On The Taxability Of Illegal Income

This article scans and evaluates the taxability of illegal income from the perspective of basic principles of tax law. Although the taxability of illegal income is discussed by all circles from different perspectives, the common recognition has not been achieved. The author holds that the key reason of forming the situation of "everything goes"lies in lacking a uniform evaluation standard. From the perspective of the basic principles of the tax law, this article tries to measure the taxability of illegal income through the principle of taxation legalism and the principle of taxation fairness. The article can be divided into five chapters. Chapter 1: the question and the definition. On the issue of whether illegal income is taxable or not, there exist two opposite viewpoints in theory circle, which results in confusion in the execution of the tax law, therefore, it is necessary to clarify the issue. The last two sections in chapter 1 define the two important conceptions discussed in the article: one is "taxability'; the other is "illegal income". For taxability, by reviewing the related discussions of each scholar, the author holds that three aspects should be grasped to define whether the target is taxable: the first aspect is to measure taxability and to judge whether there are legal bases to collect tax for certain target or object under the current established tax law system; the second aspect is the taxability on the level of legislation, that is to say, whether the certain target or object should be regulated theoretically when it is not regulated in current established law; the third aspect is the measurement of feasibility, namely, when a certain target or object is taxable in theory, whether it can be imposed effectively in practice. For "illegal income", though we can give it such a definition as "the income acquired through illegal acts is illegal income; while any act going against laws or mandatory provisions, or against the principle of public order and convention, is illegal act", it is hard to draw valuable conclusions from seeking the taxability through such a conception with so wide extension. The article tries to classify illegal income into two categories: one is the illegal income with certain market open and with no market open; the other is the validated illegal income and the illegal income not validated. Chapter 2: the evaluation standard of taxability. The debate on the taxability of illegal income mainly concentrates on four aspects. With the lack of evaluation standard and the expatiation using general "illegal income", the debaters choose one of the illegal incomes to represent the whole illegal incomes, thus the specious conclusions they made are with little persuasion. The taxability of illegal income is an issue of tax law. Under the case of no explicit text in law, the best method is to use the basic principles of tax law to make measurements and judgments. Chapter 3: discussing the taxability of illegal income from the principle of taxation legalism. Considered as "law violating rights", tax law is concerned with the protection of peoples'rights of property, so both the taxation collecting and paying should be prescribed by law explicitly. Evaluating the taxability of illegal income from taxation legalism, the major issue is to judge whether illegal income belongs to the taxable income prescribed in individual income tax of our country. Through analyzing three specific illegal incomes of prostitutes, management without licenses and bribery corruption, the author finds that different illegal income can draw different conclusions. Applying current tax law provisions, the management without licenses can be imposed as "incomes of the production and management of privately or individually-owned business"; bribery can also be imposed as "work recompense income"if it is produced with the name of "doing a favor"and seized by tax organs; the income form of prostitutes should be analyzed specifically: for those who claim money from employers with the name of "wages", tax collection can be done with the name of "income of wages and stipends"; while for the income from prostituting simply, there is handicap in tax law application and it seems to be with no taxability. Thus, from the perspective of taxation legalism, we should discuss illegal income from its concrete forms instead of making general discussion. Chapter 4: discussing the taxability of illegal income from the principle of taxation fairness. The principle contains two fundamental demands: the horizontal fairness and the vertical fairness. The horizontal fairness demandsthat people with equivalent qualifications should pay equivalent tax revenue; the vertical fairness demands that people with different qualifications pay different tax revenue. The taxation fairness has three measuring standards: one is the principle of opportunity; second is the principle of benefit, and the third is the principle of tax paying ability. Each of the three standards has its reasons and values to exist. Generally, people think the optimal one for modern countries is to measure the ability of tax paying. Therefore, when examining whether illegal income taxable, we should first judge the ability of tax paying. It can be said that illegal income has the ability of tax paying just the same as legal income. Hence, illegal income has the basic precondition for its taxability. However, tax revenue should be "limited to the open part of market". The target with no market open is not taxable due to two factors, which also can be considered as the relativity of fairness. First, for those targets with no market open, it is hard for tax organs to handle them and they cannot be imposed effectively but are possible to result in new injustice; second, if those targets with no market open are treated as objects of tax paying, and extensive investigation power is given to tax organs, it is quite possible for tax organs to largely interfere into individuals'private domain with the name of tax collecting, which makes freedom free from protection. Even if some illegal incomes have the ability to pay tax, we can not say all the illegal incomes are taxable. Illegal incomes affirmed by related organs and are regulated in other laws, it's not necessary for tax law to interfere, while for those unidentified illegal incomes, decisions should be made according to the openness; tax law can not intervene into the incomes with no market open; for incomes with market open, it is not only necessary but also possible for tax law to regulate, thus they are taxable and should be arranged in legislation. Chapter 5: two related issues. When discussing the taxability of illegal income, debaters often quote the tax efficiency. In the opinion of people who are for the taxability of illegal income, it is certain that tax authorities will be asked to define the nature of income before collecting taxes if taxable incomes are limited to legal incomes, which doesn't accord with the principle of tax efficiency; while in the opinion of discommenders, generally, illegalincomes are so covert that tax authorities have to spend lots of time and money to make investigation, which is also inefficient. Neither of the two debating parties discusses illegal income from the concrete forms, therefore they just argue from certain profile. The tax efficiency is not influenced if collecting taxes on those illegal income with market openness. If the illegal income is confiscated by related authorities after the tax is collected, it is not necessary to return the tax. The main reasons are: generally speaking, both tax and the confiscated illegal income belong to the treasury; Legislators should consider such a mechanism: if the illegal income should be sent back to the third party, the tax should be allowed to return or even directly give back to the third party.