Optimal Tax System Research Articles

Tax system or a collection of random regulations?

The tax system is the total amount of taxes that occur in a given country at a given time. It should be built in accordancewith tax principles and the principles of proper legislation, reconciling the functions of taxes with theinterests of taxpayers. When building an optimal tax system, the legislator should take into account at least thebasic tax principles: tax neutrality, tax certainty, efficiency, mitigation of the tax burden, protection of sources oftaxation, and cheapness of assessment and collection. Tax law, due to its specificity and interference with theright of ownership, should be understandable to its addressees. The principle of statutory regulation of publiclevies should limit the frequency of changes, but this is not the case. In Poland, despite the postulates, we stillhave a set of random regulations instead of a tax system.

Unstable government revenues in uncertain times: which taxes are especially volatile?

Motivation: External shocks affect the performance of economies. This is especially true recently after COVID-19 pandemics and ongoing war in Ukraine. States struggle to maintain their revenues in order to avoid skyrocketing public debts. Yet, especially now, governments face challenges connected with high uncertainty of inflows from the taxes.Aim: The aim of the article is improvement in understanding of the variability of government revenues sourced from selected taxes binding in the EU Member states as well as the potential reasons for their fluctuations.Results: The calculations are made based on empirical data for EU Members states for the period 1996–2021. There are ten taxes that were considered — both those of key importance for budgets in most jurisdictions as well as some sectoral or specific more niche levies. Study is executed with usage of statistical tools that include calculation of coefficient of variation, modified trend curve estimation with use of Hodrick–Prescott filter, correlation of such trend with empirical data, comparison of coefficient of variation for empirical data with numbers produces by Hodrick–Prescott filter and two-way ANOVA without replications, while controlling for the states. Corporate income taxes, Excise duty as well as most specific and sectoral taxes that include Taxes on capital transfers, Car registration taxes, Taxes on insurance premiums or Tax on lotteries, gambling and betting are generally characterized by greater variability in terms of revenues they provide than Payroll taxes, Real estate taxes or Value added taxes. Due to insufficient research in previous studies in this respect, findings presented in this article may provide for a useful hint for policymakers in further design of optimal tax system that would provide for stable and predictable sources of income to the government.

Optimal income taxation: An urban economics perspective

We derive an optimal labor income tax rate formula for urban models that nests the Mirrlees model as a limiting case. Optimal tax rates are determined by traditional forces plus a new term arising from urban forces: house price, migration and agglomeration effects. Based on the earnings distribution, housing costs and housing tenure in large and small US cities, we find that in a benchmark model (i) the optimal income tax rate schedule is U-shaped, (ii) urban forces raise the optimal tax rate schedule at all income levels and (iii) adopting an optimal tax system induces agents with low skill levels to leave large, productive cities.

Optimal taxation for democracies with less than perfect voters: A public choice perspective

AbstractThis paper analyzes optimal tax policy from the perspective of voters who want public policies to systematically advance their interests. Self‐acknowledged ignorance implies that voters have a practical interest in transparent and stable tax systems that allow personal tax burdens to be calculated accurately and easily. Such properties reduce voter mistakes. However, a voter's normative interests may conflict with these practical interests, because ideas about a good life or good society often support tax system complexity. Tradeoffs between these two aims of democratic tax systems imply that the optimal tax system for a democracy neither minimizes voter errors nor maximizes a social welfare function.

The unintended consequences of semi‐autonomous revenue agencies

AbstractThe past two decades have witnessed a fundamental change in how tax administrations are organized, from agencies within a ministry with little autonomy to organizations outside the institutional public service with separate legal status. This paper analyzes how a switch to a more autonomous tax administration affects a country's optimal tax system, consisting of the tax rate and the tax administration's effectiveness. I show that the creation of a more autonomous tax administration can have the unintended effect of dwarfing the tax administration's incentive to collect taxes in developing countries, adding a novel reason for the low tax revenue collections in developing countries.

