially neutral while in reality providing advantages to certain taxpayers.