Question

Economists believe that any broad-based tax should possess five characteristics. What are these and can you give examples when these characteristics hold or are violated? Provide real world examples from different countries and time periods reported in journal articles, news stories and government reports. Make sure you discuss each example in detail and provide your own critical overview.

Answer 1

The five characteristics of a broad based tax system include ease of collection, ease of compliance, flexibility, economic efficiency and end-results equity.

Ease of collection and compliance reduces the inefficiency by ensuring that individuals are better able to calculate tax bills and they are not able to hide any information. This has proved difficult in developing economies all over the world as governments and institutions were run by tax avoiding individuals. This characteristic was also violated when several countries implemented GST, as the rules were not succinct and this created confusion for the common man.

Flexibility is a key tool in order to address any inefficiencies inherent in the tax system. Such as when GST was implemented and rolled back in some countries such as Malaysia. There should be flexibility as the revenues increased, the government decided to roll back the GST, this enhances efficiency, when decisions are made to quickly respond to the need.

Economic efficiency wherein individuals face same prices, but firms and consumers don't pay the same price, which increases distortion. This is seen in the case of necessities, such as the final price is subsidised by the government so that specific consumers don't have to pay taxes as seen in developing markets all over the world, however firms have to pay a uniform tax rate in order to function in the ecosystem.

End results equity holds when there is horizontal equity wherein taxpayers in similar income brackets are made to pay similar amounts in taxation. Whereas vertical equity holds when the taxpayers which are better off should pay the same proportion of income as taxed as those who are less well off. There was regressive taxation wherein those with low incomes pay a larger share seen in Oklahoma as a sales tax was imposed which harms the poor. Thus in most instances of indirect taxation, all over the world this characteristic is violated as a person who is well off pays the same rate as a person who is not that well off.