Tax Systems and Tax Reforms. Some ideas on the topic (ii)

Alfredo CollosaAlfredo Collosa    21 February 2020
Tax Systems and Tax Reforms. Some ideas on the topic (ii)

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Secondly, in order to carry out a tax reform, it is essential to compare the current system and the one that the reform is intended to achieve. Then, we must analyze the steps to reach the proposed ideal system. Also, it is key throughout the reform process to know the causes of tax evasion[1], since only in this way we build a strategy for fighting it, which can be included in the proposals for tax reforms.

This topic highlights the gravity of tax evasion in Latin America today and the high inequality in income distribution, highlighting the limited redistributive capacity of the fiscal policy. In many countries there is no institutionalized and systematized task of estimating evasion, with adequate periodicity and with published results.

As I always affirm, it is better to do sectoral studies of evasion or comparison than global studies of non-compliance, since the sectoral studies allow to determine which taxpayer or sector evades taxes and what maneuvers it uses for it.

Regarding tax reform proposals, one of the most relevant works on the subject is the Mirlees report.   In 2006, the British Institute of tax studies (IFS) commissioned James Mirrlees, Nobel Laureate in Economics, to design an optimal tax system. It was mandated to identify the characteristics of a good tax system for an open 21st century economy and to suggest how the British tax system could be reformed to bring it closer to that ideal.

For more than four years, Professor Mirrlees surrounded himself with the best tax scholars. He created a nine – member committee under his leadership. They held many meetings in London and Oxford, in which up to 60 experts organized in small working groups participated. The result was a voluminous report that presents a series of fiscal recommendations as an “ideal to pursue”.  The following are highlighted as objectives of a good tax system:

  • Economic efficiency.

  • Equity.

  • Reduced administration and compliance costs.

  • Transparency

Regarding the characteristic features of taxation, it was said that they should be characterized by neutrality, simplicity and stability.  The report then goes on to detail each of the taxes and their main characteristics.

Regarding personal income tax, it should be consistent with the Social Security contributions with progressive and simple contributions of no more than two or three instalments applicable to all income. Regarding corporate income tax, it should respect the country of origin principle, deduction of own funds, appropriate alignment of rates in order to avoid distortions and deductions of verifiable expenses based on assessment for small enterprises.  As far as indirect taxation is concerned, the VAT-rate taxes are proposed on all consumption expenses and to exempt expenses on intermediate goods and services used by enterprises.  It also proposes to eliminate the exemption from financial services, to apply uniform rates, while reducing and exempting them should be avoided. About excise duties, it is recommended that they continue to be used for their regulatory and tax collection functions.

An important chapter of the report is devoted to the environmental taxation, which consists of using the tax system to correct environmental externalities, equalization and price stability, emissions of greenhouse gases and to establish a tax to the traffic congestion instead of one on fuel.

Regarding taxes on wealth and transfers of wealth, the report supports removing the tax on the personal property and apply the tax on the value of the soil.  It also favors the introduction of a tax on transfers of wealth between living persons and mortis causa.   Finally, it suggests not to impose taxes on transfers of property, including transfers of financial transactions.

As we see the topic of tax systems and tax reform proposals, it is extremely complex, with multiple variables to analyze, which vary in each country and at every moment of time.

I would therefore like to stress the importance of avoiding repeating errors in many countries that, without further analysis, implement tax reforms that may have yielded results in other latitudes, but can in no way help the country under analysis.

To all that said, I consider essential to work for the simplicity of the tax structure since it is clear that complex tax systems favor evasion and avoidance, because they create uncertainty about the scope of tax rules, raise the costs of control, increase compliance costs and multiply the formulas or mechanisms of evasion and avoidance.

Modern technologies, without hesitation, are a great ally for the simplicity of the tax structure. I always assert [2] that technology should simplify taxes by reducing compliance costs for taxpayers and system administration costs.  A very important role in simplification is to have broad-based taxes, single quotas and very few preferential treatments such as tax exemptions or exceptions.

No less important is the issue of acceptance of the tax system, since if taxpayers perceive the tax system as unfair, they will be less inclined to comply.

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