Today we start by analysing a paper "Designing Tax and Transfer Schemes: Some Basic Principles" by John Creedy, Department of Economics, University of Melbourne. [Dr. John Creedy, incidentally, has published quite a few papers on taxation and some of those can be accessed here.]
Below you will find some points made by Dr. Creedy and my understanding of these. For clarity they are intermingled here, but you can get better idea by reading Dr. Creedy's paper linked above. Just to keep in mind, the paper deals with taxes and benefits (such as social security) together.
So broadly what I understood from this is the following:
- While governments derive the "power to tax" from the Constitution, the nature of the system they choose depends on "attitudes" to the role of the state.
- These lead me to following inferences
- The Constitution may or may not define what the "role of state" is. But system for taxation is affected by what government itself and/or the society thinks the "role of government" is.
- Further, over time, as a perception of the role of the state changes, the best system to attain that goal may also change. But tax systems do not change that much. In that context, look at the FDR tax reforms. These are reorienting to new "role of the state" as a provider of social security.
- In Indian scenario, the role of government changed drastically from near socialism to proper capitalism. The Indian Constitution does state the country to be socialist but the society has moved away from it.
- So Indian tax system needs a drastic reform.
- The tax structure is influenced by views regarding the extent to which govern- ments may intervene in peoples lives. Tax administration involves obtaining private information. It may, for example also involve forcing people to take particular jobs. Attitudes towards these aspects are influenced by views regarding certain basic freedoms or rights. A related issue here is the level of government chosen to carry out necessary administration.
- The ways in which individual responsibilities are perceived are important. For example, unemployment has variously been judged as a failing of individuals, or alternatively as a ‘problem of industry’. This affects the extent to which people are categorised as being ‘deserving poor’ or ‘non-deserving poor’.
- The nature of a tax and transfer system adopted will depend on a range of paternalistic judgements. For example, some judges may prefer to provide benefits (such as rent assistance, food stamps and so on) which are linked to certain spe- cific goods. Or, the view may be taken that people should make minimum savings for retirement in the form of a special income-related contribution in addition to income taxation.
- An important factor is the view taken of intra-family intra- and inter-generational transfers versus a state system of support involving compulsory taxation. This has been particularly relevant in the context of aged care and disability care, where there have been substantial changes in attitudes over time. Thus there is a strong preference for tax-financed care (insurance) rather than within-family transfers.
- A choice must be made regarding those eligible for the receipt of transfers, or payment of taxes. This may involve the choice of a social insurance type of system whereby unemployment and sickness benefits and pensions are available only to those who have a history of tax (or ‘national insurance’ contributions).1 Alternatively, eligibility may be related to nationality or residence requirements.
- A judgement must be made regarding the tax base. This may be some concept of income, consumption, or wealth. The decision here is influenced by views regarding the main aims of the tax system, and often a variety of tax bases are used. In the public finance literature, the ‘comprehensive’ income concept is often mentioned, but its choice in favour of other bases involves a value judgement. Comprehensive income is of course difficult to measure in practice, and involves the awkward treatment of unrealised capital gains and the coverage of such a tax.
Next we will look at other papers.
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