Principles of Good Tax Principles of Good Tax PolicyPolicy

Annette NellenSan José State University

Presentation OverviewPresentation Overview

• Purpose of the statement

• Overview to the 10 principles

• Examples of application of the 10 principles

Tax Policy Concept Tax Policy Concept Statement #1Statement #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 Smith’s tenets + 6 more

Purpose of the FrameworkPurpose 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 add’l tax policy papers.

Equity & FairnessEquity & 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.

CertaintyCertainty

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 PaymentConvenience 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 CollectionEconomy 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.

SimplicitySimplicity

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.

NeutralityNeutralityThe effect of the tax law on a taxpayer’s

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 & Economic Growth & EfficiencyEfficiency

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 jurisdiction’s economic

goals for economic growth, capital formation and int’l competitiveness.

– Should not favor one industry or type of investment at the expense of others.

Transparency & VisibilityTransparency & 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 GapMinimum 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 Appropriate Government RevenuesRevenues

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.

ChallengesChallenges

• 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 TaxExample: Armey Flat Tax

Mostly meets:

• Certainty

• Convenience of payment

• Economy of collection

• Simplicity

• Minimum tax gap

Needs work:

• Equity & fairness

• Neutrality

• Economic growth and efficiency

• Transparency

• Appropriate government revenues

Example: Charitable Example: Charitable deduction for non-deduction for non-itemizersitemizersNo problem

with:

• Convenience of payment

• Transparency

• Appropriate government revenues

Problem areas:

• 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 E-Example: SUT and E-commercecommerce

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 E-Example: SUT and E-commercecommerce

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 E-Example: SUT and E-commercecommerce

Neutrality, Minimum Tax Gap, Appropriate Government Revenues

• if SUT not charged by seller and state doesn’t 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?Questions?

Comments?Comments?