Why Taxes Matter, by Scott A. Hodge - Tax Foundation

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Why Taxes Matter, by Scott A. Hodge - Tax Foundation

What Is a Good Tax?In evaluating taxation, the Tax Foundation is guided by principles that apply just as wellto state and local tax systems as to federal taxes. All levels of government should enact taxsystems that work together as harmoniously as possible by using consistent definitions,procedures and rules.These are the key criteria that all taxes should meet:6TransparencyA good tax system requires informedtaxpayers who understand how taxes areassessed, collected and complied with.It should be clear to taxpayers who andwhat is being taxed, and how tax burdensaffect them and the economy. Tax legislationshould be based on careful economicanalysis, and legislative procedures shouldinclude open hearings with ample opportunityfor the public to comment.NeutralityThe fundamental purpose of taxes is to raisenecessary revenue for programs, not to micromanagea complex market economy withsubsidies and penalties. The tax system’scentral aim should be to collect that moneywhile interfering as little as possible with thedecisions of free people in the marketplace.SimplicityThe tax system should be as simple as possible.The cost of tax compliance is a realcost to society, and complex taxes createperverse incentives to shelter and disguiselegitimately earned income.StabilityTax law should not change continuously.A rapidly changing tax system frustrateslong-term planning and increases uncertaintyin the economy.No RetroactivityChanges in tax law should not be retroactive.As a matter of fairness, taxpayersshould rely with confidence on the law asit exists when contracts are signed andtransactions are made.Low Rates, Broad BasesIt makes a difference how large a share ofnational income is taken by government intaxes. The private sector is the source of allwealth and improvements in the standardof living. Taxes should consume as small aportion of national income as possible andshould be broadly based so that tax ratescan be moderate at all points. The currentfederal individual income tax system ignoresmore than half of all income, mostlyso that politicians can curry favor withvoters. The result is high tax rates on theremaining income, rates more than twiceas high as they could be.Don’t Inhibit TradeIn our increasingly global marketplace, theU.S. tax system must be competitive withthose of other developed countries. Our taxsystem should not penalize or subsidizeimports, exports, U.S. investment abroador foreign investment in the U.S. Taxes oncorporations, individuals, and goods andservices should be competitive with othernations.

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