Optimal nonlinear taxation: a simpler approach

The typical method of solving for the optimal nonlinear tax schedule relies on deriving optimal incentive-compatible allocations. While this “primal approach” is mathematically rigorous, it lacks intuitive appeal. This paper considers a different method that relies on directly solving for the optimal tax system. This “dual approach” is much closer to actual tax policy as it centers around the welfare effects of tax reforms. I show that it can easily incorporate preference heterogeneity, as well as individual utility misoptimization. Beyond solving for the optimal tax system, the dual approach allows one to obtain insights into the welfare effects of small nonlinear tax reforms outside the optimum.

Health Risk, Insurance, and Optimal Progressive Income Taxation

Abstract We study the optimal progressivity of personal income taxes in a general equilibrium overlapping generations model where individuals are exposed to idiosyncratic shocks to labor productivity and health status over the lifecycle. Our results—based on a calibration to the US economy—indicate that both, the presence of health risk and the available insurance institutions, have a strong effect on the optimal level of tax progressivity. Given the fragmented and non-universal health insurance system in the US, a welfare maximizing income tax system is substantially more progressive than the current US income tax. The higher progressivity provides additional redistribution and social insurance, especially for unhealthy low income individuals who have limited access to health insurance. When exposure to health risk is removed or reduced by introducing more comprehensive health insurance systems, we observe large decreases in the optimal level of income tax progressivity, and the optimal tax system resembles findings from the previous literature. These findings highlight the importance of accounting for the unique characteristics of health risk and the design of the health insurance system when characterizing optimal income taxes.

Do Countries Really Deviate from the Optimal Tax System?

One of the main goals of the literature on optimal tax systems is to reduce the gap between the highly stylized theory of optimal taxation and the practice of fiscal policy reform. Unfortunately, however, we know little about the extent to which the international experience follows the policy prescriptions derived from economic theory, or how those policy prescriptions would change with economic development. Based on the standard theory of optimal tax systems, this paper predicts the possible effects of economic development on the optimal level and composition of tax revenue and empirically tests these predictions with yearly data on three tax instruments from countries at different stages of development. In average, as countries develop, they are shown to collect more tax revenue and switch from regressive tax instruments like the value added tax, to more progressive taxes that become more productive with development, like the personal and corporate income taxes.

Equity in Tax Law: Vietnam Case Study

Fairness is a fundamental principle in the design of optimal tax systems. This concept of equity in taxation emerges from two primary viewpoints: the benefits principle, which relates to the services and advantages taxpayers receive from society, and the ability-to-pay principle, which focuses on taxpayers' income levels. Echoing economist Adam Smith's views, taxes are pivotal to the stability of economic institutions, and lack of transparency can lead to economic disturbances. This paper explores the evolution of tax law in Vietnam, examining how fairness has been addressed in aspects such as tax obligations, exemptions, administration, and accountability. Through an analysis of the historical development of these elements, the paper proposes solutions to enhance the fairness of the Vietnamese tax legal framework, considering the economic, social, and political context of the country across different stages of its development.

Optimal linear income taxes and education subsidies under skill-biased technical change

AbstractThis paper studies how linear tax and education policy should optimally respond to skill-biased technical change (SBTC). SBTC affects optimal taxes and subsidies by changing (1) direct distributional benefits of each policy instrument, (2) indirect, general-equilibrium effects on wages, and (3) education distortions. Analytically, the effect of SBTC on these three components is shown to be ambiguous. In simulations for the US economy, SBTC makes the optimal tax system more progressive and lowers optimal education subsidies. This is because for both income taxes and education subsidies; their direct distributional effects become more important, which more than offsets the larger general-equilibrium effects and increased education distortions.

