What are the Challenges in Designing an Effective Personal Income Tax System?
Taxation, as a primary media of the implementation of fiscal policies of various national governments, generally has three primary functions, which come as follow:
* Raise funds as a main source of fiscal income of national governments
* Stabilize the market and macro economy against market failure
* Distribute and redistribute the income among individuals to reduce social wealth inequality
The priority of those functions varies from country to country and changes in different phases of social and economic development. For most developing countries, the widening gap between the rich and the poor is not only a major economic issue arousing public concern but also a major social issue. The developed west, yet is in need of effective taxation system to tackle with problems such ...view middle of the document...
Hereby, this essay illustrates the challenges in designing an effective income tax system on a basis of social fairness to achieve purposes of distributing and redistributing wealth, promoting social security, and reducing income disparity.
Discussion Concerning the Major Taxation System Elements
1. The system selection
The personal income tax systems adopted by over 100 countries and regions around the globe can be divided into three types:
1. Comprehensive income tax system. It levies an extra progressive tax rates on the sum of all net income (capital, wage and pension income less deductions) after deducting deductible allowances.
2. Classified income tax system. This is a system where individual’s income will be levied against its different sources at corresponding differentiated tax rates.
3. Dual Income tax system, also known as the Nordic tax system. Literally, it is the mixed taxation system of the comprehensive income tax and classified income tax.
The choice of income tax system is determined by the national expropriation and requisition level, in which the national political system plays a major part. When the classified personal income source is to be levied at progressive proportional tax rate, the intervals for the progression of different levels of taxable income and the highest taxable income tax rate should be within reasonable range. Otherwise the payees will be face with unreasonable high income tax burden where the sensitivity of the deductible expenses is high enough to encourage malpractices. Issues for filings of tax returns such as the complexity of the process, the complicated computation will also be considered when selecting the national taxation system.
[ 2 ]. Musgrave, Richard A. (1959). The Theory of Public Finance: A Study in Public Economy.
[ 3 ]. Source: World Institute for Development Research WIDER (WIID1) 2014, Luxembourg Income Study Database 2012.