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want to kill the goose that lays the golden egg paradigmatic efficient taxes are those that are either non distortionary or lump sum however economists define distortion only according to the substitution effect because anything that does not change relative prices is non distortionary one must also consider the income effect which for tax policy purposes often needs to be assumed to cancel out in the aggregate the efficiency loss is depicted on the demand curve and supply curve diagrams as the area inside harberger s triangle national insurance in the united kingdom and social security in the united states are forms of social welfare funded outside their national income tax systems paid for through worker contributions something labeled a stealth tax by critics administration edit the implementation of tax policy has always been a complex business for example in pre revolutionary colonial america the argument no taxation without representation resulted from the tax policy of the british crown which taxed the settlers but offered no say in their government a more recent american example is president george h w bush s famous tax policy quote read my lips no new taxes efficient tax administration is key to encouraging businesses to become formally registered thereby expanding the tax base and revenues on the other hand an unfair tax administration can harm the tax system and reduce the government s legitimacy in many developing countries the failure to improve tax administration while introducing new tax systems has led to widespread tax evasion and lower tax revenues it is important to keep tax rules clear and simple to encourage compliance as high tax evasion is associated with complicated tax systems as the tax administration ecosystem evolves with the introduction of new analytical tools digital information flows are increasing consequently the tax administration is operating in a way that increases incentives for compliant taxpayers 5 operating costs of tax policy edit modern taxation systems can impose a heavy burden on taxpayers particularly on small businesse taxpayers that burden typically consists of three elements firstly there are the taxes themselves secondly there are the efficiency costs variously referred to as deadweight losses or excess burden the third type of costs are compliance costs of taxation and finally there are the administrative costs sometimes referred to as operating costs of the tax system 6 administrative costs can be described as costs incurred by mainly public sector agents to administer the tax benefit system 7 the relationship between administrative and compliance costs of taxation is not always clear at first glance sometimes there might be an inverse relationship between them which is a phenomenon called the administrative costs compliance costs trade off 8 an example of this inverse relationship might be the implementation of a self assessment system in taxation however this trade off principle is not always the reality as it is for example possible to reduce both types of costs through some sort of simplification of the tax system or an increase in compliance costs might occur as a result of administrative inefficiency these types of costs together are called operating costs of taxation when implementing some new parts of tax policy or reorganizing it policymakers always have to consider the weight of administrative costs and compliance costs of taxation there are two main types of administrative costs direct administrative costs indirect administrative costs direct administrative costs edit direct administrative costs are on the government side the burden is borne by the government it is not immediately obvious exactly which activities should be attributed to the operation of the system p 19 6 administrative costs are mainly connected to running the tax collection office they include salaries of staff costs of legislative enactment relating to the tax system judicial costs of administration of the tax dispute system and many more indirect administrative costs edit indirect administrative costs are on the side of taxpayers the burden is borne by the government tax compliance costs are those costs incurred by taxpayers or third parties such as businesses in meeting the requirements laid upon them in complying with a given structure and level of tax sandford godwin and hardwick 1989 p 10 6 indirect administrative costs are mainly connected to the costs of complying with tax requirements it includes the costs of labour time consumed in completion of tax activities filling out forms record keeping the fees paid to professional tax advisers transfer pricing and many more compliance costs edit tax compliance costs are the costs incurred by taxpayers or third parties such as businesses in meeting the requirements laid upon them in complying with a given structure and level of tax 9 there is no consensus about what should and should not be included under the definition of compliance costs although one distinction usually made is between gross versus net compliance costs the difference between the two is made up of any financial or managerial benefit derived by the taxpayer from tax compliance however there is a possibility to define some indisputable examples of costs that are directly connected to the compliance of individual taxpayers these examples include the costs of labor and time required for the completion of tax activities such as acquiring the necessary knowledge to operate within the tax system properly or compiling and creating all documents needed 10 more examples include the cost of purchasing professional assistance for the completion of tax activities or other expenses connected to tax activities such as purchasing software and hardware other types of compliance costs such as the negative psychological effects on taxpayers as a result of the attempts to comply with the current tax policy or many types of social costs are very intangible and it is therefore hard to quantify them even though the effect of their existence is visible especially for individuals and small businesses equity vs efficiency edit an equity efficiency tradeoff appears when there is some kind of conflict between maximizing equity and maximizing economic efficiency the trade off between equity and efficiency is at the heart of many discussions of tax policy two questions are debated first there is disagreement about the nature of the trade off to reduce inequality how much efficiency do we have to give up second there is a disagreement about the relative value to be attributed to the reduction in inequality compared to the reduction in efficiency 4 some people claim that inequality is the central problem of society and society should simply minimize the extent of inequality regardless of the consequences to efficiency others claim that efficiency is the central issue these disagreements relate to social choices between equity and efficiency equity edit equity can be divided into two main groups horizontal equity and vertical equity vertical equity vertical equity is a method of taxation based on the principle that the higher the income of an individual is the higher the personal income tax liability i e as your income goes up you pay more 11 vertical equity is often more achievable than horizontal equity because horizontal equity is harder to implement it is not easy to define and it can be undermined by loopholes and