Effective Taxation

8 Key excerpts on "Effective Taxation"

• 

  eBook - PDF

  Global Issues in Social Sciences

  Different Perspectives Multidisciplinary Approaches

  • Nurettin Bilici, Birol Akgül, Ragip Pehlivanli(Authors)
  • 2018(Publication Date)
  • Peter Lang Group

    (Publisher)

  The objective of optimal taxation provides the best way to establish the balance between the efficiency and justice criteria. Economic efficiency means that resources in an economy are used in the right areas in the right amount. In this case, the expec- tation of the optimal taxation is applied a tax that does not detract the economic activity in the market. Justice of taxation aims to distribute the tax burden fairly among the members of society and in proportion to the ability to pay of people. In this direction, an optimal tax system should be designed appropriately with justice to taxation. The levels of development of the countries and the policies they follow have directed the taxation. There has been a shift towards consumption taxes in Turkey, especially the growth policies followed after the 1980s. VAT, which began to be implemented in 1985 in Turkey and has been levied on almost all Ebru Karaş 338 goods and services, is a general consumption tax. It is observed that VAT has a large share in tax revenues from the beginning of the year. The main aim of the chapter is to show whether VAT, which is a comprehensive tax in terms of subject and taxpayer, reflects the criteria for optimal taxation or not. 2 The conceptual framework of optimal taxation The issue of taxation, the amount of tax and what it is based on have always led to debate, no matter what kind of tax it is. Therefore, there is a common agreement that taxation should be taken from the most appropriate sources, in the most appropriate ways and amounts (Yüksel, 2016: 7). The theory of optimal taxation, in a modern sense, was brought up by Ramsey and Mirrlees. Economists such as Diamond and Seaz have put forward further opinions on the optimal taxa- tion approach. While Mirrlees (1971) pioneered the study of optimality about income tax, Ramsey (1927) focused on the optimal taxation research on con- sumption tax (Kaplow, 2008a: 209).

  Sign up to read

  Learn more about book
• 

  eBook - ePub

  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

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Taxes and Taxation Trends

  • Jolanta Iwin-Garzy?ska(Author)
  • 2018(Publication Date)
  • IntechOpen

    (Publisher)

  Within this framework, changing market conditions changes demand elasticity of luxury and necessity goods, and this change on the other hand necessitates reassessing basic assumptions of optimal taxation and criticisms against optimal taxation. 2. Optimal taxation The most fundamental goal of economic and fiscal policies is to maximize wealth. This goal includes quite large sub-goals, such as providing stability, growth, efficient allocation of resources, and fair income distribution. Tax is the primary fiscal tool to be used in reaching the goals in question. Among the tax applications that are under the changing and developing state understanding, what type of taxation is the taxation that serves the goal of wealth maximiza -tion is considered in the literature especially in the framework of “ Optimal Taxation ” theory. While within classical welfare economics understanding, optimal taxation theory considers taxes as effective tools in assuring resource allocation; new welfare economics’ view of utility measurement and impossibility of inter-personal comparisons caused economic area of inter -est to rotate to Pareto efficiency. This situation focused on substitution effect of taxes, creating efficiency loss and lasted until the study of Mirrlees [ 2 ], which targets resolution of equality and efficiency conflict. In this context, optimal taxation is the taxation that reflects the preferences of the society between equality and efficiency with rivaling goals, and that has social wealth maximization Optimal Taxation of Consumption in the Scope of Changing Elasticities of Demand... http://dx.doi.org/10.5772/intechopen.74378 125 as the starting point. Within this scope, balance between the goals of justice (equality) in taxa -tion and economic efficiency is tried to be redressed. On the other hand, trade-off between these goals created different approaches to the topic. Existence of the relevant trade-off depends on the existence and influence of distortionary taxes.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  A Course in Public Economics

  • John Leach(Author)
  • 2003(Publication Date)
  • Cambridge University Press

    (Publisher)

  Taxation and Efficiency It is inevitable that people will try to avoid paying taxes. These attempts are, in the aggregate, futile – the government ultimately does raise the revenue that it wants – but they do have important economic implications. The adjustments that people make in their attempts to dodge taxes reduce economic efficiency. Governments have a role to play in the provision of public goods, and in the reg-ulation of externalities and “increasing returns” industries. In each of these roles, the government’s activities have the potential to reduce economic inefficiency. But these activities must be funded through taxation, and taxation generates other inefficiencies. The social benefits of additional government expenditures will at some point fall short of the social costs of the additional taxation required to finance them, so that the in-tervention reduces welfare instead of raising it. The welfare gains of intervention will be maximized if the government targets its expenditures to generate the greatest social gains, and designs its tax system to minimize the damage done by it. These issues are discussed in the next few chapters. Governments also, to greater or lesser degrees, attempt to reduce economic dispari-ties by redistributing income. A major element of any redistributive policy is the design of the tax system, and the welfare costs associated with taxation limit the government’s ability to redistribute income, or its willingness to do so. The relationship between economic efficiency and income distribution is discussed in the last part of the book. 239 240 16 Taxation The things that people do to avoid paying taxes alter the allocation of resources in ways that reduce economic welfare. To see this, compare the following situations: 1) On the morning of the first of January, you discover that $100 that you had in your pockets is no longer there.

