Tax Policy: Mastering Tax Policy, Navigating the Fiscal Maze for Financial Empowerment

By Fouad Sabry

What is Tax Policy

Tax policy refers to the guidelines and principles established by a government for the imposition and collection of taxes. It encompasses both microeconomic and macroeconomic aspects, with the former focusing on issues of fairness and efficiency in tax collection, and the latter focusing on the overall quantity of taxes to be collected and its impact on economic activity. The tax framework of a country is considered a crucial instrument for influencing the country's economy.

How you will benefit

(I) Insights, and validations about the following topics:

Chapter 1: Tax policy

Chapter 2: Tax

Chapter 3: Deadweight loss

Chapter 4: Income tax

Chapter 5: Public finance

Chapter 6: Tax noncompliance

Chapter 7: Tax cut

Chapter 8: Tax competition

Chapter 9: Direct tax

Chapter 10: Indirect tax

Chapter 11: Tax incidence

Chapter 12: Optimal tax

Chapter 13: Tax efficiency

Chapter 14: Taxation in China

Chapter 15: Laffer curve

Chapter 16: Taxation in Germany

Chapter 17: Theories of taxation

Chapter 18: Taxation in Brazil

Chapter 19: Fiscal capacity

Chapter 20: Value-added tax

Chapter 21: Optimal labor income taxation

(II) Answering the public top questions about tax policy.

(III) Real world examples for the usage of tax policy in many fields.

Who this book is for

Professionals, undergraduate and graduate students, enthusiasts, hobbyists, and those who want to go beyond basic knowledge or information for any kind of Tax Policy.

• Language: English
• Publisher: One Billion Knowledgeable
• Release date: Jan 21, 2024

Book preview

Chapter 1: Tax policy

A government's rules and principles for the imposition and collection of taxes constitute its tax policy. It includes both microeconomic and macroeconomic components, with the former focused on questions of justice and efficiency in tax collecting and the latter on the total amount of taxes to be collected and its effect on economic activity. The tax structure of a nation is seen as a major weapon for shaping its economy.

There are many important reasons why the government must collect taxes:

Failure of the market, mostly to discourage purchases of that product (any tax creates a disincentive, so consumers will reduce their purchases and seek alternatives).

Taxes may generate incentives that promote good conduct and disincentives that discourage undesirable behavior.

Taxes may alter consumer behavior and hence impact market result.

For example, because of externalities, an —omnipotent and ethical policymaker ≠would want to change the market outcome to reach the social optimum (otherwise there would be a deadweight loss of externality).

In this situation, Government officials would apply excise charges, carbon tax and so forth.

To produce income.

Taxation is the government's primary source of income. Governments may utilize tax money to fund social security, health care, national defense, and education.

Altering the distribution of wealth and income.

Taxation allows for the redistribution of economic resources to individuals with low income or special needs (tax revenue can be used for transfer payments such as welfare benefits).

Policymakers discuss the type of the tax system they want to impose (i.e., whether it will be progressive or regressive) and the potential effects of these taxes on people and enterprises (i.e., tax incidence).

This emphasis is due to economic efficiency; as Richard Petty, counselor to the Stuart King of England, stated, the government does not wish to murder the goose that lays the golden egg. The most paradigmatically efficient taxes are either non-distortionary or lump sum. However, economists define distortion only by the substitution impact, since anything that does not alter relative prices is non-distortive. One must also examine the impact on income, which, for reasons of tax policy, is often considered to balance out in the aggregate. On the demand curve and supply curve diagrams, the efficiency loss is represented by the region within Harberger's Triangle.

National Insurance in the United Kingdom and Social Security in the United States are types of social assistance financed outside their national income tax systems and paid for by worker payments, which detractors refer to as a stealth tax..

Tax policy implementation has always been a complicated endeavor. In pre-revolutionary colonial America, for instance, the idea No taxation without representation arose in response to the tax policy of the British Crown, which taxed the settlers but gave them no voice in their government. President George H. W. Bush's famous tax policy phrase, Read my lips: no new taxes, is a more modern American example.

Effective tax administration is essential to enticing firms to legally register, therefore broadening the tax base and increasing tax collections. On the other side, improper tax administration may damage the tax system and diminish the credibility of the government. Failure to enhance tax administration while adopting new tax systems has resulted in widespread tax evasion and decreased tax collections in a number of emerging nations. To promote compliance, it is essential to maintain tax regulations plain and straightforward, since significant tax evasion is connected with complex tax systems. As the environment of tax administration develops with the introduction of new analytical tools, digital information flows are growing. As a result, the tax administration operates in a manner that strengthens the incentives for cooperative taxpayers.

Modern taxation systems have the potential to place a significant burden on taxpayers, especially small company taxpayers. Typically, this load consists of three components. To begin with, there are taxes themselves. Second, there are efficiency costs (also known as deadweight losses or excess load), compliance costs of taxes, and administration expenses (also known as running costs) of the tax system. Administrative costs are expenses spent by (mostly public sector) agencies to run the tax-benefit system. As an illustration of this inverse connection, consider the adoption of a self-assessment tax system. However, this trade-off approach is not always applicable, since it is possible, for instance, to lower both kinds of expenses by simplifying the tax system, or administrative inefficiencies may lead to an increase in compliance costs. These are referred to collectively as the running expenses of taxes.