THE TAX SYSTEM OF THE FUTURE: A MODEL TAXKIN

Purpose. The purpose of the article is to analyze hypothetical models of tax policy, determine the necessary conditions for creating an optimal tax system and propose a new transparent fiscal mechanism, the introduction of which would provide unique competitive advantages for investment boom and economic growth in the country. Methodic. The theoretical and methodological bases are results of scientific research of economic development and structure of fiscal policy and the following methods: abstract-logical, theoretical generalization, analysis, grouping, comparison, analogy, dialectical method and systematic approach. Results. The analysis of the basic budget-forming taxes available in the tax systems of many countries of the world makes it possible to conclude their moral obsolescence. There has been proposed a transparent fiscal mechanism - TAXKIN, the quintessence of which is to tax any movement of money (without exceptions) instead of existing budget-forming taxes. The possible TAXKIN rate for Ukraine as an example is calculated based on the amount of budget revenues for the types of taxes that are to be abolished, as well as the volume of transactions and the size of the shadow economy. It is proved that the starting value of TAXKIN to fully offset the abolition of tax revenues is about 2%. TAXKIN tax is withdrawn digitally at the sender's bank automatically at the time of any movement (transfer) of funds, both between individuals and legal entities. The technical requirement for the introduction of the proposed tax is a digital (non-cash) financial system. There are three main starting conditions for TAXKIN start-up in Ukraine: 1) gradual complete abandonment of cash circulation, switching exclusively to non-cash electronic transactions; 2) full legalization of all income, absolute and unconditional tax amnesty; 3) a complete ban on any barter operations. Scientific novelty. A fundamentally new tax model is proposed and substantiated, the quintessence of which is to tax any movement of money instead of existing budget-generating taxes; it would make life easier for society, accelerate economic processes, and at the same time ensure automatic replenishment of the budget, regardless of the will of an individual natural or legal person. Practical significance. The proposed model can be applied in any country. The first country to implement this model will receive unique competitive advantages for the investment boom and economic growth. The results of TAXKIN implementation for the first country to implement it are the creation of the world's best conditions for economic activity in as a whole and for business in particular; total de-bureaucratization of the entire economic system; elimination of all corruption schemes and conditions of corruption related to taxation; accelerating all economic processes and maximum relief the life of the whole society.

Optimal commodity taxation – a new computational procedure with application to India

PurposeThis paper aims to illustrate the usefulness of the proposed procedure to evaluate the Goods and Services Tax (GST) in India by applying it to provide evidence on optimal commodity tax rates.Design/methodology/approachIn the optimal commodity tax literature, the commonly used Ramsey–Samuelson–Diamond–Mirrlees framework assumes invariance of budget allocation between pre- and posttax regimes and uses only the first-order conditions in the two-stage optimization procedure. This paper proposes an iterative method that overcomes the above limitations in obtaining the optimal tax rates.FindingsIt is found that the optimal commodity taxes are highly sensitive to the procedure used to estimate them. The resulting tax rates turn out to be close to the GST tax slabs. The results also show that on both absolute and relative measures, for all the selected states considered here and for All-India, the optimal tax systems are progressive for two chosen values of the inequality aversion parameter.Originality/valueThere is a very limited literature on the computational methodology to calculate optimal commodity taxes, and consequently, the evidence is quite scarce as well. In combining contributions to the computation of optimal taxes with empirical evidence, this paper fills a significant gap in the literature. The context of India gives it added value since the GST has recently been introduced in India, and to the best of the authors’ knowledge, this is one of the first attempts at evaluating the Indian GST through the spectacles of optimal taxes.

Oil and gas complex of Russia:fiscal instruments and taxation system

The largest shares of the formation of the country's budget are tax revenues from the oil and gas complex of the national economy, obviously the huge impact of this complex of management on the "health" of the economy as a whole. The creation of an optimal tax system that ensures stable forecasting of oil and gas revenues, rational control and constant replenishment of the budget in the face of the most complex global economic shocks, the volatility of world markets, and a raging pandemic is becoming a priority task of the Government of the Russian Federation. The development of deposits, the parallel decline in hydrocarbon production and the decline in the production of subsequent products require a detailed analysis of the current state of taxation in the hydrocarbon segment of the economy of the Russian Federation. Perhaps closer attention to the problems of taxation of such an important complex as the oil and gas complex for the Russian economy will help solve the problems not only of the functioning of the complex, but also of the economy of the state as a whole. The oil and gas complex, being a powerful source of benefits, could become a necessary basis for the formation of an economy that does not focus on the banal sale of the extracted raw product. Tax reforms of the subjects of the oil and gas complex could become an example for further reforms needed in our time in all sectors (complexes, segments, industries) of the national economy.

