What is the difference between a “charge” and a “tax”?

What is the difference between a “charge” and a “tax”? We have a "health charge" and a "waste charge" in the new Medium Term Financial Plan. Ministers are insistent it is a "charge" but not a "tax". Is this just political spin?

According to “Municipalities and Finance: A Sourcebook for Capacity Building”, edited by Nick Devas. Ian Blore and Richard Slater, it is dependent on how it is implemented. A charge is linked to a deniable service, a tax is mandatory.

“From the point of view of implementation, the essential difference is that the former implies that the payer can somehow he denied access to a service if they do not pay. That usually makes the charge payer more willing to pay and may reduce, though not eliminate, the need for capacity to enforce collection that is so important for taxation.”

Hence with social security, non-payment can lead to denial of access to medical treatment without paying the full sum, and loss or diminution of any pension rights. This has nothing to do with it being called a “charge” or a “tax”, it is to do with how it is linked to services provided by the States, in this instance, medical care and pensions.

So where does the “health charge” come into the equation. Non-payment of the health charge would not lead to reduction or denial of healthcare, but just as with income tax, it would lead to the imposition of fines. It doesn't fit as a charge.

In “The Greening of International Law: Emerging Principles and Rules” by Philippe Sands, he looks in an environmental context where:

“The difference between a charge and a tax relates to the way in which the revenues are allocated: tax revenues are added to the general public budget while charge revenues are used specifically to finance environmental measures.”

The waste charge levied on businesses is clearly used the finance disposal of waste, so it is related to an environmental measure.

But looking at this as a more general principal, this rule would mean that charges are hypothecs, whereas taxes go into the general revenue. The hypothecation of a tax (also known as the ring fencing or ear marking of a tax) is the dedication of the revenue from a specific source for a particular expenditure purpose.

But is all the income raised by the health charge put directly to the health budget? Or does it go into the “general pot”? That would seem to be crucial in looking at this revenue stream.

The paper by the Tax Foundation, “How Is the Money Used? Federal and State Cases Distinguishing Taxes and Fee” suggests this distinction:

• The public understanding of “tax” aligns with the widely understood definition of a tax as a charge imposed with the primary purpose of raising revenue.
• This is in contrast to a “fee,” a charge imposed for the primary purpose of recouping costs incurred in providing a service to the payer, and a penalty, a charge imposed for the primary purpose of punishing behaviour.

In this sense, the health charge must be considered a tax and not a charge.

What about Alan Maclean’s reply to the criticism that it was a health charge, and not a health tax, because taxation did not have upper capped limits?

This simply doesn’t hold true. High net worth individuals only pay a capped amount on basic income tax. As Price Waterhouse explains:

“The standard rate of income tax is 20%, however there is a special and beneficial tax regime for incoming HNWs. Jersey rental income is always taxable at 20%, but for other income the first £625k is taxable at 20% and the balance at 1%. Through pre-immigration structuring it is possible to effectively cap a HNW’s Jersey income tax liability at £125k.”

No one is suggesting that they are paying an “income charge” rather than “income tax”, and all assessments of their tax position use the term “income tax”. Yet this is an income tax, which is capped for some individuals. Taxes can be capped: that's a principle established by Jersey's own system of taxation.

So why is there so much political will to say that the term “charge” should apply rather than “tax” when for a considerable number of tax payers, even those on marginal relief, it means the basic rate of income tax has effectively increased?

The answer can surely be found in “The Differences Between Taxes & Fees” by Michael Wolfe in which he notes:

“Sometimes, a tax will be incorrectly labelled as a fee, often for political reasons. For example, if a politician wishes to keep a promise that he will not raise taxes, but still wishes to increase government revenue, he may push for an increase in certain kinds of taxes that can be labelled as fees. This is because, for voters, a "fee" does not always have the same loaded political connotations that taxes do.”

That, of course, is exactly what the Ministers are doing when they “correct” any use of the term “tax” to apply to what they would like to call a “health charge”. It is a fiction which fools no one, unless perhaps those promoting this particular piece of propaganda actually are naive enough to believe it themselves.

"When I use a word," Humpty Dumpty said in rather a scornful tone. "It means just what I choose it to mean - neither more or less."