i
Guiding principles
of good tax policy:
A framework for
evaluating tax
proposals
Tax Policy Concept Statement 1
ii Guiding principles of good tax policy: A framework for evaluating tax proposals
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About the American Institute of CPAs
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1
2 Overview
Purpose of this tax policy concept statement
Guiding principles of good tax policy
Formulations of principles of good tax policy
7 Explanations of the guiding principles of good tax policy
Equity and fairness
Certainty
Convenience of payment
Effective tax administration
Information security
Simplicity
Neutrality
Economic growth and efciency
Transparency and visibility
Minimum tax gap
Accountability to taxpayers
Appropriate government revenues
11 Challenges
13 Conclusion
14 Bibliography
15 Notice to readers
Contents
2 Guiding principles of good tax policy: A framework for evaluating tax proposals
Overview
Purpose of this tax policy concept statement
Discussions occur regularly among politicians, economists, tax practitioners
and others about changing national and subnational tax systems. Any
suggestion for modifying tax rules — whether major or minor — raises the
question of how to best analyze and compare proposals. A framework
based on appropriate tax policies is needed to effectively analyze proposals
to change tax rules and tax systems. Such a framework, based on widely
accepted principles, also provides an objective approach for evaluating and
improving existing tax rules.
3
Guiding principles of good tax policy
The guiding principles, listed below, are commonly cited
and used as indicators of good tax policy. The rst
four principles are the maxims of taxation laid out by
economist Adam Smith in his 1776 work, The Wealth
of Nations.
1
These principles, along with the additional
eight, have been used for many years by governments,
economists, tax advisers and others.
2
The numbered
order of the principles in this statement is for reference
only and is not an indication of the order of importance
of these principles.
1. Equity and fairness — Similarly situated taxpayers
should be taxed similarly.
2. Certainty — The tax rules should clearly specify how
the amount of payment is determined, when payment
of the tax should occur, and how payment is made.
3. Convenience of payment — Facilitating a required tax
payment at a time or in a manner that is most likely
convenient for the taxpayer is important.
4. Effective tax administration — Costs to collect a tax
should be kept to a minimum for both the government
and taxpayers.
5. Information Security — Tax administration must
protect taxpayer information from all forms of
unintended and improper disclosure.
6. Simplicity — Simple tax laws are necessary so that
taxpayers understand the rules and can comply with
them correctly and in a cost-efcient manner.
7. Neutrality — Minimizing the effect of the tax law
on a taxpayer’s decisions as to how to carry out
a particular transaction or whether to engage in a
transaction is important.
8. Economic growth and efciency — The tax system
should not unduly impede or reduce the productive
capacity of the economy.
9. Transparency and visibility — Taxpayers should know
that a tax exists and how and when it is imposed
upon them and others.
10. Minimum tax gap — Structuring tax laws to minimize
noncompliance is essential.
11. Accountability to taxpayers — Accessibility and
visibility of information on tax laws and their
development, modication and purpose are
necessary for taxpayers.
12. Appropriate government revenues — Tax systems
should have appropriate levels of predictability,
stability and reliability to enable the government to
determine the timing and amount of tax collections.
1
Adam Smith, The Wealth of Nations, edited by Edwin Cannan, New York, The Modern Library, 1994, pages 887 to 890
2
For example, per the OECD: “Assuming a certain level of revenue that needs to be raised, which depends on the broader economic and scal policies of the country
concerned, there are a number of broad tax policy considerations that have traditionally guided the development of taxation systems. These include neutrality,
efciency, certainty and simplicity, effectiveness and fairness, as well as exibility.” OECD, Addressing the Tax Challenge of the Digital Economy, 2014, page 30.
4 Guiding principles of good tax policy: A framework for evaluating tax proposals
Formulations of principles of good tax policy
The following table shows how the guiding principles
correspond to commonly used formulations of criteria
used to analyze tax systems.
AICPA principles of
good tax policy OECD tax principles
U.S. Joint Committee on
Taxation (JCT) analysis
criteria
U.S. Government
Accountability Ofce (GAO)
criteria for a good tax system
Equity and fairness See neutrality below. Is “the tax system fair? Does
the tax system treat similarly
situated individuals similarly?
Does the tax system account
for individuals’ different
capacities to bear the burden
of taxation?”
Equity includes two principles:
(1) ability to pay (horizontal
and vertical equity), and (2)
benets received. “When making
judgments about the overall
equity of government policy, it is
important to consider both how
individuals are taxed and how the
benets of government spending
are distributed.”
Certainty See simplicity below.
Convenience of
payment
“ Compliance costs for taxpayers
and administrative costs for the tax
authorities should be minimized as
far as possible.”