Direct Taxation in the European Union Countries (II)

The importance of the topic lies in the role played by taxation and fiscal reforms in this field for the economic development of the states around the globe especially as this paper focuses on the Member States of the European Union, which record different levels of taxation and where there are still quite a few different approaches to taxation, despite sustained efforts towards convergence. The involvement of our country in this process of European integration is based on removing the inconsistencies and failures of previous reforms, as well as reconciling the objectives of efficiency, effectiveness and equity that are the foundation of an optimal tax system.

How to Tax Different Incomes?

We study the optimal tax system when taxpayers earn different kinds of income by supplying different inputs. Imperfect substitution between inputs allows for general equilibrium effects. We consider any type of cross-base responses to tax changes such as income-shifting. Formalizing the tax schedule as the sum of many one-dimensional schedules, we express optimal marginal tax rate on any kind of income in terms of sufficient statistics, including new ones for cross-base responses and general equilibrium effects. We also identify the conditions under which making the personal income tax marginally more schedular is socially desirable. The comprehensive and schedular (dual, in particular) income taxes being recurring proposals in the public debate, we derive sufficient conditions under which each form of tax is optimal. We stress how empirically restrictive these conditions are. Using a new algorithm on French tax return data, we characterize the optimal combination of a nonlinear tax schedule on personal income and a linear tax rate on capital income. We find that one should include, without any deduction, all income sources in the personal income base and subsidize the source of income which is more elastic. We find that crossbase responses have little effects on the personal nonlinear income tax schedule but increases by 5.9 to 6.9 percentage points the capital tax rate. General equilibrium effects also increases this tax rate by around 4.5 percentage points.

Direct Taxation in the European Union Countries (I)

The importance of the topic lies in the role played by taxation and fiscal reforms in this field for the economic development of the states around the globe especially as this paper focuses on the Member States of the European Union, which record different levels of taxation and where there are still quite a few different approaches to taxation, despite sustained efforts towards convergence. The involvement of our country in this process of European integration is based on removing the inconsistencies and failures of previous reforms, as well as reconciling the objectives of efficiency, effectiveness and equity that are the foundation of an optimal tax system.

Fiscal reform: a computable general equilibrium (CGE) analysis for the Kingdom of Saudi Arabia

PurposeThis paper aims to provide a quantitative assessment of the broad economic effects of tax policy reform in the Kingdom of Saudi Arabia (KSA).Design/methodology/approachUsing a dynamic computable general equilibrium (CGE) model of the KSA, three simulations are run. The first simulation is the baseline simulation, which generates growth paths of the Saudi economy in the absence of tax reform. In developing the baseline simulation, this study incorporates forecasts from the International Monetary Fund. The remaining simulations are policy simulations. A policy simulation deviates from the baseline simulation in response to a policy change. In the first policy simulation, this study introduces a value-added tax (VAT) that generates SAR 35bn. This study assumes budget neutrality with the additional tax revenue transferred to households via a lump sum payment. In the second policy simulation, this study introduces a corporate income tax that generates SAR 35bn. This study then calculates and compares the distortion these taxes introduce into the economy.FindingsThis study finds that although the introduction of new taxes increases government tax revenue, markets are distorted lowering efficiency and production. An introduction of VAT increases the cost of consumption relative to the cost of production. As a consequence, the real cost of labour increases lowering employment in the short run. Employment moves to the baseline, as wages adjust capital and real gross domestic product (GDP) is below base throughout the simulation period. The second simulation is an increase in the corporate tax rate with lowers the post-tax rates of return investors receive. This simulation shows that the negative impact on investment, capital and GDP is larger with the introduction of a corporate tax than with the VAT.Research limitations/implicationsLiterature focusing on tax policy reform in the Gulf Cooperation Council and, specifically, Saudi Arabia is limited. This paper contributes to the literature by focusing on the following: understanding the impact and mechanisms through which changes in taxation impact the economy more generally; understanding the potential harm caused to allocative efficiency and production due to taxes; and ways in which fiscal reform might complement other reforms such as efforts to diversify the economy, labour market and energy price reforms. This improves the information base available to policymakers charged with designing an optimal tax system that meets all future requirements of a country such as the KSA.Originality/valueThe authors developed and applied a CGE model for the KSA to analyse the impact of VAT and corporate tax on the Saudi economy. To the best of the authors’ knowledge, there are no recent CGE models for Saudi Arabia that have been used for tax policy or quantifying the potential harm to the economy when new taxes are introduced.