deductions since this method takes into consideration the ability to pay taxpayers nowadays it is one of the most accepted taxation methods by various countries around the world the ability to pay principle says that the amount of a tax a person pays has to be dependent on the burden the tax will create about the wealth of an individual vertical equity operates on the principle of people with higher incomes paying more taxes through progressive tax rates in progressive taxation the amount of taxes paid increases with income in this tax system people are divided into tax brackets each tax bracket has a different tax rate with high income brackets paying more taxes with this taxation system the effective tax rates increase with income furthermore another possibility is the proportional tax method in which the income is charged at a single rate regardless of income this taxation method is also known as flat taxes horizontal equity the basic principle of horizontal equity is based on the concept of distributive justice in which taxpayers should pay the same level of income tax in proportion to their respective income groups most important but more costly is to define income groups knowing that each individual consumes and saves in different ways making it very hard for tax policymakers horizontal equity requires a tax system that does not give preference to certain individuals or companies it makes sure that we don t have discrimination on the grounds 12 horizontal equity is a constant topic of tax policy discussions and in many countries it is a cause of several exemptions deductions and special provisions efficiency edit efficiency for economists is equal to the concept of pareto efficiency pareto efficiency means the situation of resource allocation where the concept of net is dominant in other words we need to make someone worse to make others better under this efficiency to seek efficiency it is necessary to build a decentralized market mechanism and to build that mechanism the tax system is often seen as an obstacle here we need to think about the balance between efficiency and equity and the best point of this balance is called pareto improvement this is the ideal answer to reply for the question of which policies should be implemented 13 social choice edit the choices or decisions of the government are one of the social choices social choice consists of two elements individual level and societal level for the individual level each individual builds their preference and has their utility following the budgets constraint this can form an indifference curve and we can say that the points which are on this curve are matched to pareto efficiency in the society s level the curve is created by seeing the participants as group a and group b here the curve is an inversely proportional relationship which is a very common style in the pareto efficiency curve at this curve when group a s utility will get down group b s utility will get increased there are other curves in other ways utilitarian way and rawlsian way when attempting to implement economic policies and projects the measurement of the net benefits of different groups is needed and to consider that the project policy is the pareto improvement under social choice if the project policy has net positive gains and reduces measured inequality it should be taken if net positivity can not be determined other factors are utilised the compensation principle the inverse proportion of measures of efficiency and equality and the weighted benefits approach the inverse proportional of measures of efficiency and equality is the judgement based on the contemplation of efficiency and equality the weighted benefits approach is focused on the total amount of utility the compensation principle is based on the willingness to pay the tax if people are motivated to pay there is a growth in consumer surplus in this principle when the willingness to pay is more than the cost to do so including if there is a cost imbalance for individuals the projects policies should be taken the compensation principle can overcome the difficulty of taxation due to the intervening efficiency 14 tax policy in the european union edit main principles and objectives edit no unified tax policy edit the eu commission stated the belief that there is no need for an across the board harmonization of member states tax systems 15 member states are to take full control of which tax system they want to impose as long as they respect the rules of the eu there is a possibility for tax field action of the eu under the principles of subsidiarity and proportionality 15 and also under the assumption that the member state in question was not able to provide an effective solution therefore there is a need for support in terms of coordination for example removing obstacles edit as a part of the eu s objective to empower its citizens to play a full part in the market the organization announced in 2020 that the objective is to ensure that tax rules do not discourage individuals from benefiting from the internal market the communication removing cross border tax obstacles for eu citizens outlines the most serious tax problems that eu citizens face in cross border situations such as discrimination and double taxation 15 tax policy of developing countries edit the tax policies of different countries differ in many ways besides that there are some patterns that we can observe among various groups of countries with the same characteristics an example of this would be the low level and utility of taxes in developing countries low income countries typically collect taxes of between 10 to 20 percent of gdp while the average for high income countries is more like 40 percent 16 problems faced by tax policymakers in developing countries edit there are several challenges that tax policymakers in developing countries have to face and that make it difficult for each of these developing countries to introduce effective and equitable tax systems tackle inequality and corruption or increase their development level as a result of this developing countries often use tax policies that are not very effective in terms of generating tax revenue therefore not allocating the country the funds needed for improvement unclear incomes edit as many people in developing countries are often paid wages based on the time they spend at work volatile value and many are paid in cash which lowers the government s ability to track such money flows it is difficult to keep record of any reliable data on income and wealth distribution in the country this leads to a situation in which the policymakers are unable to create statistics or models that would allow them to propose changes to the current tax system mainly income taxes in this case in the country that would improve the situation mainly the efficiency vs equity trade off unclear spendings edit similarly to the problem regarding unclear incomes a big part of the spending in developing countries is done in such a way that does not lead to extensive spending reports being supplied to the government this lack of information is supported by the fact that just like in the case of incomes most spending is done in cash which is again more difficult to keep a record of in this situation policymakers are deprived of the ability to analyze spending statistics in their country and thus they are not able to produce changes to the tax system mainly the sales taxes in their country limitations ...