Criteria for Evaluating Tax Revenue Sources

The criteria that govern a tax system are based on revenue yield,

equity, efficiency, economic growth and stability, ease of

administration and compliance, and political acceptability. This

paper will discuss the importance of using the aforementioned

criteria to evaluate tax revenue sources.

Revenue Yield.

Income and sale taxes have proven to yield vast amounts of

revenue for local, state and federal governments. To ensure adequate

revenue resources, governments impose methods (progressive tax

structures) that are difficult to avoid, i.e., via income/payroll

deductions, sales and purchases of tangible and intangible goods, etc.

Routinely, governments use these revenues to finance highways, health,

hospitals, education, and welfare.

Equity/Fairness.

The guiding principles for tax equity/fairness evolve around the

“ability to pay” and the “benefit received.” (Lee, Johnson & Joyce,

2008, pp.71-4). When governments impose progressive income taxes, the

reverberation is that the government should base the rate of taxes on

the amount earned, such as income taxes. However, use of regressive

tax (such as sales taxes) resonate that equivalent percentage rates

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should be applicable to all, though the percentage of income paid in

sales tax goes up as the income goes down. Lee, Johnson and Joyce

(2008) refer to horizontal equity as a method for individuals with

equal taxpaying ability to be treated equally; and they define

vertical equity as a process wherein higher incomes are taxed

accordingly. (pp. 71-2). It is an apparent difficulty of achieving

horizontal equity because income alone is an inadequate computation of

an individual's ability to pay. Progressive rates are forms of

vertical equity. One may opine that the rationale for opposition to

vertical equity is understandable because tax impositions appear to

dampen assets.

To demonstrate the positions as asserted above, hypothetically,

two individuals purchase economical automobiles for work purposes at

$30,000 each, with a state sales tax rate of 5 percent. One buyer’s

annual income is $40,000 and the other’s is $80,000. As such, the

lower income buyer pays approximately four percent of his income, and

the higher income buyer only pays approximately two percent of his

income. Though a regressive rate may cause some inequality, “payment

of services results in an efficient allocation of public sector

resources, because people will use only the amount of particular

service for which they are willing to pay.” (Lee, Johnson & Joyce,

2008, p. 73). Clearly, this example shows the surmises a necessity of

evaluating revenue sources regarding the ability to pay and the

benefit received.

Efficiency.
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Efficiency is also a principle for evaluating good tax revenue

resources because “an efficient tax is one that does not appreciably

affect the allocation of resources with the private sector.” (Lee,

Johnson & Joyce, 2008, p. 74). To elaborate, taxes should raise

worthwhile revenue along with considering equity. Otherwise, taxes

will be of little value if they have a considerable effect on resource

distribution.

Economic growth and stability.

Because taxes may also affect the rate of economic growth and

stability, tax structures should encompass future revenue estimates

with inelasticity. Therefore, an inelastic tax rate increase would

offer a greater its contribution to economic stabilization. For

instance, Florida’s tax structure is an impediment example of an

inelastic revenue “low-tax state.” As artfully explained by Holcombe

(2002), funding for a large percentage of Florida’s appropriations

derive from inelastic, regressive revenue sources, such as sales

taxes, transportation fees and property taxes. (pp. 2, 13-14).

Ease of administration and compliance.

Taxes levied effectively include clarity of laws, policies and

procedures, continuity, cost-effectiveness, and expediency. Since

cost of administration a “net loss to society,” enforcing compliance

and collection practices should keep expenditures at a low minimum.

For this reason, the execution of a budget should incorporate a phase

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that sets forth procedures for effective tax administration and debt

collection. (Lee, Johnson & Joyce, 2008, p.75).

Political Acceptability.

The final principle, though it may be the most prevailing, is the

correlation of tax structures and the political environment. The

design of a tax system must give great weight to the role played by

the legislature. Oftentimes, constituent preferences influence the

decisions of lawmakers - in lieu of tax revenue adequacy, equity,

efficiency, and ease of administration. Thus, a concise evaluation

of tax structures should demonstrate a clear understanding of

challenging issues that controlling taxpayers will or will not want

the government to adopt.

For the foregoing reasons, a well-designed budget should identify

a flexible financial plan that responds to fluctuation in tax revenue

resources. Therefore, it is an ideal budget balancing strategy, along

with other desirable attributes, to consider an evaluation of a good

tax system by ensuring adequate yield, administrative efficiency,

sufficient collection techniques and processes, political feasibility,

and tax equity.

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REFERENCES

Holcombe, R.G., Florida’s Tax Structure: An Overview and Evaluation.

October 2000. James Madison Institute Policy Report No. 27

Lee, R.D., Johnson, R.W., Joyce, P.G. (2008) Public Budgeting Systems.

(8th ed.). Massachusetts: Jones and Bartlett Publishers, Inc.