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Guiding Principles of Good Tax Policy: a Framework for Evaluating Tax Proposals

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Tax Policy Concept Statement 1 Guiding principles of good tax policy: A framework for evaluating tax proposals i About the Association of International Certified Professional Accountants The Association of International Certified Professional Accountants (the Association) is the most influential body of professional accountants, combining the strengths of the American Institute of CPAs (AICPA) and The Chartered Institute of Management Accountants (CIMA) to power opportunity, trust and prosperity for people, businesses and economies worldwide. It represents 650,000 members and students in public and management accounting and advocates for the public interest and business sustainability on current and emerging issues. With broad reach, rigor and resources, the Association advances the reputation, employability and quality of CPAs, CGMAs and accounting and finance professionals globally. About the American Institute of CPAs The American Institute of CPAs (AICPA) is the world’s largest member association representing the CPA profession, with more than 418,000 members in 143 countries, and a history of serving the public interest since 1887. AICPA members represent many areas of practice, including business and industry, public practice, government, education and consulting. The AICPA sets ethical standards for its members and U.S. auditing standards for private companies, nonprofit organizations, federal, state and local governments. It develops and grades the Uniform CPA Examination, offers specialized credentials, builds the pipeline of future talent and drives professional competency development to advance the vitality, relevance and quality of the profession. About the Chartered Institute of Management Accountants The Chartered Institute of Management Accountants (CIMA), founded in 1919, is the world’s leading and largest professional body of management accountants, with members and students operating in 176 countries, working at the heart of business. CIMA members and students work in industry, commerce, the public sector and not-for-profit organizations. CIMA works closely with employers and sponsors leading-edge research, constantly updating its qualification, professional experience requirements and continuing professional development to ensure it remains the employers’ choice when recruiting financially-trained business leaders. ii Guiding principles of good tax policy: A framework for evaluating tax proposals Contents 2 Overview Purpose of this tax policy concept statement Guiding principles of good tax policy Formulations of principles of good tax policy 7 Explanations of the guiding principles of good tax policy Equity and fairness Certainty Convenience of payment Effective tax administration Information security Simplicity Neutrality Economic growth and efficiency Transparency and visibility Minimum tax gap Accountability to taxpayers Appropriate government revenues 11 Challenges 13 Conclusion 14 Bibliography 15 Notice to readers 1 Overview Purpose of this tax policy concept statement Discussions occur regularly among politicians, economists, tax practitioners and others about changing national and subnational tax systems. Any suggestion for modifying tax rules — whether major or minor — raises the question of how to best analyze and compare proposals. A framework based on appropriate tax policies is needed to effectively analyze proposals to change tax rules and tax systems. Such a framework, based on widely accepted principles, also provides an objective approach for evaluating and improving existing tax rules. 2 Guiding principles of good tax policy: A framework for evaluating tax proposals Guiding principles of good tax policy The guiding principles, listed below, are commonly cited 6. Simplicity — Simple tax laws are necessary so that and used as indicators of good tax policy. The first taxpayers understand the rules and can comply with four principles are the maxims of taxation laid out by them correctly and in a cost-efficient manner. economist Adam Smith in his 1776 work, The Wealth 7. of Nations.1 These principles, along with the additional Neutrality — Minimizing the effect of the tax law eight, have been used for many years by governments, on a taxpayer’s decisions as to how to carry out a particular transaction or whether to engage in a economists, tax advisers and others.2 The numbered transaction is important. order of the principles in this statement is for reference only and is not an indication of the order of importance 8. Economic growth and efficiency — The tax system of these principles. should not unduly impede or reduce the productive capacity of the economy. 1. Equity and fairness — Similarly situated taxpayers should be taxed similarly. 9. T ransparency and visibility — Taxpayers should know 2. Certainty — The tax rules should clearly specify how that a tax exists and how and when it is imposed upon them and others. the amount of payment is determined, when payment of the tax should occur, and how payment is made. 10. M inimum tax gap — Structuring tax laws to minimize 3. C onvenience of payment — Facilitating a required tax noncompliance is essential. payment at a time or in a manner that is most likely 11. Ac countability to taxpayers — Accessibility and convenient for the taxpayer is important. visibility of information on tax laws and their development, modification and purpose are 4. E ffective tax administration — Costs to collect a tax necessary for taxpayers. should be kept to a minimum for both the government and taxpayers. 12. Appropriate government revenues — Tax systems 5. Information Security — Tax administration must should have appropriate levels of predictability, stability and reliability to enable the government to protect taxpayer information from all forms of determine the timing and amount of tax collections. unintended and improper disclosure. 1 Adam Smith, The Wealth of Nations, edited by Edwin Cannan, New York, The Modern Library, 1994, pages 887 to 890 2 For example, per the OECD: “Assuming a certain level of revenue that needs to be raised, which depends on the broader economic and fiscal policies of the country concerned, there are a number of broad tax policy considerations that have traditionally guided the development of taxation systems. These include neutrality, efficiency, certainty and simplicity, effectiveness and fairness, as well as flexibility.” OECD, Addressing the Tax Challenge of the Digital Economy, 2014, page 30. 3 Formulations of principles of good tax policy The following table shows how the guiding principles correspond to commonly used formulations of criteria used to analyze tax systems. U.S. Joint Committee on U.S. Government AICPA principles of Taxation (JCT) analysis Accountability Office (GAO) good tax policy OECD tax principles criteria criteria for a good tax system Equity and fairness See neutrality below. Is “the tax system fair? Does Equity includes two principles: the tax system treat similarly (1) ability to pay (horizontal situated individuals similarly? and vertical equity), and (2) Does the tax system account benefits received. “When making for individuals’ different judgments about the overall capacities to bear the burden equity of government policy, it is of taxation?” important to consider both how individuals are taxed and how the benefits of government spending are distributed.” Certainty See simplicity below. Convenience of “ Compliance costs for taxpayers payment and administrative costs for the tax authorities should be minimized as far as possible.” Effective tax See convenience of payment above. “ Can the tax system be Administrability including administration easily administered by the “processing returns, enforcement, government and can it induce and taxpayer assistance.” compliance by all individuals? Is enforcement costly? Can some individuals successfully avoid their legal liabilities?” Information security Structural features should keep pace with technological changes. Simplicity “ The tax rules should be clear and Is “the tax system simple? Simplicity in terms of the simple to understand so that Is it costly for taxpayers to “compliance burden (record taxpayers can anticipate the tax determine their tax liability and keeping, planning, return consequences in advance of a file their taxes?” preparation, and responding to transaction, including knowing when, audits).” where and how the tax is to be accounted.” 4 Guiding principles of good tax policy: A framework for evaluating tax proposals U.S. Joint Committee on U.S. Government AICPA principles of Taxation (JCT) analysis Accountability Office (GAO) good tax policy OECD tax principles criteria criteria for a good tax system Neutrality “ Business decisions should be See economic growth and The system should not distort motivated by economic rather efficiency below. economic decisions. than tax considerations. Taxpayers in similar situations carrying out similar transactions should be subject to similar levels of taxation.” Economic growth and “ The systems for taxation should be Does “the tax system promote Economic efficiency of tax efficiency flexible and dynamic to ensure that or hinder economic efficiency? changes should be considered. they keep pace with technological That is, to what extent does and commercial developments.” the tax system distort taxpayer behavior by imposing high marginal tax rates on labor, saving, or other activities? Does the tax system create a bias against the domestic production of goods and services? To what extent does it promote
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