Chapter 2 (2) - 2 Tax Policy Issues: Standards for a Good...

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2 Tax Policy Issues: Standards for a Good Tax Learning Objectives After studying this chapter, you should be able to 1. Explain the concept of sufficiency as a standard for a good tax 2. Differentiate between the income effect and the substitution effect of an increase in income tax rates 3. Compare the concept of a convenient tax from the government's viewpoint and from the taxpayer's viewpoint 4. Contrast the classical economic standard of tax neutrality with the Keynesian concept of taxes as a fiscal policy tool 5. Define horizontal and vertical equity 6. Differentiate between a regressive, a proportionate, and a progressive tax rate structure 7. Explain the difference between marginal and average tax rate 8. Discuss the concept of distributive justice as a tax policy objective n Chapter 1, we examined one dimension of the tax environment by describing the various taxes that different jurisdictions use to raise revenues In this chap- ter, we will consider a more qualitative dimension of the environment as we identify the normative standards by which politicians, economists, social scientists, and individual taxpayers evaluate the merit of a tax I Governments are cognizant of and influenced by these standards as they for- mulate tax policy Tax policy can be defined as a government's attitude, objectives, and actions with respect to its tax system Presumably, tax policy reflects the nor- mative standards that the government deems most important After reading this chapter, you can draw your own conclusions as to the relative importance of the standards by which tax systems are judged You will be able to evaluate the current federal tax system in light of these standards When you are asked as a voter to choose between competing tax policy proposals, the material covered in this chap- ter will help you make an informed decision Business managers and their tax advisors typically share a keen interest in tax policy They know that many complex technical rules in the Internal Revenue Code have an underlying policy rationale If they can understand this rationale, the rule itself is easier to interpret and apply Moreover, busmesspeople know that today s
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24 Part One h\plonm> the T<i\ Environment policy issues shape tomorrow's tax environment. By paying close attention to the cur- rent policy dehale, managers can anticipate developments that might affect their firm's long-term business strategies. Their familiarity with policy issues help them assess the probability of changes in the lax law and develop contingent strategies to deal with such changes. Standards for a Good Tax The American jurist, Oliver Wendell Holmes, is quoted as saying, "I like to pay taxes. With them 1 buy civilization." Few people in modern society seem to share this senti-
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This note was uploaded on 12/14/2011 for the course ECONOM 110 taught by Professor Tuturukov during the Spring '11 term at London College of Accountancy.

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Chapter 2 (2) - 2 Tax Policy Issues: Standards for a Good...

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