The collection of taxes as a single goal. A concept that does not correspond to the Tax Policy

The analysis of taxes and their role requires locating them and relating them to the different functions or tasks of the State and to the Economic Policy, to identify their specific role in it.

Consequently, this necessarily links us with the fiscal policy in its instrumental nature and its direct relationship with tax policy, all of which makes it essential the participation of the Tax Administration in charge of applying, controlling, and administering the latter.

We understand that the tax as such is not isolated and independent, as is an end, but is part of a larger scope that constitutes the Public Finances, which in turn integrates a set of instrumental and coordinated policies that help to achieve the final goal set by the Economic Policy.

Certainly, that tax revenues constitute an objective, which is generally implicit in any tax, although the generation of income for the state does not mean that it is in all cases the only objective, that is why we could identify taxes called “finalists”, which although they collect revenue, also fulfill other tasks.

Although there are taxes that could be identified by their simple or simple technical structure which facilitates their application, control and administration accompanied by a significant income, this alone is not enough to qualify them as one of the suitable tools of the economic policy.

If the primary task assigned to a tax was to increase the collection significantly and rapidly, it would be an error to evaluate it exclusively through the income obtained. In fact, this should be accompanied by a simultaneous and conceptual study of the consequences that this tax generates in the economic process, a task that constitutes precisely one of the substantial functions of the Tax Policy.

It is therefore essential to bear in mind that the tax policy responsible for generating genuine income to finance budgetary policy through taxes, has two basic tasks:

  • The distribution of the tax burden in the economy. This means projecting the technical structure of taxes, designing the type of tax, its characteristics, as well as locating them in the different sectors and in the circuit of the economy.
  • To analyze the effects that the task expressed above causes in the process of economic development. This arises from the fact that the work mentioned in the previous point alters the flow of income, the relative prices of goods and services, as well as that of factors of production, affecting the expectations and behavior of economic agents.

No doubt, then, that these tasks indicate that taxes affect the mechanisms of the market, which is exploited by the state, which by induction uses them as a tool of economic policy.

The foregoing allows us to express in terms of a tight synthesis, that taxes perform two basic functions:

  • The raising of resources from the economic system to finance public spending.
  • Influence the expectations and decisions of economic agents in such a way that through them, it allows to influence the market.

Consequently, taxes can modify the behavior of the economy through the market mechanisms – supply and demand – what is commonly called the “parametric effect” of taxes that begin with the creation or even the suspension of a tax. Therefore, the content of these differs depending on the different reactions or effects they cause on the market and consequently on the economic system.

Based on the above considerations, we understand that taxes do not have as their sole objective the collection, however, some of them are very effective in this regard.

Indeed, some taxes have been created, whose technical structure is characterized by being simple, easy to implement and to control, as are, among others, some of those affecting the financial sector (tax on checks, or to the movements of the bank accounts, etc.). They have demonstrated significant effectiveness in the collection, however, to consider them as successful only because of this outcome would be a criterion that we do not share.

A statement in this sense would be considering only one side of the coin since it would ignore the effects of taxes on the economic system, an aspect we have referred to previously, and which is of great importance.

The impact that taxes generally produce on the expectations of economic agents and their subsequent chain effect, can generate in certain cases harmful and contradictory consequences to achieve the final objective established by the economic policy.

There is no doubt that taxes such as those affecting the financial sector mentioned above, among other consequences, affect the cost of money, as well as the eventual overall increase in prices with undesired inflationary effects, investments, etc., all of which creates a major impact in the development process.

Precisely, since taxes are differentiated according to the different reactions or consequences they generate in the market and therefore in the economic system, this means that it is not possible to achieve various objectives through a single tax.

On the other hand, if taxes were to be considered as an instrument that the tax policy designs with a single goal of increasing collection, this position would imply admitting the existence of “neutral” taxes. These are a concept that we consider not realistic in practice, since it would mean recognizing that they do not affect the decisions of economic agents, in terms of the use of production factors. That is, they would not produce a” substitution effect”.

Consequently, recommending the use of taxes based on the criterion that the collection is substantial, without recognizing and analyzing the repercussions that they cause in the economic process, would imply excluding or ignoring one of the basic functions of the Tax policy

Those who for a long time have frequented the field of International Consulting in the political scope know that this is not possible, because of the reciprocal influence that exists between the tax policy and the Tax Administration. We know that it is not possible to achieve the task assigned to us without the prior preparation of an adequate diagnosis that includes, among other aspects, the reality of the current tax system and its repercussions on the economic process, as well as the level of efficiency of the administration. Therefore, if these considerations are respected, this excludes what some call the “single recipe”.

In short, each country through its government has the tax authority to decide which taxes should integrate its tax system and, obviously, take responsibility for their consequences in the development process.

 

Disclaimer. Readers are informed that the views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author's employer, organization, committee or other group the author might be associated with, nor to the Executive Secretariat of CIAT. The author is also responsible for the precision and accuracy of data and sources.

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