What Are the Characteristics of Sound Tax Policy?
As our quarter’s focus on taxes comes to a close, we will step back from the details and examine our overall system of taxation. Some Americans believe the only sound tax policy is the policy that minimizes taxes. However, most of these same people would be appalled at the devastation that such tax policy would wreak on our schools, roads, parks, and military. So, dismissing this extreme position leads us to accept the fact that taxes must be levied and a more relevant question might be the consideration of the factors that make for a sound tax policy.
The Tax Foundation is a non-partisan organization that evaluates and informs on various elements of taxation. They propose the following four elements for a sound tax policy:
- Simplicity
- Transparency
- Neutrality
- Stability
How do our current tax regimes perform on these four factors? It would be hard to find any American who would argue that our Federal Income Tax code is simple. After all, a printed copy of all Internal Revenue Code provisions would completely fill up the floor to ceiling bookshelves in a good-sized room. Some of our forms of taxation, such as retail sales taxes, however, are straightforward so our grade here would not be an unequivocal “F”.
Transparency suggests that tax policy should clearly define what taxpayers must pay and when they must pay it. Once again, retail sales taxes score well here, as do property taxes. Taxes which are hidden in the final price of goods are not transparent so excise taxes and the value-added tax systems so prevalent in Europe would not fare well under this measure.
Neutrality in taxation means the tax should not encourage or discourage personal or business decisions. Such neutrality results in the government having no role in picking the winners and losers within the economy. Once again, our federal income tax code here fails miserably as it is larded with tax preferences for real estate, energy and any other favorite industry (usually determined by donated dollars) of a powerful legislator. Simple flat taxes applied uniformly across all forms of income would score far higher on this factor.
Lastly, taxpayers deserve consistency and predictability in taxation. Frequent and retroactive changes, tax holidays and sunset clauses in taxation score poorly here. The Tax Cuts and Jobs Act of 2017 failed miserably in this area as do our frequently changing Estate Tax laws. These latter regulations serve mostly to provide consistent employment for Estate Tax Attorneys/Planners, rather than providing a consistent revenue stream to fund governmental operations.
In summary, our methods of taxation in the US have earned at best a middling grade on these criteria. As taxpayers, we spend substantial amounts on the elected officials we choose to represent us. One could easily argue that when it comes to taxation, they are clearly not giving us our money’s worth!
If you would like to learn more about these and other wise financial planning moves, please contact us through our Level 5 Financial LLC website or via phone at 719-323-1240. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
