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The improvement in the taxation policy in developed states has resulted to a remarkable success. On the other hand, developing states experience immense tax policy challenges. This is in the attempt to institute efficient tax systems.
This paper is aimed at exploring the challenges states face while managing their tax policy, how states make choices between various types of revenues, and how states cope with challenges, such as higher education costs and changing economy.
Challenges States Face in Managing Tax Policy
While managing their tax policy, states experience challenges such as poor tax administration, absence of statistical figures and data, increased underground economy, taxes multiplicity, and the incompetence to rank tax effort (Atkinson, 1977).
One of the challenges that states face is an evidenced escalation in the general budget deficits. This implies that even after several reforms, no improvement is experienced in domestic revenue mobilization growth. The commonness of budget deficits is an indication that states’ tax policies require imperative appraisal. This will ensure greater tax revenues.
The value and worthiness of resources that tax administrators require are substantially determined by the prevalent tax policy. The tax system in the majority of the developing countries is lopsided. Moreover, it is dominated by particular revenues. Consequently, establishing efficient and effective tax systems is surrounded by formidable challenges.
A popular challenge that leads to this is inaccessibility to tax statistics. Irrespective of the fact that taxation is an old government activity in many states, tax statistics are unavailable. State agencies, as well as related federal tax offices, possess a grave data management failure.
In addition, nothing is done to routinely collect or analyse the limited data that is accessible. To make matters worse, there are no efforts to store or make the data easy to retrieve and assess. As a result, there is inadequate input in the policy process (Atkinson, 1977).
Multiplicity of taxes is another key challenge. In the majority of developing countries, corporate bodies, as well as individuals, often complain about the ripple impacts that come about as a result of tax duplication.
This challenge arises when states complain about the disparity in fiscal jurisdiction or powers, and responsibilities. In order to compensate this, some states end up levying particular taxes. As a result, business closures, harassment, and arbitrariness are experienced.
As far as poor tax administration is concerned, individual agencies as well as the tax administration, lack sufficient resources to cope with the escalating difficulties. Indeed, the negative opinion that the majority of the tax collectors have towards citizens is because of the inappropriate motivation. The administrative capacity’s lack is a principal government impairment in the willingness to escalate revenue.
How States make Choices Between various types of Revenue
Before making a choice regarding the types of revenue to choose, it is imperative that a state has adequate knowledge and information. Moreover, states collect and analyse adequate data, which then becomes information (Oliff, Mai & Palacios, 2012).
This data helps states to keep trends of the tax systems they have been using, and evaluate where adjustments are necessary. Through this, states are able to select the most efficient types of revenue.
If states make good decisions, then there is accessibility to proper information. Consequently, there is efficient structuring of the knowledge management process. The challenges experienced by other states in their tax policies should act as lessons for others (Parkin, 2006).
States also use incremental analysis, which is an exceptionally powerful tool for decision making. Use of the tool encompasses comparing the relevant revenues and costs of the alternative to those of another.
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Similar costs are regarded as irrelevant. Sometimes, incremental analysis is referred to as relevant, marginal, or differential costing. While using this tool, it is imperative that states do not ignore the period when the revenue was realized or costs incurred.
How States Cope with Challenges
For states to cope with the mentioned challenges, it is imperative to consider the present domestic social phenomena. These include epidemics such as HIV/ AIDS, prevailing civil wars, effective tax administration barriers, and the enlarging informal sector, all of which wear down the tax base rapidly.
Before a state considers how to manage its tax policy effectively, there should a clear and vivid picture of the tax system’s scope (Oliff, Mai & Palacios, 2012).
The state’s tax goals cannot be achieved through enacting a just tax system. Hence, for a state to cope with these challenges, it is worth ensuring an effective tax policy system which can sufficiently finance the appropriate public spending level.
This should be accomplished in an extremely equitable and efficient manner possible (Parkin, 2006). The tax policy system should generate adequate revenue to cater for essential expenditures. This should be achieved without resorting to unnecessary public sector borrowing.
Second, the state should ensure the tax policy raises revenue through equitable ways. This reduces the disincentive impact imposed on economic activities. Third, this should be carried out in a way that does not substantially differ from global norms.
Atkinson, A. B. (1977). Optimal Taxation and the Direct Versus Indirect Tax Controversy, 10 Can. J. Econ.,590, 592.
Oliff, P., Mai, C. & Palacios, V. (2012). States Continue to Feel Recession’s Impact. Retrieved from https://www.cbpp.org/research/states-continue-to-feel-recessions-impact?fa=view&id=711
Parkin, M. (2006). Principles of Microeconomics. New York: Routledge.