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Thursday, March 27, 2008

Taxes and the Modern Economy

Ideally, tax reforms, of any size, should follow the principles of good tax policy. There are many views of exactly what these principles are, dating back to at least Adam Smith in the late 1700s (and even back to Aristotle if considering "fairness" in general - "equals should be treated equally and unequals unequally"). Most of the lists are fairly similar (see this chart for an example).

A while back I came across a 1967 report of the Ohio Tax Study Commission that included a principle to follow in its work that we don't often see. It ties well to the point of the 21st Century Taxation Blog. The extra Ohio principle was:

"Relationship to the Modern Economy

Insofar as possible, a tax or tax structure should be capable of growing with the economy of the state and should be revised from time to time so as to correspond with the true makeup of that economy as it develops and changes. Some products, habits of consumption, and classes of enterprise decline, while others rise to take their place. Ideally, a tax structure should be reviewed and revised as necessary so as to bear a relationship to the way people are doing things, regardless of whether additional revenues are needed at a given time."
That's great! Tax systems should be reviewed even when revenue isn't needed. Actually, that is likely the best time for reforms because in dire budget times, principles of good tax policy are often overlooked, which may put the state into a chronic state of budget problems.

btw - the other factors used by the 1967 Ohio Tax Study Commission to evaluate tax policy were:
  • Effect on economic growth
  • Neutrality
  • Equity, or Fairness
  • Administrative feasibility
  • Compliance costs

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