Identify and explain three criteria for an effective tax system.
There are several criteria for a tax system to be effective. One of the characteristics is the tax system must be fair and equitable: Equity. The tax system should be based on a person’s ability to pay. A progressive tax system may accomplish this. Those who make more money should pay a greater percentage of tax than those who make less money.
Another characteristic of an effective tax system is that is must be relatively easy for people to understand: Simplicity. If the tax code is too complex, and some people feel our tax code fits this description, people won’t support that tax system. The tax system should be simple enough that most people can do their own taxes without needing professional assistance.
Finally, the tax system must accomplish the goals it is supposed to accomplish: Efficiency. If the tax system is supposed to raise money for the government to operate and to pay its bills, then it must do those things. If the tax system is supposed to redistribute income, then that should be accomplished. If the tax system should is supposed to have the wealthiest people pay their fair share, then there shouldn’t be ways for ways for people to avoid paying their fair share.
Taxes are important. The tax system must accomplish what it is supposed to accomplish in order to be effective.
The greatest difficulty with this question is that the term "effective" is a relative rather than an absolute one. A tax code is effective if it achieves its purpose. Without knowing what the purpose is of a tax code, it's impossible to measure its effectiveness.
For example, one could imagine a tax code designed for the (absurd) purpose of enriching people born under the astrological sign of Gemini and impoverishing people born under the sign of Pisces. If the code achieved this purpose, it would be effective. Whether we like or dislike the purpose of a tax code is irrelevant to the question of whether it achieves its intended goals.
If, for example, the goal of taxation is to promote income equality, one can look at how changes in a tax code correlate with the GINI coefficient, a measure of income inequality. The difficulty here, though, is that tax codes are not the only factors affecting income inequality.
Next, an effective tax code should be one that most people consider fair. If it is considered unfair or punitive, people will go to great lengths to evade taxes and an underground economy will flourish. Similarly, part of efficiency is that the code is sufficiently simple so that compliance can be readily enforced and monitored and so that evasion is difficult.
First, the tax code as it stands is too complex. Even people who are very intelligent have problems filing their taxes. So, one of the best steps for the government to make is to simplify.
Second, a clear progressive tax code is important. All people should pay taxes, but the wealthier should shoulder more of the burden. However, the limit should not be the limit set by president Obama. Perhaps those over 1 million should be taxed more.
Third, tax loopholes for corporations should be closed up. Too many corporations benefit from the U.S., but pay little in taxes.
Finally, the government should watch the super wealthy in America more closely - Swiss bank account, offshore account, and the like.