The design of the tax system is economically important because it influences labor participation, employment and economic growth. In this Special, we provide a blueprint of an economically desirable tax system. We will discuss the basic principles that apply to any good tax system, and then discuss the economic effects of individual taxes: income tax, consumption tax (VAT), wealth tax and corporate tax. In addition, on this basis we looked at what economically desirable reforms are for the English tax system, see The English tax system: enough to reform. You can make use of the tax bracket calculator there.
- Before discussing the desired structure of a tax system, it is important to ask yourself what are the reasons for levying tax at all. The most obvious reason is to finance public spending. But the tax system can also be used to reduce inequality or to change people’s behavior. Consider, for example, discouraging the use of alcohol or cigarettes or promoting sustainable energy. In any case, it is clear that if we value public spending, such as defense, healthcare, infrastructure and education, we also need tax revenue to finance it. And every tax has, intended or unintended, influence on social factors such as income distribution and generally also on the behavior of households and businesses.
However, the purpose of this Special is mainly to investigate what is the best way to shape the tax system from an economic point of view. We do this by first looking at the tax system as a whole, and then examining the effects of individual taxes on economic factors such as economic growth and employment. And while it is ultimately up to politicians to determine the desired level and progressivity of taxes, we will show that given a preference for social outcomes, the tax system in many countries can be classified more efficiently than is currently the case. You can also choose the calculator with brackets there.
Basic principles of tax system
Three key concepts are important in any discussion of tax reform: neutrality, simplicity and stability. Neutrality means that similar activities are taxed in the same way. This avoids disruptions in the choices people make and wastes time and resources avoiding taxes. An important exception to this is if the government wants to consciously change behavior in order to achieve social goals: think of excise duties on alcohol and cigarettes to discourage their use, or tax breaks on green energy to stimulate sustainability. Second, it is important to keep the tax system as simple as possible.
This makes it more transparent and there are lower administrative costs for citizens and businesses. A complicated tax system will also lead to more tax avoidance. Finally, the stability of the tax system must be monitored: continuous changes in the structure of the tax system create a lot of uncertainty for businesses and consumers, and make it difficult to make long-term plans. In addition to the above principles, it is important to see individual taxes as part of a whole.