Question

As we know, optimal tax theory uses the tools of welfare economics to provide another view of the efficiency and equity considerations of tax design. Yet, in general how do we know that taxes: have horizontal and vertical equity, neutral concerning economic incentive, should be administratively easy, and should have low compliance costs. Please explain. please show reference

Answer 1

Ans: An optimal tax theory is a theory that is used for the study for calculating and carry out a tax that mainly maximize the social welfare task and that lead to economic limitations. And the social welfare task is mainly a function of person's value and therefore tax system is used especially for persons value.

also the tax revenue is needed for giving capital for the supply of goods and for giving other government services and it is a very important thing for the redistribution of the goods to the rich and poor persons.

And the main purpose of tax system is that, giving a sufficient amount of money to the government economic system as tax revenue.

we know that taxes have horizontal and vertical equity,when we talk about cost and optimal tax system the the horizontal and vertical equity is very important for that,and also the equity is determined by means of persons ability to pay their tax.

a persons ability to pay the tax is determined by looking their ability and how much resources they keep and according to that how much tax they should pay to the government is determined. these answers for these questions can be understand from the horizontal and vertical equity.

Horizontal equity mainly refers to a concept that the two persons with the ability to pay the same amount , actually that means that both persons have same amount of income and they should pay the same tax.

vertical equity shows a concept that the government should give a higher tax on the persons having higher capability to pay and lower tax on the persons having lower capability.

thanks...