Former US President Ronald Reagan said that the US tax system was “complicated, unfair, cluttered with gobbledygook and loopholes designed for those with the power and influence to hire high-priced legal and tax advisers”. Paul Solman of PBS News, looks at the US tax system in the video below and compares it to other countries. Even Paul Ryan, Speaker of the House states that the USA has the worst tax code in the industrialised world, bar none. T.R.Reid, author, “A Fine Mess” suggests that New Zealand is a model of good tax policy. “They have done what all the economists think is right, to get a tax code that is simple, fair and efficient”. He mentions the BBLR – broaden the base, lower the rates. You broaden the base by making everything taxable – health insurance, car park, pension contribution. By contrast Americans spend about six billion hours a year collecting the data and filling out the forms. They spend $10 billion to H&R Block and other preparers and, on top of that, $2 billion in tax preparation software, which still takes hours of work. Furthermore there are more than 400 additions to the tax code every year, and most of them are giveaways to one or two taxpayers. Of the 35 richest countries, in total tax burden, U.S. ranks 33rd. And in return, the US government spends less as a percentage of GDP than other governments.
What makes a good tax?
A new part of the AS Level Economics syllabus is Canons of Taxation. Adam Smith’s contribution to this part of economic theory is still regarded as classic. His enunciation of the canons of taxation has hardly been surpassed in clarity and simplicity. His four celebrated canons are as follows:—
- Canon of Equality. Equality here does not mean that all tax-payers should pay an equal amount. Equality here means equality or justice. It means that the broadest shoulders must bear the heaviest burden.
- Canon of Certainty. The individual should know exactly what, when and how he is to pay a tax. Otherwise, it causes unnecessary suffering. Similarly, the State should also know how much it will receive from a tax.
- Canon of Convenience. Obviously, there is no sense in fixing a time and method of payment which are not suitable. Land revenue in India is realized after the harvest has been collected. This is the time when the cultivators can conveniently pay.
- Canon of Economy. This means that the cost of collection should be as small as possible. If the bulk of the tax is spent on its collection, it will take much out of the people’s pockets but bring little into the State’s pocket. It is not a wise tax.