Tax policy
Tax policy is the choice by a government as to what taxes to impose, in what amounts, and on whom. It has both microeconomic and macroeconomic aspects. The macroeconomic aspects concern the overall quantity of taxes to collect, which can inversely affect the level of economic activity; this is one component of fiscal policy. The microeconomic aspects concern issues of fairness (whom to tax) and allocative efficiency (i.e., which taxes will have how much of a distorting effect on the amounts of various types of economic activity).A country’s tax regime is a key policy instrument that may  negatively or positively influence the country's economy. Tax policies have significant economic consequences for both a national economy and particular groups within the economy (e.g., households, firms and banks). Tax policies are often designed with the intention of stimulating economic growth—although economists differ significantly about which policies are most effective at fostering growth. Taxation is as much a political issue as an economic issue. Political leaders have used tax policy to promote their agendas by initiating various tax reforms: decreasing (or increasing) tax rates, changing the definition of taxable income, creating new taxes on specific products, and so  forth. Of course, no one particularly wants to pay taxes. Specific groups, such as small business owners, farmers, or retired individuals, exert significant political effort to reduce their share of the tax burden. Tax codes are packed with rules that benefit a certain group of taxpayers while inevitably shifting more of the burden to others. Main reasons for taxation. There are some main reasons why government needs to levy taxes: Philosophy. Policymakers debate the nature of the tax structure they plan to implement (i.e., how progressive or regressive) and how they might affect individuals and businesses (i.e., tax incidence). The  reason for such focus is economic efficiency as advisor to the Stuart King of England Richard Petty had noted that the government does not want to kill the goose that lays the golden egg. Paradigmatic efficient taxes are those that are either nondistortionary or lump sum. However, economists define distortion only according to the substitution effect, because anything that does not change relative prices is nondistortionary. One must also consider the income effect, which for tax policy purposes often needs to be assumed to cancel out in the aggregate. The efficiency loss is depicted on the demand curve and supply  curve diagrams as the area inside Harberger's Triangle. National Insurance in the United Kingdom and Social Security in the United States are forms of social welfare funded outside their national income tax systems, paid for through worker contributions, something labeled a stealth tax by critics. Administration. The implementation of tax policy has always been a tricky business. For example, in pre-revolutionary colonial America, the argument "No taxation without representation" resulted from the tax policy of the British Crown, which taxed the settlers but offered no say in their government. A more recent American example is President George H.  W. Bush's famous tax policy quote, "." Efficient tax administration encourage businesses to become formally registered, expanding the tax base and increasing revenues. An unfair tax administration can harm the tax system and reduce the government legitimacy. In many developing countries, the non-success of improving the tax administration while introducing new tax systems has led to the widespread of tax evasion and lower tax revenues. Furthermore,is important to keep rules clear and simple to encourage compliance. High tax evasion is associated with complicated tax systems. Having a well designed and simple tax system is able to increase employment , investment and transparency. Tax administration ecosystem is also changing, with the introduction of new analytical tools and technology, because of this digital information flows are increasing. Consequently, administration is operating in a way in which they increase incentives for compliant taxpayers. Operating costs of tax policy. Modern taxation systems have the capacity to impose a heavy burden on taxpayers, and particularly on small businesses taxpayers. That burden typically consists of three elements. Firstly, there are the taxes themselves. Secondly, there are the efficiency costs (variously referred to as deadweight losses or excess burden), the third types of costs are compliance  costs of taxation, and finally, there are the administrative costs (sometimes referred to as operating costs) of the tax system. Administrative costs can be described as costs incurred by (mainly) public sector agents in order to administer the tax-benefit system. The relationship between administrative and compliance costs of taxation is not always clear at a first glance. Sometimes, there might be an inverse relationship between them, which is a phenomenon called "The administrative-costs compliance-costs trade-off." An example of this inverse relationship might be an implementation of a self-assessment system in taxation. However, This trade-off  principle is not always the reality, as it is, for example, possible to reduce both types of costs through some sort of simplification of the tax system or an increase in compliance costs might occur as a result of administrative inefficiency. These types of costs together are called operating costs of taxation. When implementing some new parts of tax policy or reorganizing it, policymakers always have to consider the weight of administrative costs and compliance costs of taxation. There are two main types of administrative costs: Direct administrative costs. Direct administrative costs are on the government side (the burden is  borne by the government). "It is not immediately obvious, exactly, which activities should be attributed to the operation of the … system” (p. 19). Administrative costs are mainly connected to running the tax collection office - it includes salaries of staff, costs of legislative enactment relating to the tax system, judicial costs of administration of the tax dispute system, and many more. Indirect administrative costs. Indirect administrative costs are on the side of taxpayers (the burden is borne by the government). Tax compliance costs are those costs “incurred by taxpayers, or third parties such as businesses, in meeting the requirements laid upon  them in complying with a