Question

We know that taxation has a cost, deadweight loss, yet governments are creative in applying a wide range of taxations tools. Considering the GCC economies, which just started to adopt taxation, what does it take to put in place an effective tax system? Drawing on your efficiency and equity discussion (Forum1), what does it take to reduce the cost of taxation (improve efficiency) and make it more equitable? Why governments should pay attention to these issues?

Answer 1

taxaation provides the resources necessary to the government to carry out development projects and its daily activities of maintaing law, order and peace in the country. An effective tax system is based on a few things:-

• Population- A country with a large population can have a lower average tax rate than a country having a relatively lower population.
• Per capita income- If per capita income of a country is high then more tax can be charged but if per capita income is low then lower taxes have to be charged
• Aspirations of the government- If government wants to invest highy in infrastructure projects and other developmental tasks, it has to either take more debt or increases taxes in a suitable manner as high taxes leads to less collection of taxes.

An effective tax system also has to decide on how to collect taxes and how to make the revenue collection system robust.

The best working tax mechanism is to charge progressive tax in different slabs for different income groups i.e., higher income groups pay higher taxes than the lower income groups to bridge the income inequality gap but these policies have to be grouped together with indirect taxes to have a larger impact. Also to avoid tax evasions, rebates and subsidies via tax payers contribution towards social security schemes and infrastructure development schemes can also be used such that the government gets the investment as well as tax payers gets the benefit of tax saving.