Tax Reform

Tax reform is a policy implemented by the government through which a few alterations are made to the tax system to overcome the loopholes and enhance the effectiveness of the tax administration in the country to generate higher revenues from taxes than the overall spending.

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 rates, reducing taxation on investment and savings, boosting the economic development of the nations, lowering the number of tax defaulters, etc.

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 evasion 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.

It improves the simplicity, efficiency, and the effective implementation of the tax system in the economy. Any economic or corporate tax reform includes many changes made in the system like alteration of tax rate, any changes in exemptions, credits, etc.

It is a very complex process with every government has to implement and strictly follow in order to arrange for revenue needed to run the country. It is a very politically sensitive topic which helps in bring a balance in the objective and interest of the government and the citizens. The opinions regarding the tax reform system varies between people and a lot of research, analysis and consultation is needed for proper implementation of the same.

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.
• Every government requires a source of revenue that will be used for infrastructural and economic development of the country and tax is the most important source of the same.
• 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.
• Corporate tax reform also helps simplify the rules and procedures to reduce the cost of compliance and administrative burden.
• The reform creates an equal and fair system of tax collection and use by getting rid of loopholes and fraud through disproportionate use of the system.
• Any new tax reform helps in globalizing the economy and making it competitive for attracting investment through reduction of corporate tax rates and providing incentives.
• 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 fulfil multiple objectives. It aims at improving the efficiency of the tax administration and allowing it to become more systematic by:

1. Decreasing the marginal tax rates.
2. In case of income tax reform , it helps in lowering the tax implication of savings and investment.
3. Lowering the occurrence and probabilities of tax avoidance and tax evasion;
4. Lowering the total number of tax defaulters;
5. Improving economic decision-making;
6. Lowering the cost involved and time required to organize, plan and implement the change in the tax system;
7. Uniform treatment in the case of industries, investments, and properties.

Basically three different types include:

1. Income Tax Reforms - Individual Income Tax Reform can be learned as a strategy that is used for eliminating the income expenditures and payroll taxes incurred by an individual.
2. Corporate Income Tax Reforms - Corporate Income Tax Reform can be learned as a strategy that is used for administering the corporate income taxes and avoid distortions that take place on account of special provisions and also boosts the economic growth and development of an economy.
3. Others - 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.

The effects of such reform may not be the same for all taxpayers and economies too. On the one hand, new tax reform 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 led 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.

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 taxpayers will find a way by identifying and taking advantage of the loopholes in the system and avoiding/ evading taxes. As a result of this, the need has risen and ensures that the tax administration of a nation is totally organized.

Let us look at some of the benefits of the tax reform proposals system in taxation, which will give us an idea about how and why it is used in the economy in brief.

• Reduces marginal tax rates;
• Ensures that there is the same treatment for all, whether it’s a property, industry, or an investment. This policy establishes an equality in the country and prevents any individual or corporate form taking any unfair advantage.  
• Tax reform ensures that the rate of tax evasion and avoidance gets lowered. The new rules and reform made should be strictly followed so that it is possible to identify the loopholes and deviations in the system.
• It ensures that the tax structure gets fully organized. It is important so that proper and timely collection and implementation is done and the arrangement is efficient and transparent.
• Reforms are implemented when the structure becomes too complicated or difficult to implement, or individuals and corporates are not ready to comply with them. Thus, reforms 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.

Thus, the above are some of the advantages the system has,

Along with advantages, it is also necessary to understand the disadvantages or limitation the tax reform proposals has so that it can be used effectively through proper assessment.

1. It ignores the fact that it is the impact of the overall tax administration that is important and not just individual taxes.
2. It makes the tax system more complicated. In that case it creates a lot of tax evation problem, mismanagement and use of unfair practices in the taxation departments.
3. It ignores that the slightest change in the tax system can significantly impact the masses.

This article has been a guide to what is Tax Reform. We explain it with example, effects, benefits, purpose, objectives, types, need & limitations. You may learn more about financing from the following articles –

• Compliance Audit
• Tobin Tax
• Transfer Tax
• Tax Shield