Given the many levels of taxation (federal, state and local) that most taxpayers are subject to, it is safe to say that tax laws are changing constantly. Some of these changes are minor (changing a rate or adding a deduction) while others may involve major substantive changes (changing from an income tax to a consumption tax or taxing online transactions). Any suggestion for modifying tax rules raises the question of how to compare the proposed changes to either existing rules or other possible alternatives.
TEN GUIDING PRINCIPLES
To help evaluate changes in tax rules, the AICPA developed a framework of 10 guiding principles of good tax policy.
- Equity and fairness. Similarly situated taxpayers should be taxed similarly. This includes horizontal equity (taxpayers with equal ability to pay should pay the same amount of taxes) and vertical equity (taxpayers with a greater ability to pay should pay more taxes). Note: Equity is best measured by considering a range of taxes paid, not by looking just at a single tax.
- Certainty. Tax rules should clearly specify when and how a tax is to be paid and how the amount will be determined. Certainty may be viewed as the level of confidence a person has that a tax is being calculated correctly.
- Convenience of payment. A tax should be due at a time or in a manner most likely to be convenient to the taxpayer. Convenience helps ensure compliance. The appropriate payment mechanism depends on the amount of the liability, and how easy (or difficult) it is to collect. Those applying this principle should focus on whether to collect the tax from a manufacturer, wholesaler, retailer or customer.
- Economy of calculation. The costs to collect a tax should be kept to a minimum for both the government and the taxpayer.
- Simplicity. Taxpayers should be able to understand the rules and comply with them correctly and in a cost-efficient manner. A simple tax system better enables taxpayers to understand the tax consequences of their actual and planned transactions, reduces errors and increases respect for that system.
- Neutrality. The tax law’s effect on a taxpayer’s decision whether or how to carry out a particular transaction should be kept to a minimum. A tax system’s primary purpose is to raise revenue, not change behavior.
- Economic growth and efficiency. A tax system should not impede productivity but should be aligned with the taxing jurisdiction’s economic goals. The system should not favor one industry or type of investment at the expense of others.
- Transparency and visibility. Taxpayers should know that a tax exists, and how and when it is imposed on them and others. Taxpayers should be able to easily determine the true cost of transactions and when a tax is being assessed or paid, and on whom.
- Minimum tax gap. A tax should be structured to minimize noncompliance. The tax gap is the amount of tax owed less the amount collected. To gain an acceptable level of compliance, rules are needed. However, a balance must be struck between the desired level of compliance and the tax system’s costs of enforcement and level of intrusiveness.
- Appropriate government revenues. A tax system should enable the government to determine how much tax revenue it likely will collect and when—that is, the system should have some level of predictability and reliability.
For further discussion of this framework and its specific application to some actual proposals, see “The AICPA’s 10 Guiding Principles,” by Annette Nellen, in the February 2002 issue of The Tax Adviser.
—Nicholas Fiore, editor
The Tax Adviser