What is Tax Reform?
Tax reform is a policy implementation by the government through which few alterations are made into the tax system in order to overcome the loopholes and enhance the effectiveness of the tax administration in the country in order to generate higher revenues from taxes as compared to the overall spending.
Tax reform, as the name suggests, is a kind of reform made in the tax system of a nation that can help the government of the same in minimizing the chances of tax evasionChances Of Tax EvasionTax Evasion is an illegal act in which the taxpayers deliberately misreport their financial affairs to reduce or evade the actual tax liability. This includes using multiple financial ledgers, hiding or representing lesser income, gains, or profits than actually earned, overstating deductions, & failing to file returns. and avoidance. It brings sustainability in the revenue levels, addresses issues and conflicts concerning inequality employing behavior change and redistribution, and also aids in the development of a nation.
Tax reform is introduced for multiple purposes. The first and foremost purpose is to minimize the slightest of probabilities of avoidance and evasion of the tax from the economy. Another purpose is to induce a higher rate of sustainability in the revenue levels and directing the public investments into desired avenues by means of providing tax deductions, tax breaks, and tax exemptions. The ultimate purpose is to enhance the overall functioning of the tax system and bring economic growth in the country.
Tax reform is introduced to fulfill multiple objectives. It aims at improving the efficiency of the tax administration and allowing it to become more systematic by:
- Decreasing the marginal tax ratesMarginal Tax RatesA marginal tax rate is a progressive tax structure in which an individual's tax liability grows in proportion to the amount of income he earns over a course of a financial year. It ensures that all citizens are judged equally based on their income..
- Lowering the tax implication of savings and investment;
- Lowering the occurrence and probabilities of tax avoidanceTax AvoidanceTax avoidance is the process of reducing the income tax liability of an individual or firm by adopting the lawful methods. The taxpayers can claim exemptions and deductions as allowed under the nation's tax provisions. Such as investments in municipal bonds and deductions for business loss. and tax evasion;
- Lowering the total number of tax defaulters;
- Improving economic decision-making;
- Lowering the cost involved and time required to organize, plan and implement the change in the tax system;
- Uniform treatment in the case of industries, investments, and properties.
Types of Tax Reform
Basically three different types include:
- Individual Income Tax Reform can be learned as a strategy that is used for eliminating the income expenditures and payroll taxesPayroll TaxesPayroll taxes are statutory deductions made by the employer from an employee’s regular salary and wages, and usually, such withholdings mostly have both employer and employee equal contributions. These taxes are collected by tax authorities from respective employers and paid for human welfare schemes, infrastructure development. incurred by an individual.
- Corporate Income Tax Reform can be learned as a strategy that is used for administering the corporate income taxesCorporate Income TaxesCorporate tax is a tax levied by the government on the profits earned by a company at a fixed rate each year and is calculated in accordance with specific tax regulations. and avoid distortions that take place on account of special provisions and also boosts the economic growth and development of an economy.
- Other Reform Proposals are used to create and introduce new types of taxes in the tax system for replacing or supplementing the current taxes.
The introduction of Carbon taxes is one of the prominent examples of tax reform. Some of the people suggest that with the introduction of the carbon taxes in any economy, to two goals can be achieved that includes firstly the raising of the revenue of the government as the person who uses the carbon content of the fuel will have to pay the taxes to the government of the country, and another goal is discouraging the use of the carbon-intense energy as with this government is ultimately trying to reduce the negative effect of carbon content in the environment thereby creating positive environmental effects.
Effects of Tax reform
The effects of such reform may not be the same for all taxpayers and economies too. On the one hand, It might enhance the functioning of the tax system while, on the other hand, it paves ways for political pressures that are short term in nature. These reforms have somehow contributed to the creation of certain tax incentives that has ultimately lead to the distortion in the economy and have even marginalized not just the efficiency of the tax system but has also allowed it to become more fair and transparent as compared to what it used to be earlier.
Need for Tax reform
There has always been an undying need for the changes in the tax system. The collection of taxes is necessary for funding the services that are arranged and provided by the government of a country. The tax system must be efficient enough for the collection of a sufficient amount of revenues and boosting the economic growth of a country. No matter how systematic the tax system of a country is, the taxpayersThe TaxpayersA taxpayer is a person or a corporation who has to pay tax to the government based on their income, and in the technical sense, they are liable for, or subject to or obligated to pay tax to the government based on the country’s tax laws. will find a way by identifying and taking advantage of the loopholes in the system and avoid/ evade taxes. As a result of this, the need has risen and ensures that the tax administration of a nation is totally organized.
- Reduces marginal tax rates;
- Ensures that there is the same treatment for all, whether it’s a property, industry, or an investment.
- Tax reform ensures that the rate of tax evasion and avoidance gets lowers down.
- It ensures that the tax structure gets fully organized.
- It simplifies tax laws and encourages compliance.
- It widens the tax base and reduces per capita tax by dividing the tax burden by bringing more and more taxpayers under the umbrella.
- Ignores the fact that it is the impact of the overall tax administration that is important and not just individual taxes.
- It makes the tax system more complicated.
- It ignores the fact that the slightest of change in the tax system can have a huge impact on the masses.
Tax reform focuses on strengthening the current tax system and widens out the tax base. Tax reform aims at enhancing the efficiency of the overall tax system by lowering marginal tax ratesMarginal Tax RatesA marginal tax rate is a progressive tax structure in which an individual's tax liability grows in proportion to the amount of income he earns over a course of a financial year. It ensures that all citizens are judged equally based on their income., reducing taxation on investment and savings, boosting the economic development of the nations, lowering the number of tax defaulters, etc.
This article has been a guide to what is Tax Reform and its definition. Here we discuss objectives, types, examples, and need for tax reform along with benefits and limitations. You may learn more about financing from the following articles –