is tax law fairIn the US, we have taxes. And we have lots of them. Taxes on labor, property, consumption, investments, sales, and even death itself. Taxes at federal, state, and local levels. There are literally dozens of ways a dollar is taxed in this country. We are all dealing with taxes one way or another every single day.

In addition to paying these taxes, working with professionals like me is often necessary for many taxpayers simply to understand and navigate our various systems of taxation. In light of ever-changing rules, even us specialists specialize – state & local tax only, property tax only, inbound real estate investment only, estates & trusts only, individual income tax only, etc.

To say our tax system is complicated is putting it mildly.

As we consider our complicated tax system, it begs the question do we have a good tax system? Is having a complicated system merely a reflection of living in a complicated world? Or is it perhaps an indication that our tax rules could use some improvement? What even is a good tax system?

Below I’ve listed some principles that make for a good and effective tax system. As you read through these principles, reflect on your own experiences. Reflect on tax proposals you’ve voted on or otherwise have seen become law. Reflect on the complex and quickly changing world we live in and how taxes might fit into that. Consider your own tax situation over time. Have your experiences indicated that we have a good, effective tax system?

Good Tax Policy Principles1:

    1. Are fair & equitable: Compare the tax returns of two taxpayers with the same income. Would they show the same tax liability? From a fairness standpoint, one could argue they should. If one taxpayer’s income is higher than another’s, does that taxpayer pay more taxes? Again, if the tax rules in place are equitable, one would expect so.
    2. Are simple & certain: Taxpayers should have a clear idea of how and when a tax is paid. They should have confidence that a tax has been calculated correctly. The more complicated and vague tax laws are the less certainty taxpayers have that their tax liabilities are accurate. For most people, the US tax code is a foreign language. The concept of simplicity asserts that taxpayers should be able to easily understand tax rules and apply them consistently.
    3. Are convenient to pay: Paying taxes should not be a difficult task. For example, having taxes withheld as part of a taxable transaction such as buying groceries, makes it relatively easy to pay sales taxes.
    4. Should safeguard taxpayer information: Taxing authorities should take adequate measures to ensure that taxpayer data is protected from bad actors and is not improperly disclosed.
    5. Are straightforward to administer: How much does it cost a government to generate tax dollars and what is the return on that investment? Can tax filings be readily and accurately processed? Can tax laws be readily enforced and are they?
    6. Are neutral: Ideally, taxes should be neutral, meaning they distort behavior as little as possible. Are tax laws influencing your decision to donate to charity or buy a new home? Are you moving to a new state for tax reasons? If so, tax laws aren’t neutral.
    7. Are suitable for economic growth and efficiency: Effective taxing regimes don’t obstruct economic growth. This good tax principle can be harder to pin down than others. Whether a tax law is fair, neutral, simple, etc. is fairly easy to measure. Just ask your tax advisor! However, whether a new tax law will allow for the economy to “do its thing” must be modeled and, well, guessed. Furthermore, because nothing happens in a vacuum, the historic impact of a particular tax policy may not always be clear either.
    8. Are transparent & visible: Have you found out about a relevant tax only after a transaction took place? Knowing in advance would have helped you better understand the entire cost of the transaction. An effective tax system educates taxpayers about applicable taxes.
    9. Are accountable to taxpayers: Taxpayers should be aware of how tax laws are made, possible tax law changes, and sources and uses of tax dollars. Similar to transparency and visibility, a system that is accountable to taxpayers seeks to educate.
    10. Promote a minimum tax gap: The tax gap is the difference between taxes owed and taxes paid. If the sales tax on your purchase was $50, but a clerical error calculated it as $45, the tax gap on your purchase is $5. In addition to honest errors, fraudulent reporting is another source of tax gaps. A complicated tax system also contributes to the tax gap by confusing taxpayers, leading to honest and dishonest
    11. Provide appropriate government revenues: The key word here is “flexibility.” An effective tax system will have sufficient flexibility to allow for fluctuations in government revenue needs, to allow for changes in the nature of transactions that are taxed, and to allow for changes in tax systems of other jurisdictions.

The next time you pay taxes, prepare your tax returns, or vote on a potential tax law change, keep these principles in mind. Is the tax system you’re participating in a good one?


1As discussed by the American Institute of Certified Public Accountants at  https://us.aicpa.org/content/dam/aicpa/advocacy/tax/downloadabledocuments/tax-policy-concept-statement-no-1-global.pdf?cm_mmc=email-_-aicpa%3atax-_-TSNews_2017_05_25-_-Modernized_Tax_Principles