Ask the business community about retrospective taxation and they will tell you that it is an absolute “no” in their books. Retrospective application of tax law is the means by which a government charges or levies (usually) additional tax by way of an amendment from a specified date in the past. In the United States, few states have such retrospective tax laws but several, such as Georgia and Texas, have constitutions that flatly prohibit their legislatures from enacting any law with retroactive application — this includes tax laws. Minnesota prohibits retroactive legislation by statute; laws are presumed to apply prospectively, unless the legislature intended retroactive applicability, and that intent is clearly expressed in the law.
Why is the retrospective application of tax law generally frowned upon? The main reason simply comes down to one that of fundamental fairness. It’s like changing the rules of a game after you have won the tournament. Would the winning team like it if their trophy was taken away from them by the match organisers who enacted a retroactive rule after the game and changed their mind on why the team does not deserve to win? As children, we would crib about such unfairness. Well, grown-ups would too if it affected their incomes or businesses.
The function of any business-friendly environment is to enact laws to provide a stable legislation where by people can be fairly confident of the effects of their actions when it comes to legalities and liabilities. Retroactive tax laws are restrictive to the ability for people and business to make long term plans. It creates risk and uncertainty in operating any business.
Retroactive legislation also encourages lawmakers to act arbitrarily and come off as irresponsible. Their actions can result in litigation — which it often does — especially in the business world. Such actions are also often criticised by opponents as ‘politically motivated’ and targeting specific people or businesses. Legislators must keep in mind that a court can overturn a statute; so this encourages precise and careful drafting of a tax law.
The crux of the problem in regards to retrospective application of tax laws, according to some experts, is that politicians and their decisions to go after the accused are driven by populist views. Going after a safer political target to extract more money to pay off an increasing public debt. But this often results in their successors having to deal with fallout. The 14th Amendment of the US Constitution requires due process of law before a person can be deprived of life, liberty, or property. The legislature should be aware that the retroactive implementation of taxing power can be abused, therefore safeguards should be drafted to reduce the possibility.
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