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Tax policy
This document discusses tax policy and equity in Tanzania. It covers the key considerations in developing a tax policy, including fairness, efficiency, revenue generation, and transparency. It examines Adam Smith's principles of tax equity and the concepts of tax incidence and distributional analysis. The analysis distinguishes between legal and economic tax incidence and how incidence is determined by price elasticity and market alternatives. The document provides frameworks for analyzing the positive and normative aspects of tax equity and the potential regressive, proportional, or progressive impacts of tax distribution.
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Tax policy
- 1. United Republic ofTanzania Joint Finance Commission Tax Policy Presented by the Asian Institute for Technology William P. Kittredge, Ph.D. Visiting Scholar in Residence DOI: 10.13140/RG.2.1.2947.6720
- 2. Taxation Tax Policy Tax Equity Equity Analysis Tax Incidence Distributional Analysis
- 3. Tax Policy Whendeciding on the best taxes to use, you should think about which tax (or better a balanced system of taxes) is: Fairest – Equity Least distortion Able to raise sufficient revenue Least costly to administer Most transparent The specific order of these considerations is unimportant since tax policy is iterative, in part, because tax induced behavioural changes and, in part, due to exogenous changes in market conditions.
- 4. Tax Equity –Adam Smith 1. The subjects of every state ought to contribute towards the support of the government, as nearly as possible … in proportion to the revenue which they respectively enjoy under the protection of the state. 2. The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person. Where it is otherwise, every person subject to the tax is put more or less in the power of the tax-gatherer, who can either aggravate the tax upon any obnoxious contributor, or extort, by the terror of such aggravation, some present or perquisite to himself.
- 5. Tax Equity –Adam Smith 3. Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it. 4. Every tax ought to be so contrived as both to take out and keep out of the pockets of the people as little as possible, over and above what it brings into the public treasury of the state. (Smith 1776)
- 6. Tax Equity Todecide whether a tax is fair, an incidence analysis must be combined with a value judgement. Most people rely on one or both of two well-known principles: The Ability to Pay Principle: People with more to pay taxes should pay more. The Benefit Principle: People who receive more benefits from the public services funded by a tax should pay more. I argue that Smith, quoted above, does not make this distinction, believing that the 'ability' arises from the 'benefits'.
- 7. Tax Equity Anyanalysis of tax equity must address two questions, one positive and one normative. The positive question: Who pays the tax? The normative question: Is the distribution of the tax burden fair?
- 8. Tax Equity: PositiveAnalysis A tax alters real incomes by changing market prices. There are mathematical models that estimate the incidence effects of various taxes. However, the real 'test' requires socio-economic research post-imposition.
- 9. Tax Equity: PositiveAnalysis Begin with a distinction between legal and economic incidence: Legal incidence: Who is responsible for writing the tax checks to the government? Economic incidence: Whose real income is diminished because of the tax? Legal and economic incidence may not be the same! e.g. a sales tax that is imposed on the retailer that is then passed on to the consumer in addition to the price of an item
- 10. Tax Incidence Legalincidence does not affect economic incidence Economic incidence is determined by supply and demand, not by institutional arrangements. Legal incidence should be selected on administrative grounds (not based on misperceptions about economic incidence!) Consider Washington State in the USA, a sales tax dependent state, which has a legal requirement for payment of sales tax on interstate purchases but fails to collect very much because of administrative infeasibility of enforcement.
- 11. Tax Incidence Insome cases, the tax burden falls entirely on consumers. In other cases, the tax burden falls entirely on firms, although some consider this a distinction without a difference, arguing that all costs, including taxes, are ultimately included in the price. Or the burden may be shared. Incidence is determined by responsiveness (price elasticity).
- 12. Tax Incidence Elasticity Effects Economic actors are responsive to price to the extent that good alternatives exist. Consider the 'alternatives' available respectively to the heavy drinker who regularly travels internationally and one who does not have regular access to duty free alcohol The market participant with better alternatives escapes more of the tax. If market participant has poor, or no, alternatives, he/she cannot escape the tax.
- 13. Distributional Analysis Thefinal step in positive analysis of tax equity is to translate the above incidence analysis into a distributional impact. The supply side may represent rich (corporations) or poor (low-wage craftspeople) The demand side may represent poor (buyers of necessities) or rich (buyers of fine crafts). Tax distribution can be proportional, progressive, or regressive.
- 14. References Duncombe, W.D.,Yinger, J., (2007) “Does School District Consolidation Cut Costs?” Education Finance and Policy No. 4 pp. 341–75. Kittredge, W.P., (2004) Local Government Fiscal Condition Analysis. University of Georgia Press. Musgrave, R.A. (1959) The Theory of Public Finance: A Study in Public Economy New York: McGraw Hill Smith, A (1776) An Inquiry Into the Nature And Causes of the Wealth of Nations. Chapter II of Book V.