The 10 Guiding Principles of Good Tax Policy
Written by Ben Robinson
Position
One of the favorite topics among politicians, tax practitioners, and economists is about changing the national and subnational tax systems. Whenever there is a suggestion to modify the tax rules, there should be a framework done based on applicable tax policy to analyze the proposals to change the tax systems effectively.
The Ten Guiding Principles
There are various ways to structure an income or sales tax and even the tax system. There are many factors to consider, too, in doing it. It needs careful planning and structuring to come with sound tax policy. Hence, the American Institute of Certified Public Accountants (AICPA) came up with several principles for designing a tax system to achieve a good tax policy.
Equity and Fairness
Also known as the fairness principle, Equity and Fairness states that similarly placed taxpayers must be taxed the same amount. Horizontal equity is important in this principle, which means that taxpayers with equal “ability to pay” should pay the same amount of tax. Another concept of Equity and Fairness is the vertical equity which means that If one taxpayer has more ability to pay a higher tax than the other, then he should pay more.
Certainty
A good tax policy contains tax rules that specify when and how a tax is to be paid and how the amount is to be determined. The Certainty principle is also viewed as the level of assurance that a taxpayer has that the tax is being calculated correctly.
Convenience of Payment
In this principle of good tax policy, the Convenience of the taxpayer is given much importance. It states that the due date for paying tax should be in a manner convenient to the taxpayer. This principle believes that a taxpayer tends to comply with the rules and policies when he experiences convenience in paying taxes. The payment tool depends on the amount of liability and how easy it is to collect.
Economy of Calculation
According to this principle, the costs to collect a tax should be kept to a minimum for both the taxpayer and the government. The Economy of Calculation principle is difficult to achieve if the government needs to hire more revenue agents and collection officers to administer the tax. The costs to collect are higher if there are millions of collection points compared to only a hundred or thousands collection points.
Simplicity
The Simplicity principle of good tax policy implies that the tax rules should be easy to comprehend so that taxpayers would easily understand it so they could comply with them correctly and in an effective manner. With this principle, the aim is to provide a simple tax system to enable the taxpayers better to understand the aftereffect of their actual and planned transactions. Furthermore, this also aims to reduce the errors in tax and boost respect for the system.
Neutrality
To be able to achieve a good tax policy, the tax system’s primary purpose must be to raise revenue for government activities instead of influencing businesses and personal decisions. This principle on Neutrality aims to minimize the tax law’s effect on the taxpayer’s decision on how to carry out a particular transaction.
Economic Growth and Efficiency
It is important in the Economic Growth and Efficiency principle that a tax system should not hinder the economy’s productive capacity. Instead, it should be aligned with the economic goals of the taxing jurisdiction. According to this principle, a good tax policy should have a system that should not favor one industry or type of investment at the expense of others.
Transparency and Visibility
Taxpayers must know that a tax exists and when it is enforced upon them and others. It enables businesses and individuals to know the real cost of the transactions. Moreover, the Transparency and Visibility principle also allows them to see what their total tax liability is and to which level of government it is being paid. This aims to bring awareness among taxpayers about how the tax affects them.
Minimum Tax Gap
The tax gap is the difference between unpaid taxes and those that are voluntarily paid. To be able to achieve an acceptable level of compliance, there should be rules provided. Hence, tax laws must be structured to minimize non-compliance.
A tax gap exists for several reasons, such as underreporting of income, non-filing of income, overstating deductions, and omission of transactions. It also involves unintentional errors such as math mistakes and a lack of understanding of the rules. Thus, the rules are essential to encourage compliance.
Appropriate Government Revenue
A good tax policy involves a tax system with a suitable level of predictability, stability, and reliability to empower the government to determine the timing and amount of tax collections. It is necessary to have a dynamic and flexible tax system to be able to adapt to the changing needs and technological, commercial developments. Furthermore, it is also imperative that a tax system is flexible enough to meet the government’s current revenue needs while adapting to changing needs on an ongoing basis. Hence, it is essential to regularly review the tax system to guarantee that they are supportive of the jurisdiction’s goals, capable of generating appropriate revenues, and applicable for new business models.
These principles of good tax policy can be applied to an existing tax or a tax proposal. It aims to help determine the issues in the current tax system or to enhance further the tax proposal where changes are needed to meet the principles better.
Understanding the tax system and tax policy could be difficult, especially if you are not well-versed in the tax department. If you are planning on putting up a bookkeeping business or simply understand the hows and whys of the tax policy, you may want to check out Bookkeeper.com. They offer courses to help you get more high-paying clients so that you gain more profit and enjoy your client at the same time.
For those who would like to understand more about the tax system and good tax policy, you can check out the video above. Leave your comments below if you would like to know more about starting up a bookkeeping business.
UP NEXT:
