[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

CHARACTERISTICS OF A GOOD
TAX SYSTEM
While the design of the tax system is a perennial subject of controversy—views
of how to balance the equity-efficiency trade-off differ markedly, as is wholly
predictable—there is broad consensus on five principles of a good tax system.
Fairness The first criterion is fairness. But fairness is not always easy to define.
Economists focus on two points: horizontal equity, the notion that individuals
who are in identical or similar situations should pay identical or similar
taxes, and vertical equity, the notion that people who are better off should pay
more taxes.
Efficiency The second criterion for a good tax system is efficiency. The tax system
should interfere as little as possible with the economy’s allocation of resources, and
it should raise revenue with the least cost to taxpayers. Very high taxes may discourage
work and saving, and thereby interfere with the efficiency of the economy.
Taxes that narrowly target particular goods—such as excise taxes on perfume, boats,
and airline tickets—discourage individuals from purchasing those goods, and thereby
also interfere with efficiency.
Sometimes, taxes can be used to improve economic efficiency or to advance
broader social purposes: taxes on pollution can improve the environment; taxes on
cigarettes discourage smoking, leading to improvements in public health. Such taxes
are said to yield a “double dividend,” increasing overall efficiency or promoting social
purposes at the same time that they generate revenue.
Administrative Simplicity The third criterion is administrative simplicity.
Taxation is an expensive process, both to those who must pay taxes and to the government
that must collect them. In addition to the costs of running the IRS, billions
of hours are spent each year in filling out tax forms, hours that might be spent producing
goods and services or enjoyed as additional leisure time. Billions of dollars are
spent by taxpayers and by the IRS on tax software, accountants and lawyers in the
annual ritual of preparing and processing tax forms. Finally, having a simple tax
system reduces the likelihood that a would-be tax evader will succeed.
Flexibility The fourth criterion is flexibility. As economic circumstances change,
it may be desirable to change tax rates. A good tax system should permit such
adjustments with relative ease.
Transparency The fifth criterion is transparency. A good tax system is one in
which it can be ascertained what each person is paying in taxes. The principle of
transparency is analogous to the principle of “truth in advertising.” Taxpayers are
consumers of public services. They should know what they (and others) are paying
for the services they are getting.
382 ∂ CHAPTER 17 THE PUBLIC SECTOR