Effective tax
administration
See convenience of payment above. “ Can the tax system be
easily administered by the
government and can it induce
compliance by all individuals?
Is enforcement costly? Can
some individuals successfully
avoid their legal liabilities?”
Administrability including
“processing returns, enforcement,
and taxpayer assistance.”
Information security Structural features should keep
pace with technological changes.
Simplicity “ The tax rules should be clear and
simple to understand so that
taxpayers can anticipate the tax
consequences in advance of a
transaction, including knowing when,
where and how the tax is to be
accounted.”
Is “the tax system simple?
Is it costly for taxpayers to
determine their tax liability and
le their taxes?”
Simplicity in terms of the
“compliance burden (record
keeping, planning, return
preparation, and responding to
audits).”
5
A more detailed explanation of each of the guiding
principles is provided in the next section. Some of the
challenges in following the principles are also described.
Despite the challenges, proposals for changes to the tax
law should strive to consider all guiding principles.
AICPA principles of
good tax policy OECD tax principles
U.S. Joint Committee on
Taxation (JCT) analysis
criteria
U.S. Government
Accountability Ofce (GAO)
criteria for a good tax system
Neutrality “ Business decisions should be
motivated by economic rather
than tax considerations. Taxpayers
in similar situations carrying out
similar transactions should be
subject to similar levels of taxation.”
See economic growth and
efciency below.
The system should not distort
economic decisions.
Economic growth and
efciency
“ The systems for taxation should be
exible and dynamic to ensure that
they keep pace with technological
and commercial developments.”
Does “the tax system promote
or hinder economic efciency?
That is, to what extent does
the tax system distort taxpayer
behavior by imposing high
marginal tax rates on labor,
saving, or other activities?
Does the tax system create
a bias against the domestic
production of goods and
services? To what extent does
it promote economic growth?”
Economic efciency of tax
changes should be considered.
Transparency and
visibility
Transparency of “tax calculations,
logic behind tax laws, tax burden
and compliance.”
Minimum tax gap “ The potential for tax evasion and
avoidance should be minimized
while keeping counteracting
measures proportionate to the risks
involved.”
“ Can some individuals
successfully avoid their legal
liabilities?”
Accountability
to taxpayers
3
“ Taxpayers understand the
extent to which the tax laws are
enforced.”
Appropriate
government revenues
“ Taxation should produce the right
amount of tax at the right time.”
3
This principle ties to one of nine specied by the National Conference of State Legislatures (NCSL). This group’s explanation of this principle states: “The essence
of accountability is that tax laws should be explicit, not hidden. Proposals for changes should be well publicized to stimulate debate.” National Conference of State
Legislatures, Principles of a High-Quality State Revenue System, Fourth Edition, June 2007.
6 Guiding principles of good tax policy: A framework for evaluating tax proposals
6
6
7
Explanations of the guiding
principles of good tax policy
Equity and fairness
Similarly situated taxpayers should be taxed similarly.
The principle of taxing similar taxpayers similarly is typically
described in terms of equity. The concept of horizontal
equity provides that two taxpayers with equal abilities to
pay should pay the same amount of tax. If a taxpayer has
a greater ability to pay than another taxpayer, the concept
of vertical equity comes into play, which means that the
person with the greater ability to pay should pay more tax.
Of course, how much more tax to pay is a common topic
of debate and, over the decades, has resulted in a variety
of ranges of graduated tax rates and exemption amounts
leading to varying levels of progressivity of the tax systems.
The principle of equity is often viewed as a fairness
principle. That is, many people view a tax as fair if taxpayers
with the greatest ability to pay have the highest tax burdens.
Nevertheless, the term fair tends to have different meanings
to different people. For example, with respect to an income
tax, consideration of a fair income tax system might arise if:
1. All taxpayers are taxed at the same tax rate (a at tax)
because those with higher incomes will pay more than
taxpayers with lower incomes.
2. Taxpayers with higher incomes pay tax at higher rates
than lower-income taxpayers (a progressive tax).
3. Many types of income are taxed the same (meaning, for
instance, that few or no types of income are excluded
from taxation).
4. It combines the elements of items 1 and 3 above.
5. It combines the elements of items 2 and 3 above.
Therefore, use of the word fair in describing a tax is better
used in the context of whether a tax system is perceived
as fair. This approach acknowledges some of the
subjectiveness of the term fair. Yet, as explained in the JCT
and GAO reports, various measures exist to examine equity
including distributional analyses of annual taxes, lifetime
taxes, and more.
Generally, in evaluating the principle of equity, giving
consideration to the entire range of taxes a taxpayer is
subject to, rather than to just one type of tax, is a must.
