taxation, public-policy, governmentWhat is the most efficient way for the government to collect revenue? Is there a particular tax or revenue collection mechanism which at least according to mainstream economic theory is clearly superior to say an income or a consumption tax?
If there is no method which is clearly the best, what are the major factors to be evaluated in determining the best option?
I wrote a very nice and comprehensive discussion on this back in 2008:
Much of modern economic theory has been about reducing the gap between rich and poor, and making a more equitable society. Troublingly for social scientists, GINI varies wildly irrespective of economic system. However, poor and autocratic societies tend to be more unequal than wealthy and free ones. And even where income disparities are wide (as in the US, where the poorest 20% of Americans earn as much as the richest 20% of Russians) it doesn’t always mean that the poorest are scrabbling in the dirt while the rich dine on caviar.
There isn't any one perfect solution to taxation, however - as with rule of law - the more consistent the better (i.e. no peculiar tax loopholes available to a favoured few).
The basics:
The variations are moot from a consumer perspective since all taxes raise prices (see the Lerner Symmetry Theorem). From a business perspective, however, they're important. The more tax administration is loaded onto businesses then the more smaller businesses are disadvantaged (since the administration takes up a larger proportion of their time and money). The higher taxes are levied on businesses then the harder it can be to start and invest in the first place.
Taxes are also used to influence behaviour ("sin taxes").
The most efficient is one that is the most transparent and with the least number of steps/processes and special deductions. Potentially either a flat tax, a uniform consumption tax, or a uniform transaction tax. Bear in mind, though, that people will always attempt to arbitrage / minimise their tax liability. Consumers through outright avoidance, and businesses through offshoring investments.
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