![]() But careful theory and empirical evidence have illuminated key considerations. As long as people have differing views on what is equitable, there will never be universal agreement on the best tax schedule. The design of the personal income tax, therefore, revolves around a fundamental trade-off: progressive taxes support equity objectives, but can reduce efficiency. Taxing income might not only discourage effort (not just hours worked, but also, for example, entrepreneurial activity and striving for promotion), but can also give rise to tax avoidance and evasion. But the indicator is imperfect, because the government cannot be sure whether a high income results from intrinsic talent or luck-which will not be affected by taxation-or hard work and creativity-which might be. The great appeal of the personal income tax is that it taxes people on an indicator of their ability to pay and can collect progressively more from those with higher incomes. Here we apply them to some central and current tax policy debates. In “ Taxing Principles”, we deal with the basic principles of taxation. Designing a good tax system requires more than a good slogan. But taxes on windows and beards are long gone, import tariffs are in decline, and new levies, such as the value-added tax, have gained ground. There is an adage, for example, that “an old tax is a good tax.” That may be true for, say, the property tax. But sometimes they can be dangerously misleading. ![]() Tax policy is often guided by simple rules of thumb. It is hard to design a fair and efficient revenue system ![]() Back t o Basics Compilation | Finance & Development | PDF version IV.
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