Describe the criteria that governments use when decisions are made about employing taxes.

Question

What will be an ideal response?

Answer 1

Government must look at the collectibility of a tax. That is, when deciding what type of tax to levy, government must consider its ability to collect a tax and the potential of the tax to yield enough revenue to justify the cost incurred in collecting it. By definition almost all money in an economy is both income and expenditure and governments can raise revenue by tapping either or both streams of economic transactions. Given that in modern economies most income is earned and most purchased are made in relatively large and identifiable organizations, governments can employ private bodies to do much of the tax collections for them. Taxes should be fiscally neutral. A “good” tax is one that does not create significant distortions in the economy; that is, the tax systems should not give preference to one kind of revenue or expenditure unless there is a very good reason for doing so. Raising revenue is unpopular so any tax that can produce additional revenue without any political activity is a valuable tax for government. A buoyant tax is one whose yield keeps pace with or perhaps exceeds that pace of economic growth. In principle, the progressive income tax is a buoyant tax. Taxes can alter the income distribution within a society. Such an effect is usually thought of as benefitting the less affluent at the expense of the more affluent. The net income of taxes on income distribution is difficult to calculate. In the United States, there is evidence to indicate that the working poor and the rich pay higher rates of tax than the majority of other Americans. Finally, public officials must be concerned about the political acceptability of a tax. Acceptability may be a function of visibility. Everything else being equal, the less visible the tax is, the more acceptable it will be. The lack of a total tax bill is a very important element in a country with different levels of government, all of which levy taxes. The division among taxes and taxing units may make the total tax bill appear lower than it is.