5 Reasons Why Tax Systems Fail
Tax systems are meant to bring as much revenue as possible while at the same ensure that business thrive and individuals are enterprising
. However in many cases we see tax systems all over the world failing in their roles or even causing the collapse of entire economies all together. Here are five reasons why they fail:
1. Failure to Reward Compliance
One of the reasons why tax systems fail is because of their unwillingness or inability to reward compliance. This is not about recognizing the taxpayer of the year or something like that, but failing to put systems in place where people who follow the law see it as profitable compared to those who don't.
People who make genuine mistakes in filing their tax returns should not be under the constant fear of facing an IRS agent for an audit. Instead they should be guided so that they are able to correct the mistakes that they have made. Otherwise, they will shift their focus from following the law, to hiring tax experts to help them bend the law.
2. Complexity
Another reason why tax systems fail is because they are unable to explain the taxation process in a simple manner. Complexity increases the chances of avoiding taxes and creates loopholes for evading them. With increased complexity, the taxpayer is focused more on the letter of the law rather than the spirit of the law.
3. Lack of Transparency and Accountability
The third reason why tax systems fail is because of lack of transparency and accountability. Since the roles of collection and spending of taxes is usually under different authorities in most cases, it is quite hard for the collecting authority to show the public that their funds will be utilized properly. However, it is the role of every government to show the taxpayers that there money will be used in transparent way.
4. Failure to Be Consistent
This relates to the principle of certainty. A good system must be consistent in that the time of payment and the amount of taxes to be paid should be determined in a consistent manner.
Systems that allow a large room for interpretation and second guessing end up encouraging tax evasion and non-compliance. In cases where the law is not clear about a certain issues, the relevant agency must come up with a clarification on the issue as soon as it is possible.
5. Political Interference
In many economies, tax agencies are usually under the control of the government. This might cause some people to associate the agency with the party in power. Again, politicians might want to interfere with the appointments to the authority and may want to have people whom they know will take decisions that those politicians will agree to.
These are some of the factors that determine the amount of trust that the taxpayer will have in the system. The moment they lose faith in it, the tax system has failed.
by: David de Souza
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