Principles of Good Tax Policy

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Principles of Good Tax Policy

• Annette NellenSan José State University

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Tax Policy Concept Statement 1

• Guiding Principles of Good Tax Policy A
  Framework for Evaluating Tax Proposals
• created by AICPA as preliminary step to analyzing
  tax reform proposals
• Joint Venture SV Network converted it into a
  workbook well use that in class
• but - also useful for analyzing any tax proposal
  - any size, any degree, any level
• basically - Adam Smiths tenets 6 more

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Purpose of the Framework in our MUSE Course

• To answer the question
• Is Proposal X to use the tax law to protect or
  reduce harm to the environmental a good tax
  proposal?
• If not, why not and can it be improved?

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Fairness
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1. Equity Fairness

• Similarly situated taxpayers should be taxed
  similarly.

• Horizontal and vertical equity.
• Fairness (or really, the perception of
  fairness).

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2. 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.

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Operability
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3. 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.

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4. 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.

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5. 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.

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6. 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.

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7. 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.

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8. 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.

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Appropriate Purpose and Goals
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9. 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.

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10. 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.

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Challenges

• Politics
• Not all ten principles can be achieved to same
  degree for all proposed changes - need to strike
  a balance though.
• Should tax law be used to influence human
  behavior towards the environment?
• Is a useful way to implement polluter pays, but
  not the only way (permits, fees, etc.)

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Example 12 Increase in Gas Tax

• Mostly meets
• Certainty
• Convenience of payment
• Economy of collection
• Simplicity
• Minimum tax gap
• Appropriate government revenues

• Needs work
• Equity fairness
• Transparency
• Neutrality
• Economic growth and efficiency

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What would be better than a 12 gas tax increase?

• Depends on what youre trying to accomplish?
• Have all costs of gas production and usage been
  identified?
• What will money be used for?
• General fund?
• Specific purpose?

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Additional comments?