given structure and level of tax” (Sandford, Godwin and Hardwick, 1989, p. 10). Indirect administrative costs are mainly connected to the costs of complying with tax requirements - it includes the costs of labour/time consumed in completion of tax activities, filling out forms, record keeping, the fees paid to professional tax advisers, transfer pricing and many more. compliance costs. Tax compliance costs are the costs "incurred by taxpayers, or third parties such as businesses, in meeting the requirements laid upon them in complying with a given structure and level of tax”. There is no consensus  about what should and should not be included under the definition of compliance costs. However, there is a possibility to define some indisputable examples of costs, that are directly connected to the compliance of individual taxpayers. These examples include the costs of labour and time required for the completion of tax activities, such as acquiring the necessary knowledge to operate within the tax system properly, or compiling and creating all documents needed. More examples include the cost of purchasing professional assistance for the completion of tax activities, or other expenses connected to tax activities, such as purchasing software and hardware . Other types of compliance costs, such as the negative psychological effects on taxpayers as a result of the attempts to comply with the current tax policy, or many types of social costs, are very intangible, and it is, therefore, hard to quantify them, even though the effect of their existence is visible. Equity vs. Efficiency. An equity-efficiency tradeoff appears when there is some kind of conflict between maximizing the equity and maximizing economic efficiency. The trade-off between equity and efficiency is at the heart of many discussions of tax policy. Two questions are debated. First, there is disagreement  about the nature of the trade-off . To reduce inequality, how much efficiency do we have to give up? Second, there is a disagreement about the relative value to be attributed to the reduction in inequality compared to the reduction in efficiency. Some people claim that inequality is the central problem of society, and society should simply minimize the extent of inequality, regardless of the consequences to efficiency. Others claim that efficiency is the central issue. These disagreements relate to social choices between equity and efficiency. Equity. Equity can be divided into two main groups: horizontal equity and vertical equity . Efficiency. Efficiency for economists is equal to the concept of Pareto efficiency. Pareto efficiency means the situation of resource allocation where the concept of 'net' is dominant. In other word, basically we need to make someone worse in order to make others better under this efficiency. To seek for the efficiency, it is necessary to build the decentralized market mechanism. And to build that mechanism, tax system is often seen as an obstacle. Here, we need to think about the balance between efficiency and equity. And the best point of this balance is called 'Pareto improvement'. This is the ideal  answer to reply for the question of which policies should be implemented. Social Choice. The choices or decision of government are one of social choices. And social choice consists of two elements. First, it is the individual level. Second, it is the society's level. As far as the individual level, each individual builds their preference and has their utility following the budget's constraint and so on. This can make the indifference curve. And we can say that the points which are on this curve are matched to pareto efficiency. In the society's level, the curve are created  by seeing the participants as group A and group B. Here, the curve becomes the inverse proportional one which is very common style in the Pareto efficiency's curve. In this curve, when group A's utility will get down, group B's utility will get increased. The relation between them is like trade-off style. This is the very typical example of social indifference curve (There are other curves in other ways: Utilitarian way and Rawlsian way. And I will introduce them in the below paragraph). In the above, I mentioned about the thinking way or the process of  social choice. Now, when we try to take some policies, we need to measure the net benefits of different groups and to think about if the project is the Pareto improvement. If the project has the net positive gains and reduces measured inequality, it should be taken. If it is not so clear to understand so, we need to have other points to judge. Basically, there are three ways to do so: the compensation principle, the trade-off across measures of efficiency and equality, and the weighted benefits approach. The latter two are relatively easy to understand. The trade-off  one is the judgement based on the contemplation of efficiency and equality. The weighted benefits approach is focused on the total amount of utility. When we think about the compensation principle, we need to care about the willingness to pay the tax. If people are motivated to pay, the consumer surplus is getting higher. And in this principle, when the willingness to pay is more than the cost to do so (even when the cost is higher for some people), the projects should be taken. The compensation principle can overcome the difficulty of taxation due to the intervening efficiency. Tax  policy in the European union. Main principles and objectives. No unified tax policy. the EU Commission stated the belief that "there is no need for an across the board harmonization of Member States' tax systems.". Member states are to take full control of which tax system they want to impose, as long as they respect the rules of the EU. There is a possibility for tax field action of the EU under the principles of subsidiarity and proportionality, and also under the assumption that the member state in question was not able to provide an effective solution, therefore there is  need for support in terms of coordination for example. Removing obstacles. As a part of the EU's objective to empower its citizens to play a full part in the market, the organization announced in 2020 that the objective is to ensure that tax rules do not discourage individuals from benefiting from the internal market. The Communication "Removing cross-border tax obstacles for EU citizens" outlines the most serious tax problems that EU citizens face in cross-border situations, such as discrimination, and double taxation.