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

• AICPA - Guiding Principles of Good Tax Policy A
  Framework for Evaluating Tax Proposals
• 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

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Purpose of the Framework

• To answer the question
• How should proposals to change existing tax
  rules be analyzed.

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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.

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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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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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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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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 (intentional and
  unintentional).
• Increases respect for the system (and therefore
  higher compliance).
• Enables taxpayers to understand tax consequences
  of their transactions.

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Why are federal income taxes so complex today?

• Use of IRC to do more than raise revenue.
• Numerous and frequent changes.
• Complex transactions.
• Anti-abuse rules.
• Law makers dont prepare own returns.
• Desire for accuracy in measuring TI.
• Desire to limit certain rules to certain
  taxpayers (EX phase-outs, special definitions,
  etc.)
• Lack of political will or perhaps true
  simplification constituency.

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AICPA Guiding Principles for Tax Simplification

• Make simplification a priority
• Seek simplest approaches
• Minimize compliance burdens
• Reduce frequency of tax law changes
• Consider administrative burdens
• Avoid limited applicability

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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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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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Neutrality vs. Economic Growth

• In conflict?
• Not necessarily.
• Taxes do have impacts.
• EX need depr rule to measure TI. 30 yr life vs
  3 year life for chip manuf equip will both
  measure TI, but have different economic effects.
• Should be cognizant of what economic goals are
• Also, govt may WANT to have an impact through
  the tax law to achieve an economic goal. EX
  bonus depr on new equipment research credit

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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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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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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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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.

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Example Charitable deduction for non-itemizers

• 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)

• No problem with
• Convenience of payment
• Transparency
• Appropriate government revenues

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In-class examples

• Increase excise tax on motor fuel by 12 per
  gallon
• New federal tax collected by states to help
  reduce GHG and preserve oil