When introducing new portions of tax policy or restructuring it, policymakers must constantly consider the administrative and compliance costs of taxes. There are two primary categories of administrative expenses:

Direct administrative costs

Indirect administrative costs

Direct administrative expenses are incurred by the government (the burden is borne by the government).

It is not readily apparent., exactly, which activities should be attributed to the operation of the … system" (p.

19).

Administrative expenses relate mostly to the operation of the tax collecting office and include personnel wages, Costs of tax system-related legislation enactment, judicial expenses associated with administration of the tax dispute system, and many others.

Indirect administrative expenses are paid by taxpayers (the burden is borne by the government). Tax compliance costs are the expenses spent by taxpayers or third parties, such as corporations, to comply with a certain tax system and rate (Sandford, Godwin and Hardwick, 1989, p. 10). Indirect administrative expenses are mostly associated with the costs of complying with tax laws; they include the costs of labor/time used in completing tax operations, filling out forms, record keeping, the fees paid to professional tax advisors, transfer pricing, and many more.

Tax compliance costs are the expenses spent by taxpayers or third parties, such as corporations, to comply with a certain tax system and rate. Additional examples include the cost of hiring a professional to do tax-related tasks, as well as software and hardware purchases related to tax-related tasks.

Other sorts of compliance costs, such as the negative psychological impacts on taxpayers as a consequence of their efforts to comply with the present tax policy, or many types of societal costs, are particularly intangible and, thus, difficult to measure, despite their presence having a visible effect.

A tradeoff between equity and economic efficiency occurs when there is a contradiction between maximizing equity and economic efficiency.

Some say that inequality is the core issue of society, and that society should simply strive to reduce inequality to the greatest degree possible, regardless of the effect on efficiency. Others say that efficiency is the most important factor. These differences involve societal decisions between equality and efficiency.

Horizontal equity and vertical equity are the two primary categories of equity.

Vertical equity

Vertical equity is a form of taxation based on the premise that a person's personal income tax burden increases in proportion to his or her income (i.e. as your income goes up, you pay more). Due to the fact that this system takes into account the capacity to pay of taxpayers, it is one of the most widely recognized taxation techniques in the world today.

The capacity to pay principle states that the amount of a tax a person pays must be proportional to the burden the tax places on his or her resources. Vertical equity is based on the principle of progressive taxation, in which those with higher earnings pay more in taxes. Progressive taxation raises the tax burden as income rises. In this tax system, individuals are classified into tax brackets, and each tax bracket has a distinct tax rate, with higher-income brackets paying a higher tax rate. With this tax structure, effective tax rates are proportional to income. In addition, the proportional tax technique, in which all income is taxed at the same rate, is an additional choice. This system of taxation is commonly referred to as flat taxes.

Horizontal equity

The notion of distributive justice is the foundation of horizontal equity, when people pay the same amount of income tax proportional to their income groupings.

Most important, but more expensive is defining income groupings, recognizing that each person eats and saves in unique ways, making it very difficult for tax policymakers.

Horizontal equality demands a tax structure that does not favor certain persons or businesses.

It makes sure that we don´t have discrimination on the grounds.

Horizontal equality is a recurring theme in tax policy talks, and in many nations it provides the basis for a number of tax exemptions, provisions and deductions.

For economics, efficiency is synonymous with Pareto efficiency. Pareto efficiency refers to the distribution of resources in which the idea of net predominates. In other words, with this efficiency, we need to make someone worse in order to make others better. To achieve efficiency, a decentralized market mechanism must be constructed. The tax system is often seen as an impediment to constructing this mechanism. Here, we must consider the equilibrium between efficiency and fairness. The optimal point of this equilibrium is known as the Pareto improvement. This is the optimal response to the issue of which policies should be enacted.

Governmental choices or decisions are an example of social choices. And social choice has two components. Initially, there is the individual level. Second, it is the level of society. As far as the individual level is concerned, each person determines their preferences and utility based on the budgetary constraints, etc. This may create the curve of indifference. And it may be said that the points on this curve correspond to pareto efficiency. Considering the members as group A and group B generates the society's level curve. In this case, the curve becomes inversely proportional, which is a frequent form for the Pareto efficiency curve. In this curve, as the utility of group A decreases, the utility of group B increases. The relationship between them resembles a trade-off. This is a relatively common example of a social indifference curve (different curves exist in various ways, including the utilitarian and Rawlsian approaches). And I will present them in the paragraph that follows). In the previous section, I discussed the style of thinking or procedure of social choice. Now, when we attempt to enact certain regulations, we must assess the net benefits of various groups and consider if the initiative represents a Pareto improvement. If the initiative generates positive net benefits and lowers inequality, it should be implemented. If it is not that easy to comprehend, we must use other criteria to evaluate. There are essentially three approaches to do this: the compensation principle, the trade-off between efficiency and equality metrics, and the weighted benefits approach. The last two are rather straightforward to comprehend. The judgment based on the consideration of efficiency and equality is the trade-off one. The weighted benefits method emphasizes the overall quantity of usefulness. Regarding the compensation concept, we must consider the desire to pay the tax. If individuals are encouraged to pay, the consumer surplus will increase. And according to this idea, initiatives should be undertaken when the desire to pay exceeds the cost of doing so (even if the cost is greater for some). The compensation concept may overcome the difficulties of taxes because of the efficiency of the intervening