Tax policy reform refers to various changes and amendments made to the taxation policies or taxation schemes of a particular country. These amendments are made for the sole purpose of making the tax structure convenient for the taxpayers.
A number of initiatives have been taken and a number of researches have been done on building the ideal tax system. For executing the plan in order to accomplish an ideal tax system, a number of countries have experienced extensive variations for the last few years and this is principally due to the shifting functions of the state in improvement and globalization of economic processes. The formulation of a tax policy and reformation of a present tax system are clearly two separate exercises and every time they do not produce similar types of outcomes.
One of the principal aims of tax reform is to set a plan for the path, which will transform the present tax system to an advanced and progressive system. Nevertheless, a number of hindrances can occur in this path and these may include administrative and political restraints. The track record of the present tax structure may also function as an obstacle in this transformation method. For example, an all-inclusive consumption tax (which is a form of Value Added Tax or VAT) may be enforced most adeptly at the national scale for averting matters associated with handling of interstate taxation. However, in a number of countries, the designation of tax authorities might create that transformation process hard to implement, if it is not totally out of the question. Hence, tax policy reforms should have to search for other options, for example, a dual VAT arrangement.
A significant school of thought that concentrates on the pattern of the tax structure is recognized by the name of the optimal taxation school. It discerns the problems of accomplishing the most acceptable answer and accentuates the requirement to downplay the burdensome losses in searching for the second-best answers. In this case, there are two principal and separate ideas. The first idea assumes that if the government is omnipotent in nature, has all the necessary information, is beneficent or generous, and is propelled by effectiveness in circumstances, then the following outcomes may be accomplished: for reducing the undue burden of collecting a particular revenue amount, the tax should be imposed on consumption and the optimum tax rate on separate items has to be associated with both cross-price and direct elasticities of demand.
In a particular situation where the counterbalanced cross-price elasticities are nil, the optimum rate of tax is reversely proportional to the counterbalanced and direct price elasticity of demand. This happens according to the Ramsey rule. The smaller the counterbalanced price elasticity of demand, the lower the shift off the unaltered most acceptable optimum in reply to the tax, therefore it compensates in taxing the items with smaller elasticity of demand at increased rates. As the tax systems formulated on these rules would include taxing requirements, the necessity to deal with distribution worries gets overriding. Integrating distributional factors into this epitome brings in views of optimum income tax and the implementations of those ideas do not back up aggressively liberal or reformist tax systems.
The second thought acknowledges that usually the government does not have sufficient data regarding elasticities of demand and the matter is dealt by advocacy while the government is going to impose tax on various items at various rates. This concept is highly inclined in the direction of imposition of tax on consumption at consistent rates for all types of commodities. As per this idea, when effectiveness and dispersion of weights are distinctly advantageous in the formulation of tax policies, administration capability and taking into consideration the regional organizations and political conditions are similarly important. The main issue is not to formulate a procedure, which would be optimum, however, to enforce a method that would reduce misrepresentation stimulated by tax and simultaneously be viable in terms of administrative procedures and satisfactory in terms of political situations. The fundamental Harberger reform package that is offered to the developing nations, which are price takers in the global financial market, comprises of a broad-based VAT (Value Added Tax) and uniform tariffs besides a number of other elements.
Rodrik and Panagariya study the underlying principle for consistency in the perspective of import tariffs and dispute that when the situation for homogeneous tariffs is not firm, consistency reduces the demand for positive (increased) rates on some items in priority to other items. The assurance for a consistent or standardized tax rate brings in a free-rider difficulty for industrial sectors to advocate for decreased rates for their own (as this kind of decreased rate is offered to everybody).