Optimal Tax Theory

focus on distortions
economy is in a pareto equilibrium without tax
tax disturbs the equilibrium
second best - minimise the distortion
Some say market is already distorted and the tax system must be distorted to undo the distortion.
Much less consensus on Haig - Simsons Comprehensive income tax
Earlier - Comprehensive income tax is least distortion
they say indirect tax is bad - distort relative prices ..
changes excess burden of indirect taxation.

any indirect tax bring wedge between producer price and consumer price
and direct tax wedge between work and leisure

high tax on capital → capital is mobile and capital will leave and loose employment..
natural resources that do not go away - those can be taxed. Otherwise prefer value added tax over tax on capital.

in open economy tax on capital can become a tax on labour

Steep progressivity for redistribution is no longer fashionable
tax is not a tool for equality.. high tax on high income etc do not work
fairness in tax policy is not to be judged from individual taxes but the tax system as a whole
shifting balance towards GST
GST or value added tax ..
all OECD other than US have VAT.
In India the final point sale do not pay tax - mostly unorganised sector - so collection at multiple stages
.
in USA final point of sale happens mostly in formal - so identical tax is collected as final consumption tax.
.
a good organised retail economy is needed
but tax collection is missed .. the entire chain is broken.
America collect at the last stage

Optimal Direct - avoid having high tax rate
Optimal Indirect - least distorting tax is one in which reduction in demand across commodities due to rise in price due to tax is proportionate - excess burden is less.
Price elasticity - this says tax food grains very heavily and cosmetics very less.
but high elasticity also have high income people…
So this is not used.
Also, need to calculate for multiple peple

Best Practices Approach

Reduce the three costs
Cost of Collection
Cost of Compliance
Distortion Cost

Broaden the base, reduce the rate, reduce rate differences
avoid multiple objectives to evolve a simple tax system
multiple objectives complicate - exceptions reate evasion
tax policy can make very little impact on changing income distribution.
Shift focus to poverty alleviation on the expenditure side.
a broad base tax like GST / VAT.
when u reduce tariffs - income reduces - tariff is easy to collect.
IMF asks to reduce tariff and how to make up? implement GST.
responsive tax administration is an integral part of reform.
trust the tax payer
use information system and technology
tax administration is tax policy
Proper coordination in tax refrorms among different levels of government

Trends in Tax Policy

in india - constitution - fragmented taxation
state can levy tax on agriculture and they refuse to.