Principles of Good Tax Policy Annette Nellen San José State University

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 – we’ll use that in class –but - also useful for analyzing any tax proposal - any size, any degree, any level –basically - Adam Smith’s tenets + 6 more

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?

Fairness

1. Equity & Fairness Similarly situated taxpayers should be taxed similarly. Horizontal and vertical equity. “Fairness” (or really, the perception of fairness).

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.

Operability

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.

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.

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.

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.

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.

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.

Appropriate Purpose and Goals

9. Neutrality The effect of the tax law on a taxpayer’s 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.

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 jurisdiction’s economic goals for economic growth, capital formation and int’l competitiveness. –Should not favor one industry or type of investment at the expense of others.

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.)

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

What would be better than a 12¢ gas tax increase? Depends on what you’re trying to accomplish? Have all “costs” of gas production and usage been identified? What will money be used for? –General fund? –Specific purpose?

Additional comments?