Complex tax schedule are quite difficult
to administer. Let's see and understand why.
Suppose you have a tax schedule that has
several tax brackets and several tax rates.
How this system has to be administered?
One immediate implication of this system, is that almost
every tax payer has to file a tax return,
to submit a tax declaration at the end of the year.
Why?
Because if you have a flat tax rate,
then every employer... Suppose that income comes
only from employment. That's a simplification, but just
for simplicity sake, let that be the case.
In that case, say in Russia, every employer deducts from an employee's
income 13% of her salary and remits this money to the state budget.
It's that simple. And no one has to care about that any longer
because the agent is full certain that her tax liabilities are implemented in full
because she has to pay 13% of her income from all sources.
And if she earns income from several sources, suppose she
has another part-time job, her second employer will do the same.
And, as a result, 13% of her total income will be sent to government.
Now, if the tax schedule is more complex, it's not
the case anymore
because it depends on what the total income is, and deductions
at source, as this is called, which are deduction by employers,
will not be sufficient to implement this tax requirements because no single
employer does know how much total income of this agent's will be.
So, what this agent will have to do at the end of the year, is to collect
her salary receipts from all sources and to
add receipts from all other sources which are taxable.
And then to calculate using a formula what her tax liabilities are, and if
there is a balance between what has been deducted at source and what has to be paid,
she will have to make that payment to the government.
Or if, perhaps, she was taxed more heavily than she was supposed to,
she will submit her tax return and the government will pay the difference.
But as you see, if you have this non-linear tax schedules, the immediate
implication is that every tax payer, in principle, has to file a tax return.
And filling a modern tax return is not a simple thing, this
is something that requires habit, culture,
understanding, experience, perhaps, help of tax professionals.
Worse yet, every taxpayer's situation has to be processed by a tax official.
And that also requires some capacity, some knowledge,
some skills, some data processing technologies that governments might not
have. So, this non-linear systems might be beautiful,
might be powerful but might be fairly complex to administer.
And, as a result, administration costs sometimes could be prohibitively high.
In this case, a natural choice for government would be to sacrifice some
other gains that this complex tax schedule would produce for the sake of simplicity.
And this precisely what happened in Russia almost 15 years ago
when progressive tax schedule was, in the way of tax reform,
eliminated and replaced by a simple flat income tax with a flat
rate of 13% which made the Russian tax system much simpler, much
simpler to comply for tax payers, much simpler to administer for the government.
It also made it a little bit better protected against tax evasion
because lower tax rates reduce the appeal of tax evasion. And, as a
result, it's a known fact that
after that reform was implemented in Russia, where tax
rates were reduced and made flat, and at the same time the tax base was made quite a
bit broader, revenue collection, personal income tax collection actually went up.
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