Properties of a Good Tax System
Most people realize that our current tax system is not a good one. What would a good tax system look like? Here are some of the desirable properties.
A good tax system . . .
—Is stable, and does not fall apart when the economy slows down.
Many of the funding requirements of state programs are counter-cyclic – which means that are most needed when the economy slows down. A tax system that falls apart during economic downturns is poorly designed. Tax revenues should also grow with the economy and keep pace with inflation.
— Raises adequate revenues to fund vital programs.
A tax system that starves vital programs is not doing its job.
— Is progressive – placing more of a burden upon those who have claimed a larger share of the wealth of the economy.
This is sometimes called “vertical fairness” – meaning that the tax burden is fair when comparing people with different incomes.
— Exhibits “horizontal fairness” – which means that people in similar economic circumstances pay similar amounts of taxes.
To the extent that this is not so, it should be a matter of choice.
— Furthers economic development policies, environmental policies, and social policies, in addition to raising needed revenues.
The tax system should support the goal of imposing costs upon the person or entity that generates those costs so that proper cost/price feedback is established. It should encourage economic investments that pay off in the long run instead of those that are destructive to the basis of prosperity.