Updated July 21, 2023
Definition of Tax Reform
Tax reform can be defined as an initiative that is undertaken solely with the intention of improving the efficiency of the tax system and its administration and for the purpose of maximizing the economic as well as social benefits that can be easily achieved with the help of an organized tax system.
Explanation
Tax reform can be any process where there are changes in the way of collection and management of the taxes by the government. Such reforms are really helpful for the government in enhancing the functioning of its tax administration and allow the tax system to become more efficient and organized so that the attainment of the socio-economical benefits becomes a lot easier.
Purpose of Tax Reform
A few purposes of tax reform are stated below-
- The prime purpose of tax reform is to eliminate or at least minimize the possibility of tax evasion and tax avoidance.
- This also aims at facilitating a highly systematic and efficient collection of taxes.
- This aims at simplifying the laws for encouraging people to become more compliant.
Objectives of Tax Reform
There are some important objectives of the tax reforms. Few objectives of tax reform are stated and discussed below-
- Enhancing Efficiency: This aims at improving the overall efficiency of the tax administration of the country.
- Systematic Decision Making: Tax reform aims to enhance economic and social decision-making functions.
- Lowering the Overall Rate of Tax Defaulters: Tax reform minimizes the occurrence of tax avoidance and invasion and simultaneously reduces the total number of tax defaulters in the country.
Example of Tax Reform
If there are some changes in the rate of corporate taxes then the same has an effect on the overall economy. If the corporate tax rate is reduced from the existing one then it could be an example of corporate income tax reform. This is so because, with the reduction in the corporate tax rate, there will be a reduction in the overall cost of the companies and this will lead to the creation of employment in the economy as a whole. Along with the increase in employment, the wage rate will also increase which will then increase the earnings of the workers of the company. When the earnings of the workers would increase, then their spending power would automatically increase thereby boosting the economy of the country as a whole. Thus, a reduction in the corporate tax rate is one example of tax reform.
Types of Tax Reform
There are different forms in which it can be there in the economy of the country. The general types of tax reform are stated and discussed below-
- Individual Income: This type of strategy is used to change the tax structure related to individual income as well as payroll tax expenditures.
- Corporate Income: This type of strategy is used in order to implement multiple changes in the way in which the administration of the corporate income tax takes place.
- Other Proposals: This type of strategy paves way for new types of taxes in order to replace the existing taxes or supplement them. Examples of tax reforms include consumption taxes and carbon taxes.
Effects
The impact of tax reform is such that it creates winners and losers. This is highly due to the fact that tax reform demands alterations in the pattern of the tax system. By restricting tax allowances and exemptions, it is not always necessary that all the taxpayers whether individuals or company is going to derive benefits from revised tax rates. However, it has both negative and positive effects on the economy of a country.
Need for Tax Reform
The tax code has always been highly complicated, and inefficient, and as a result of which it failed to raise enough revenues for covering the overall spending. The unsystematic nature of the tax system all across the globe created opportunities for tax evasion and tax avoidance. This created the urgent need for the countries to come up with a solution that would overcome the ongoing problems in the tax system. With the introduction of tax reform, the tax code has now become more organized and highly systematic in a way that now there is the generation of higher revenues from taxes as compared to the overall spending done by the government.
Advantages and Disadvantages
The benefits and limitations of the same are stated as follows.
Advantages
- It helps in broadening the tax base by bringing more and more individuals under the tax slab which ultimately divides the tax burden amongst a large number of individuals and thereby reduces the per-capita tax.
- It helps in simplifying the laws pertaining to the tax system and even encourages individuals to become tax compliant.
- It helps a country in generating more revenues in order to easily cover the spending done by the government on the development of a nation.
Disadvantages
- This can be easily put off. This is high because of the fact that there is nothing an ideal time for restructuring the tax system and hence, short-term political pressures can create a ruckus.
- It only focuses on a specific area of a tax system instead of considering the broader economic picture. This fails to consider the fact that it is the implication of the overall tax system and not just individual taxes.
Conclusion
Tax reform is highly useful in reducing or eliminating the occurrence of tax avoidance and tax evasion. The aim at maximizing the earnings earned by a country through its collection of taxes and infusing a higher rate of development in that country. Needless to say but this facilitates an efficient and systematic collection of taxes.
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