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Principles of Good Tax

Policy
Annette Nellen
San Jos State University

Presentation Overview
Purpose of the statement
Overview to the 10 principles
Examples of application of the 10
principles

Tax Policy Concept Statement


#1
Guiding Principles of Good Tax Policy:
A Framework for Evaluating Tax Proposals
product of the policy, legislation & simplification
committee
created as preliminary step to analyzing tax
reform proposals
but - also useful for analyzing any tax proposal any size, any degree, any level
basically - Adam Smiths tenets + 6 more

Purpose of the Framework


To answer the question:
How should proposals to change
existing tax rules be analyzed?

To be short and to the point.


To be a prelude to series of addl tax
policy papers.

Equity & Fairness


Similarly situated taxpayers
should be taxed similarly.
Horizontal and vertical equity.
Fairness (or really, the perception of fairness).
Should really look at entire range of taxes a taxpayer is
subject to.

Certainty
Tax rules should specify when the tax is to
be paid, how it is to be paid, and how the
amount to be paid is to be determined.
Certainty, rather than ambiguity.
Ability to determine tax base and rate.
Basically, the level of confidence that exists that
the tax is being calculated correctly.

Convenience of Payment
A tax should be due at a time or in a
manner that is most likely to be
convenient for the taxpayer.
Helps ensure compliance.
Appropriate payment mechanism depends on
amount of liability and ease of collection.

Economy of Collection
The costs to collect a tax should be kept
to a minimum for both
the government and taxpayers.
How many revenue officers are needed?
Closely related to simplicity principle.

Simplicity
The tax law should be simple so that
taxpayers can understand the rules and
comply with them correctly and in a
cost-efficient manner.
Reduces the amount of errors.
Increases respect for the system.
Enables taxpayers to understand tax consequences
of their transactions.

Neutrality
The effect of the tax law on a taxpayers
decisions as to how to carry out a particular
transaction or whether to engage in a
transaction should be kept to a minimum.
Taxpayers should not be unduly encouraged or
discouraged from engaging in certain activities due to
tax law.
Primary purpose of tax system is to raise revenue, not
change behavior.

Economic Growth &


Efficiency
The tax system should not impede or
reduce the productive capacity
of the economy.
Tax system should be aligned with the economic
goals of the jurisdiction imposing the tax.
For example, should be aligned with jurisdictions economic goals
for economic growth, capital formation and intl competitiveness.
Should not favor one industry or type of investment at the
expense of others.

Transparency & Visibility


Taxpayers should know that a tax exists
and how and when it is imposed upon
them and others.
Enables taxpayers to know the true cost of
transactions.
Enables taxpayers to know when tax is being
assessed or paid and to whom.

Minimum Tax Gap


A tax should be structured to
minimize noncompliance.
Tax gap = amount owed less amount collected.
Procedural rules needed to attain compliance.
Generally, is a need to strike a balance between (a)
desired level of compliance and (b) costs of
enforcement and the level of intrusiveness of the
tax system.

Appropriate Government
Revenues
The tax system should enable the government
to determine how much tax revenue will
likely be collected and when.
Need to have some level of predictability and reliability
to enable governments to know how much will be
collected and when.
Generally, government realizes better stability with a
mix of taxes.

Challenges
Desire to use the tax law for more
than raising revenue.
Frequent changes to the tax laws.
Not all ten principles can be achieved
to same degree for all proposed
changes - need to strike a balance
though.

Example: Armey Flat Tax


Mostly meets:

Needs work:

Certainty

Equity & fairness

Convenience of payment

Neutrality

Economy of collection

Economic growth and


efficiency

Simplicity
Minimum tax gap

Transparency
Appropriate government
revenues

Example: Charitable
deduction for nonitemizers
Problem areas:
No problem with:
Convenience of
payment
Transparency
Appropriate
government
revenues

Equity (how are taxable income and


ability to pay to be measured?)
Certainty (more recordkeeping)
Simplicity (not as simple as just
taking the standard deduction)
Neutrality (tax law would encourage
donations)
Minimum tax gap (many might believe
they should claim something)

Example: SUT and Ecommerce


Equity:
Internet vendors and Main Street really are not similarly situated,
so should compliance rules apply similarly?
Possible solutions:
require Main Street retailer to charge SUT based on where
customer lives
use origin approach
compensate vendors
third party collector funded by government
use a different form of consumption tax which consumer
computes

Example: SUT and Ecommerce


Certainty, Economy in Collection,
Simplicity
6000+ taxing jurisdictions creates uncertainty & complexity
Possible solutions:
uniform rules among jurisdictions; streamlined system
third party collection
better use of technology
federal level tax as a replacement (a VAT?)

Example: SUT and Ecommerce


Neutrality, Minimum Tax Gap,
Appropriate Government Revenues
if SUT not charged by seller and state doesnt enforce use
tax, neutrality is not achieved
Possible solutions:
educate consumers about use tax
simplify and unify rules
improved use of technology
replace SUT with an easier consumption tax

Questions?
Comments?

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