Principles of Good Tax Policy
Annette Nellen
San José 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 Smith’s 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 add’l 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
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 & 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 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 & 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 non-itemizers
No problem with:
Problem areas:
• Convenience of
payment
• Equity (how are taxable income and
ability to pay to be measured?)
• Transparency
• Certainty (more recordkeeping)
• Appropriate
government
revenues
• 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-commerce
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-commerce
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-commerce
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?
Comments?