Comparative Analysis of Direct Taxation Rules from Different European Union Countries

The involvement of our country in the process of European integration is based on removing the inconsistencies and failures of previous reforms, as well as reconciling the objectives of efficiency, effectiveness and equity that lay the foundation for an optimal tax system. Carrying out a comparative analysis of local taxation in the Member States of the European Union could help to remove these inconsistencies, providing an overview and the conclusions drawn can be considered for improving our tax system. The countries we have chosen to carry out the comparative analysis on are part of both groups of developed economies and emerging economies, so the analysis could be relevant based on almost similar contexts, being part of the European Union. The group of developed countries under observation is made up of Italy, France and Germany, all three of them being founding members of the European Community, while the group of developing countries we chose is made up of Bulgaria, Romania and Poland, all of which are the latest members that adhered to the European Union. This paper analyses the fiscal pressure borne by taxpayers, at the European Union level, from direct taxes. The correlation between fiscal pressure and direct taxes, in an empirical analysis conducted at microeconomic level, as well as the challenges that the Member State face in their attempt to harmonize direct taxes are also highlighted in this study. Following this comparison, we will be able to assess the impact of direct taxes and to which extent these influence a country’s economic development as well as what challenges the governments are currently facing in increasing their amounts of revenues.

Optimal Taxation of Consumption and Income

Optimal taxation and tax system design both involve important tradeoffs with respect to efficiency and fairness, and researchers in the fields of public finance and applied economics have analyzed these issues for many years. In this study, while the focus is primarily on optimal consumption and income taxes, we first explain the concepts of excessive burden and efficiency as they relate to this topic. Then, we examine optimal taxation and the structure of an optimal tax system. Lastly, we address optimal consumption and income taxes, emphasizing theoretical discussions on their impact on the economy. The aim of this study is to reveal how the concepts of optimal consumption and income taxes are related, through a literature review, and to examine whether theoretical studies have influenced tax policies. This review reveals that studies of optimal tax theory focus on (i) flat rate taxation of income, (ii) zero marginal tax rates on high income, and (iii) shifting taxation to indirect taxes, and that these concepts have been reflected in tax reforms. However, we find that optimal taxation does not mean that every country applies or should apply these concepts in the same way; they should be considered according to the specific socio-economic structures of developed and developing countries, in a way that reflects each society. While discussions on optimal tax theory from the past to the present must take place within a framework of efficiency and fairness, discussions of optimality in taxation will continue into the future with developments in technology. In addition, factors such as a country’s level of economic development, international tax competition, capital flows, and environmental factors will keep the issue politically alive.

Should Robots Be Taxed?

Abstract Using a quantitative model that features technical progress in automation and endogenous skill choice, we show that, given the current U.S. tax system, a sustained fall in automation costs can lead to a massive rise in income inequality. We characterize the optimal tax system in this model. We find that it is optimal to tax robots while the current generations of routine workers, who can no longer move to non-routine occupations, are active in the labour force. Once these workers retire, optimal robot taxes are zero.