  Sign up to read

  Learn more about book
• 

  eBook - ePub

  Taxation by Political Inertia

  Financing the Growth of Government in Britain

  • Richard Rose, Terence Karran(Authors)
  • 2018(Publication Date)
  • Taylor & Francis

    (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.

  Sign up to read

  Learn more about book
• 

  eBook - ePub

  The Economics Anti-Textbook

  A Critical Thinker's Guide to Microeconomics

  • Rod Hill, Tony Myatt(Authors)
  • 2010(Publication Date)
  • Zed Books

    (Publisher)

  Chapter 7 ) and public goods is a prominent example. Third, because the economy as a whole is potentially unstable, governments can play an important role in stabilizing the overall level of economic activity and keeping unemployment low. This is the domain of macroeconomic policy. Fourth, because there is no reason to expect that the market economy alone will produce an equitable distribution of income among individuals, governments can use taxes, transfers of cash and the direct provision of goods and services to create a more equitable distribution of income and consumption. This chapter examines this last role of government.

  I THE STANDARD TEXT 1.1 The costs of taxation

  Taxation is costly not only because it is costly for government to collect the revenues and for individuals and business to comply with the tax law, but because it influences economic decisions. These include decisions by households about what and how much to buy and how much to save, and decisions by firms about what to produce and how and where to produce those things.

  If the decisions of consumers and firms in the absence of taxes would lead to an efficient allocation of resources, then taxes must cause inefficiency if they change those decisions. We saw this in the analysis of an excise tax using the supply and demand framework in Chapter 3 . The result was a net loss to society of producing less of the taxed good. This net loss occurs because some mutually beneficial exchanges no longer take place – assuming a perfectly competitive market and no externalities. A similar analysis can be done for any kind of tax. As long as taxes influence choices that would otherwise be optimal, they create ‘efficiency losses’.

  1.2 Taxes: an international comparison

  The best single way to compare taxes across countries is to express total tax revenues collected by all levels of government to the value of the country’s total production, or gross domestic product (GDP), as shown in Table 9.1

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Toxic Economic Theory, Fraudulent Accounting Standards, and the Bankruptcy of Economic Policy

  • A. Rayman(Author)
  • 2016(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  The more progressive the rates and allowances, the greater the positive incen- tive for individuals to produce more income (free of immediate tax) than they spend on consumption (subject to tax immediately). The claims of social justice, no longer work against economic efficiency; they work in its favour. 9 All taxes have a “wealth effect”; that is, an influence on behaviour caused by a response to the reduction in wealth imposed by the tax. Tax “neutrality” implies the absence of any “substitution effect” affecting the choice between alternatives. Ch. 18 PAYS: The Economic Justification 191 The Economic Case With the removal of the disincentive to production and saving, the microeconomic impact of shifting direct taxation from income to con- sumption is likely to further two of the principal objectives of economic policy: productive investment and economic growth. It is, however, in the area of macroeconomic policy that the major benefits are to be expected. The tax system, instead of being an obstacle, can be transformed into an indispensable instrument of policy: it can become a highly potent weapon for the defeat of unemployment and inflation and for the achievement of stable economic growth. Conventional economic interventionism (whether of the Keynesian or Monetarist variety) has proved unsuccessful in achieving sustained full employment without inflation. That should occasion no surprise. Macroeconomic objectives cannot be secured by the intervention of government ministers however well intentioned, or by central bankers however independent. The arbitrary intervention of economic police- men obstructs the flow of economic traffic. A reformed tax system offers a new possibility: an automatic mecha- nism triggered by the flow of traffic itself.

  Sign up to read

  Learn more about book
• 

  eBook - ePub

  Public Sector Revenue

  Principles, Policies and Management

  • Alberto Asquer(Author)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

  3 The design of tax systems        

  Optimal tax theory

  Optimal tax theory is an area of inquiry within the field of economics that is concerned with the design of tax systems that maximise a social welfare function. The issue is posed in terms of a social planner that takes the wellness of individuals under consideration (in the analytic form of utility functions) when choosing which taxes should be levied and at what rates. The analysis can be posed in different terms, for example depending on whether individuals are assumed to hold homogeneous conditions and preferences and whether the social planner considers some allocations of economic benefits (e.g. a more equitable distribution of income and wealth) more desirable than others. In general, optimal tax theory aims to find solutions to the issue of designing a tax system that fulfils Pareto efficiency criteria (that is, equilibria where no one’s utility can be improved without decreasing the utility of someone else) (Sandmo, 1976).

  One of the early efforts to solve the optimal tax problem originated from the work of Ramsey (1927), who focused on the taxation of commodities. Drawing on the analysis of the role of price elasticity of demand in the loss of consumer surplus (the incidence of taxation that was discussed in the previous chapter), Ramsey (1927) argued that commodities should be taxed at an inverse proportion to their price elasticity of demand; that is, commodities with more inelastic demand should be taxed more than those with less elastic demand. The result, however, is of limited practical implementation because it does not address the variety of economic conditions and events that can be subjected to taxation and it does not take into account heterogeneity across taxpayers. Moreover, Diamond and Mirrlees (1971) argued that intermediate goods should not be taxed, and Atkinson and Stiglitz (1976) held that optimal taxes are equal across all final consumption goods (that is, all goods that are sold to consumers as final products).

  Sign up to read

  Learn more about book