The Economics Of Taxation

5 Key excerpts on "The Economics Of Taxation"

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  eBook - ePub

  Handbook of Public Sector Economics

  • Donijo Robbins(Author)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

  As shown in this chapter, consumer behaviors reflect the tax code in a myriad of ways, which in turn influence the revenues needed to maintain the programs and services that citizens need most. From increased spending and income reporting, to savings behaviors and marital status, tax policies and the principles of taxation involve more than the efficient collection of revenues. Rather, taxation and tax reform involve considerations of equity, social policy and income redistribution — public policy issues, which continue to be ripe for further scholarly investigation. Finally, although the future of the tax system and tax rates is undoubtedly one of life’s uncertainties, we can all rest assured that paying taxes is not.

  References

  1. Aaron H.J., Pechman J.A. Introduction and summary. In: Aaron H.J., Penchman J.A., Eds. How Taxes Affect Economic Behavior. Washington, The Brookings Institution, 1981, pp. 5–25.
  2. Agell J., Persson M., Sacklen H. Labor Supply Predication When Tax Avoidance Matters. FIEF Working Paper Series 1999, No. 157.
  3. Allingham A.G., Sandmo A. Income tax evasion: a theoretical analysis. Journal of Public Economics , 1:323–338, 1972.
  4. Alm J. What is an “optimal” tax system? In: Slemrod J., ed. Tax Policy in the Real World. Cambridge, U.K.: Cambridge University, 1999, pp. 363–379.
  5. Alm J., Whittington, L. Shacking up or shelling out: income taxes, marriage and cohabitation. Review of Economics of the Household I, 169:186, 2003.
  6. Arrow K. Social responsibility and economic efficiency. Public Policy , 21:303–317, Summer 1973 in Baker S. and Elliott C., Eds. Readings in Public Sector Economics. Lexington, MA: D.C. Heath and Company, 1990, pp. 26–37.
  7. Atkinson A.B., Stiglitz, J.E. Lectures on Pubic Economics. New York: McGraw-Hill, 1980.
  8. Auerbach A.J. Measuring the impact of tax reform. In: Slemrod J., Ed. Tax Policy in the Real World. Cambridge, U.K.: Cambridge University, 1999, pp. 353–361.
  9. Auerbach A.J., Hines J.R. Taxation and economic efficiency. In: Auerbach A. and Feldstein J., Eds. Handbook of Public Economics . Amsterdam: North-Holland/Elsevier, 2002.
  10. Auerbach A.J., Burman L.E., Siegel J.M. Capital gains taxation and tax avoidance: new evidence from panel data. In: Slemrod J., Ed. Does Atlas Shrug? The Economic Consequences of Taxing the Rich.

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  Global Perspectives on E-Commerce Taxation Law

  • Subhajit Basu(Author)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  8

  Three features of taxation are especially important. First, tax law should be simple to enable taxpayers to better understand the tax consequences of their economic decisions, and it should not influence their economic decisions. That is, taxpayers should not be unduly encouraged or discouraged from engaging in certain activities or taking certain courses of action primarily due to the effect of the tax law on the activity or action. Second, the distribution of taxation’s impact across the population raises issues of equity, or fairness, which must be given substantial weight even if it entails costs in terms of economic efficiency. Third, the practical enforceability of tax rules and the costs arising from compliance are important considerations; more so since these are both affected by, and have implications for, the efficiency and public perceptions of the fairness of tax systems.9 From an overall policy perspective, perhaps the best tax system is one that matches the benefits received with the costs of the system, providing the greatest utility to citizen taxpayers who, through political measures, can determine the desired amount of public services they wish to see funded.

  The 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. A person’s tax liability should be certain rather than ambiguous. A tax system’s rules must enable taxpayers to determine what is subject to tax (the tax base) and at what tax rate(s). Taxpayers should be able to determine their tax liabilities with reasonable certainty based on the nature of their transactions. If the transactions subject to tax are easy to identify and value, the principle of certainty is more likely to be attained. On the other hand, if the tax base is dependent on subjective valuations or transactions that are difficult to categorize, the principle of certainty might not be attained. In addition, how the taxes are paid and when the taxes are due should be spelled out in the applicable laws, as well as in the tax forms and instructions. Certainty is important to a tax system because it helps to improve compliance with the rules and to increase respect for the system. Certainty generally comes from clear statutes as well as timely and understandable administrative guidance that is readily available to taxpayers. The principle of certainty is closely related to the principle of simplicity. The more complex the tax rules and system, the greater is the likelihood that the certainty principle will be compromised.

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  Taxation by Political Inertia

  Financing the Growth of Government in Britain

  • Richard Rose, Terence Karran(Authors)
  • 2018(Publication Date)
  • Routledge

    (Publisher)

  It is attractive for politicians averse to raising tax rates and broadening the tax base to rely upon economic growth rather than increased tax effort to produce more tax revenue. Each increase in tax effort induces a disproportionate decrease in take-home pay. If a government claims 40 per cent of the national product in taxation, an increase in tax effort to 45 per cent will reduce the private-sector share by 8.3 per cent (that is, from 60 to 55 per cent).

