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Tax policy is the government's approach to taxation, both from the practical and normative side of the question.

[edit] Philosophy

Policymakers debate the nature of the tax structure they plan to implement (i.e., how progressive or regressive) and how they might affect individuals and businesses (i.e., tax incidence).

The reason for such focus is economic efficiency as advisor to the Stuart King of England Richard Petty had noted that the government does not want to kill the goose that lays the golden egg. The paradigmatic efficient taxes are either those which are nondistortionary or lump sum. However, readers must be cautioned about the economist's definition of distortion only considers the substitution effect because anything which does not change relative prices is defined as nondistortionary. As any first year undergraduate should know, there is also 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.

[edit] Administration

The implementation of tax policy has always been a tricky 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."

[edit] See also

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