Most people would agree that some level of tax is necessary to provide public services, although there is a lot of debate on the level and nature of tax. This entry will look at some of the issues involved in the tax system.

There are a number of questions that can be asked of any change in the tax system, such as a new tax being introduced, or change the rate of a tax, or other details about it, being changed. Below are a few of them.

1) Is it fair?

This can be a very difficult issue. The usual standard to apply is that a tax is fairer if those with higher incomes pay a more tax as a percentage of their income. Such a tax is called a progressive tax, as opposed to a regressive tax, where the higher the income you have the lower the proportion of it you pay in taxes. Income tax is progressive, as you pay more of your income if you have a higher income, than if you have a lower one. VAT (A tax added to the price of goods and services ) is usually referred to as regressive, as someone on a lower income is likely to spend a greater proportion of their income, so pays more VAT as a proportion of their income than a higher earner.

This is very debatable and some people say that a proportional¹ tax is fairer. They would argue that everyone has the same entitlement to keep the money they earn. Those opposing such an argument would argue that higher earners need their money less so should pay more in tax than those with lower incomes. Such a debate is possible when talking about the tax system as a whole.

Some people would favour a tax system that acted to redistribute incomes, using progressive taxes (and provision of benefits) to create more equality in income. However, there is debate about the extent to which the tax system should redistribute income, if at all. The key to this is the extent that higher earners deserve their higher incomes, and the related issue of what level of inequality of income is the fairest.

Some taxes that do not use income have to be considered carefully here. A tax on wealth can be considered in a similar way to income. However, a useful question to ask is 'Is there a reason why those paying higher rates of tax to do so?'. If the answer is no, then the tax should be scrapped or reconsidered.

2) Is it easy to collect?

This is more practical. A window tax ² would not be very easy to collect, because finding out the number of windows a house has can be difficult. The standard question to ask is, 'Is it worth it?'. If the cost of processing and collecting a tax is too large compared to the revenue that will be collected, the tax probably should be abandoned.

3) Is it easy to evade³?

A Window tax would be very easy to evade unless the detectors were very thorough. Putting a sheet over a window may reduce the tax paid, unless the inspector has a thorough inspection. Corporation tax(The tax on the profits of businesses), is harder to avoid, as businesses can be required to submit their accounts, so the amount of tax to pay can be calculated.

The greater the revenue generated, the easier evasion is to detect, as there will be more money available to employ detection methods, such as inspectors to prevent tax evasion. Whilst the more expensive detection methods can be used for taxes not intended to raise large amounts of revenue, this is less cost-effective, and may make the cost of collecting the tax so large that it is not worth the revenue raised.

4) It is easy to avoid ⁴?

This is a distinct question to tax evasion. Here, it may be you can reduce your tax bill, but the question is, "would it be fair for you to pay less tax?". If you did not have a TV that would reduce you tax bill, through the TV license, but then it would be wrong to expect you to pay it. A window tax would be quite easy to avoid, if you simply bricked up a window that you never looked out of, such as in a disused attic. This relates back to question 1). The key here, is to look out for loopholes in the tax. Such a loophole can allow a business or individual to reduce their tax bill unfairly.

This is a particular problem when the bigger businesses, and richer individuals can hire advisors to help reduce their tax bill, whilst the poorer individuals, and smaller businesses may not be able to. This can make the tax system less fair to individuals, and also make competition between businesses less fair.

One other problem is that some taxes can discourage desirable actions. For example, the Poll tax was only paid by people registered to vote. Such a tax can be an incentive for people not to register to vote, therefore resulting in fewer people voting, harming the democratic system.

5) Is it easy to understand?

This hurdle is one that many taxes at the moment could fail. A Window tax would succeed here, as it would be very simple to calculate the tax payable, by counting the number of windows. The more complex the tax is, the harder it is to implement successfully, and the less likely it is that it is collected, or paid correctly. Complexity could also introduce loopholes. However, complexity could also be aimed at closing loopholes.

A complex tax can have a number of problems. One is the chance of people making honest mistakes in paying tax. It could also make the job of tax collection more difficult. A more complex tax could also increase the costs involved in the administration of the tax.

6. How will the tax influence individuals?

A tax could provide a reason to avoid buying something. For example, a tax on tobacco could make smoking less attractive, and reduce demand for cigarettes. However, the effect may not be very pronounced. The effect of the tax depends on how much price is a factor in the decision to buy something. Some people may have an addiction to smoking, so a tobacco tax may not be very effective.

This may result in people using alternative products. For example, taxing leaded petrol may result in more unleaded petrol being sold. However, when there is no alternative, a black market may form. This is possible if taxes for tobacco, for example, are too high.

Conclusion

These tests illustrate what a good tax should be, and to some extent, the issues that are appropriate when considering the whole tax system. Whilst not comprehensive, this should give you an overview of many of the important issues involved in the taxation system.