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{{Short description|Choice by a government as to what taxes to levy, in what amounts, and on whom}}{{Multiple issues|{{More citations needed|date=December 2009}}{{tone|date=April 2021}}}}{{Taxation}}{{Public finance}}Tax policy refers to the guidelines and principles established by a government for the imposition and collection of taxes. It encompasses both microeconomic and macroeconomic aspects, with the former focusing on issues of fairness and efficiency in tax collection, and the latter focusing on the overall quantity of taxes to be collected and its impact on economic activity. The tax framework of a country is considered a crucial instrument for influencing the country's economy.WEB, 2013, POLICY FRAMEWORK FOR INVESTMENT USER'S TOOLKIT Chapter 5. Tax Policy,weblink OECD, Tax policies have significant implications for specific groups within an economy, such as households, firms, and banks. These policies are often intended to promote economic growth; however, there is significant debate among economists about the most effective ways to achieve this.BOOK, Neva, Goodwin, Principles of Economics in Context, Routledge, 2019, 9781138344037, Taxation is both a political and economic issue, with political leaders often using tax policy to advance their agendas through various tax reforms, such as changes to tax rates, definitions of taxable income, and the creation of new taxes. Specific groups, such as small business owners, farmers, and retired individuals, can often exert political pressure to reduce their share of the tax burden. The tax code is often complex and includes rules that benefit certain groups of taxpayers while shifting more of the burden to others.BOOK, Neva, Goodwin, Principles of Economics in Context, Routledge, 2019, 9781138344037,

Main reasons for taxation

There are some main reasons why government needs to collect taxes:WEB, tutor2u, 2021-04-04, External Environment: Taxation (GCSE),weblink 2021-04-05, tutor2u, en,

1. Market failure - mainly to discourage purchases of that product (any tax creates a disincentive, so consumers will reduce their purchases and seek alternatives).
   • Taxes can create incentives promoting desirable behavior and disincentives for unwanted behavior. Taxes can change consumers' behavior and thus influence the market outcome. For example, in presence of externalities, an —omnipotent and ethical policymaker ≠would want to change the market outcome to reach the social optimum (otherwise there would be a deadweight loss of externality). In such a case, policymakers would implement excise taxes, carbon tax etc.BOOK, E. Stiglitz, Joseph, Economics of the Public Sector, W. W. Norton & Company, 2015, 9780393925227,
2. To generate revenue.
   • Taxation is the most important source of government revenue. Governments can use tax revenue to provide public services such as social security, health care, national defense, and education.
3. Changing the distribution of income and wealth.
   • Taxation provides a means to redistribute economic resources toward those with low income or special needs (tax revenue can be used for transfer payments such as welfare benefits).

Philosophy

Policymakers debate the nature of the tax structure they plan to implement (i.e., how progressive or regressive) and how these taxes might affect individuals and businesses (i.e., tax incidence).The reason for this focus is economic efficiency; as advisor to the Stuart King of England Richard Petty had noted "The government does not want to kill the goose that lays the golden egg". Paradigmatic efficient taxes are those that are either non-distortionary or lump sum. However, economists define distortion only according to the substitution effect, because anything that does not change relative prices is non-distortionary. One must also consider the income effect, which for tax policy purposes often needs to be assumed to cancel out in the aggregate. The efficiency loss is depicted on the demand curve and supply curve diagrams as the area inside Harberger's Triangle.National Insurance in the United Kingdom and Social Security in the United States are forms of social welfare funded outside their national income tax systems, paid for through worker contributions, something labeled a stealth tax by critics.

Administration

The implementation of tax policy has always been a complex business. For example, in pre-revolutionary colonial America, the argument "No taxation without representation" resulted from the tax policy of the British Crown, which taxed the settlers but offered no say in their government. A more recent American example is President George H. W. Bush's famous tax policy quote, "(Read my lips: no new taxes)."Efficient tax administration is key to encouraging businesses to become formally registered, thereby expanding the tax base and revenues. On the other hand, an unfair tax administration can harm the tax system and reduce the government legitimacy. In many developing countries, the failure to improve tax administration while introducing new tax systems has led to widespread tax evasion and lower tax revenues. It is important to keep tax rules clear and simple to encourage compliance, as high tax evasion is associated with complicated tax systems. As the tax administration ecosystem evolves with the introduction of new analytical tools, digital information flows are increasing. Consequently, tax administration is operating in a way that increases incentives for compliant taxpayers.WEB, Why it matter paying taxes?,weblink 25 April 2021, The World Bank,