  The reasons why government favours economic growth are multiple: in a booming economy there is a lot more money to spend, and fewer political difficulties. Moreover, as economic growth is cumulative, in the course of a five-year Parliament an annual growth rate of 2.5 per cent will, by a process of compounding, increase the national product by 16 per cent, and total tax revenue with it.

  Viewing the economy as a source of tax revenue imposes a one-dimensional perspective upon a multi-dimensional set of activities. Models of the economy designed to illustrate processes important in economic theory often give very little attention to taxation. From a broad economic perspective, issues of prices and wages, investment and growth and foreign exchange rates appear of pervasive importance. Taxation appears only as an intervening variable in the economic system as a whole (Wallis et al., 1984). In many contexts, taxation can be seen as a fiscal instrument used for ulterior, non-revenue ends. Economic activities are reduced by tax laws to such categories as taxable income, or goods liable to value added tax. The flow of income and expenditure through the economy is not the concern of tax authorities, whose primary job is to divert a portion of that flow to the fisc through appropriate administrative means.

  Certainty and Predictability

  Government is concerned with the certainty of revenue and, because budgets are statements about future taxing and spending, about the predictability of revenue. A good tax is not only easy to collect but also will yield an amount of revenue that can be predicted when forecasts are required for the budget in the year ahead. Otherwise the Treasury may make policies based upon misleading assumptions about the public-sector borrowing requirement, the difference between the forecast total expenditure and total revenue.

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  Policy and Choice

  Public Finance through the Lens of Behavioral Economics

  • William J. Congdon, Jeffrey R. Kling, Sendhil Mullainathan(Authors)
  • 2011(Publication Date)
  • Brookings Institution Press

    (Publisher)

  44 Motivational crowding out occurs when strengthening extrinsic incentives causes intrinsic incentives to weaken. In the case of tax compliance, to the extent that latent other-regarding preferences push individuals in the direction of compliance, policymakers must be careful not to impose extrinsic motivations, such as penalties and fines, at levels or in forms that are likely to crowd out intrinsic motivations. The possibility of crowding out might make the returns to increased enforcement activities smaller than would be assumed in the standard model.

  Tax Policy Design

  Given the need for revenue to fund the various functions of government and given some understanding of the welfare consequences of taxation, the goal of tax policy is to raise sufficient revenue in ways that have desirable welfare properties. That includes setting the form and parameters of tax policy so as to raise taxes efficiently, in the sense that the taxes minimize the social costs due to distortions. It also requires implementing tax policy so that the burden of taxes is distributed in ways that correspond to social goals and preferences for equity and incidence. And, finally, it is a matter of designing and implementing tax policy to promote compliance, minimize distortions due to avoidance and evasion, and minimize enforcement costs. The welfare analysis of taxation generates lessons for how tax policy design can achieve those goals, and a behavioral approach to understanding the welfare consequences of taxation leads to corresponding revisions for tax policy design.

  The standard model identifies features of tax policy that have desirable properties along the lines of efficiency, equity, and compliance. They usually are summarized in broad terms as rules of thumb for tax design. For example, taxing relatively inelastic goods or activities tends to be efficient. Similarly, establishing low tax rates on wide tax bases generally is more efficient than setting higher rates on narrower bases. In practical terms, that often calls for tax simplicity and a tax base that has few exclusions and exceptions. For incidence, the main implication for policy is its relative neutrality. That is, while policy can be mindful of the way in which relative elasticities determine incidence, it cannot in general determine economic incidence by setting legal incidence. Finally, under some standard assumptions, avoidance is fully captured by the relevant measures of elasticity, and so again, taxes on activities for which there is less response and fewer margins for avoidance may be preferred.

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  Making Policy Work

  • Peter John(Author)
  • 2011(Publication Date)
  • Routledge

    (Publisher)

  Chapter 4 ). The other advantage is that taxation may be economically efficient because if the desired action is priced properly, then it allows other decision-makers, such as consumers and firms, to organise themselves in response to the new set of costs. If a non-desired activity, such as a short-hop plane ride, is priced to include the social cost, somebody who really needs to do it for personal or business reasons still can – it is just that the cost has been allowed for. This would be more efficient than banning internal flights in the United Kingdom, for example. The idea is that the economy and personal welfare do not lose out disproportionately from environmental regulation.

  The problem with taxes is that it is not easy to control exactly what happens as a result. It is up to the individual or organisation to respond to the incentive, which is hard to tie to a preferred form of behaviour or to ensure the response is not just strategically designed to do the minimum to get the tax benefit (though this is not just a problem with taxes). Also individuals may be inattentive to the incentives of the tax system. Much work in economics shows the lack of knowledge individuals have of their marginal tax rates (Lewis, 1982 ). If individuals do not know what their tax rates are, this would effectively nullify the effects of this instrument. In fact, people are aware of some tax rates. Research shows that tax rules tend to have an effect. For example, the timing of marriages has been found to be based on changes in marginal tax rates, as a study comparing changes in tax policy in Canada and England and Wales shows (Gelardi, 1996 ). But individuals often respond as much to how the message is framed as the tax itself (McCaffery and Baron, 2004 ). The response depends on the presentation of taxes, in particular whether they are visible or not, which relates to the debate in Chapter 6 on information. For example,

  Chetty et al

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