Question: Discuss the trade-offs between
efficient taxes, those with very low dead weight loss and `fair’ taxes, using
whatever definition of fair you wish to use.I am completely lost on what this means, and I have been struggling to answer this the text book makes no sense and myprofuseness’slecture was confusing to me.
Tax policy always has two goals.Onone hand governmet try to achieve tax efficiency i.e they try to minimise the direct and indirect cost to the economy of tax collection.On the other hand,government try to achieve tax fairness,or tax equity i.e they try to ensure that the right people actually bear the burden of tax.The central dilemna in tax policy is that an efficient tax may not seem fair,and the seemingly fair tax may not be efficient. So,there is a fundamental trade off between efficiency and equity. Most debate on taxes relies on two principles of tax fairness- the benefits principles and ability to pay principles.According to the benefit principle of tax fairness,those who benefit from public spending should bear the burden of the tax that pays for that spending. For example, those who benefit from the road should pay for that road’s upkeep. According to ability to pay principle, those with greater ability to pay a tax should pay more. This means that high income individuals should pay more in taxes than low income individuals. There is always a trade off between…
efficient tax and fair tax. For example- U.S poll tax is an example of lump sumtax- a tax that is the same for everyone regardless of any actions people take. It was perceived as much less fairer than the tax structure it replaced in which higher local taxes were paid by the people with most expensive houses because those people tend to be more wealthy.But that tax was not efficient and distorted incentives of home improvement. In contrast, a lmp sum tax does not distort incentives as people have to pay same tax regardless of their situation. So lump sum taxes, although unfair, are better tahn other taxes at promoting economic efficiency. So, a tax system can be made fairer only by sacrifising efficiency or vice versa.