Certainty
The tax rules should clearly specify how the amount of
payment is determined, when payment of the tax should
occur, and how payment is made. Certainty, rather than
ambiguity, of a person’s tax liability is vital. The tax rules
should specify the amount of the payment, when the tax
is due, and how payment is made. A tax system’s rules
must enable taxpayers to determine what is subject
to tax (the tax base) and at what tax rate(s). Taxpayers
should have the ability to determine their tax liabilities
with reasonable certainty based on the nature of their
transactions. If the transactions subject to tax are easy to
identify and value, the principle of certainty is more likely
attained. On the other hand, if the tax base is dependent
on subjective valuations or transactions that are difcult
to categorize, attaining the principle of certainty might not
happen. In addition, spelling out how the taxes are paid
and when the taxes are due under the applicable laws, as
well as in the tax forms and instructions, is essential.
Certainty is important to a tax system because it helps
to improve compliance with the rules and to increase
respect for the system. Certainty generally comes from
clear statutes as well as timely and understandable
administrative guidance that is readily available to
taxpayers.
The principle of certainty is closely related to the principle
of simplicity. The more complex the tax rules and
system, the greater likelihood that the certainty principle
is compromised.
8 Guiding principles of good tax policy: A framework for evaluating tax proposals
Convenience of payment
Facilitating a required tax payment at a time or in a
manner that is most likely convenient for the taxpayer
is important. For example, assessment of tax upon the
purchase of goods should occur at the time of purchase
when the person still has the choice as to whether to
buy the goods and pay the tax. Convenience of payment
is important in helping to ensure compliance with the
tax system. The more difcult a tax is to pay, the more
likely that payment will not happen. Typical payment
mechanisms include withholding (such as the withholding
of income taxes from employee paychecks) and periodic
payments of estimated tax liability. The appropriate
payment mechanism should depend on the amount of
the liability and ease of collection as well as the equity
of collection from all taxpayers. Also, consideration of
appropriate use of secure technology is important.
Effective tax administration
Costs to collect a tax should be kept to a minimum
for both the government and taxpayers. Minimizing
administrative and compliance costs is critical.
4
These
costs include the administrative cost to the government
that is inuenced by the number of revenue ofcers
necessary to administer the tax. Consideration of
taxpayer compliance costs is also a must. This principle
is closely related to the principle of simplicity. The more
complex a tax, the greater the costs of government
administration and the greater the compliance costs for
taxpayers to determine and report their tax liability.
Consideration of appropriate use of secure technology
is also necessary. The benets of any reform should
outweigh the costs of adoption, including transitional and
implementation costs.
Information security
Tax administration must protect taxpayer information
from all forms of unintended and improper disclosure.
This includes, but is not limited to, adequate “rewalls” for
security of the tax agency’s internal system, safeguards
necessary to prevent degradation of the system via
fraudulent claims resulting from identity theft, as well as
sufcient controls to ensure that taxpayer information is
only disclosed to the appropriate parties as permitted by
law. A tax administration’s responsibility for information
security should extend to its employees, representatives,
agents, and any contracted or afliated party. This
protection must extend throughout the period the
information is held, and must accommodate changes in
technology and threats against the information. Failure
to provide adequate security ultimately results in erosion
of the principles of equity and fairness, effective tax
administration, and appropriate government revenues.
Simplicity
Simple tax laws are necessary so that taxpayers
understand the rules and can comply with them
correctly and in a cost-efcient manner. Simplicity
in the tax system is important both to taxpayers and
tax administrators. Complex rules lead to errors and
disrespect for the system that can reduce compliance.
Simplicity is important both to improve the compliance
process and to enable taxpayers to better understand the
tax consequences of transactions in which they engage
in or plan to engage.
4
Adam Smith’s maxims referred to this principle as “economy of collection.”
Convenience of payment is important
in helping to ensure compliance with
the tax system.
9
5
General Accounting Ofce (GAO), Reducing the Tax Gap — Results of a GAO-Sponsored Symposium, June 1995, GAO/GGD-95-157, page 13.
Neutrality
Minimizing the effect of the tax law on a taxpayer’s
decisions as to how to carry out a particular transaction
or whether to engage in a transaction is important.
Minimizing the effect of the tax law on business and
personal decisions is appropriate. The primary purpose
of a tax is to raise revenue for governmental activities,
rather than to inuence business and personal decisions.
Economic growth and efciency
The tax system should not unduly impede or reduce
the productive capacity of the economy. All taxes
reduce economic efciency and create distortions, but
good tax policy minimizes these effects. The tax system
should not hinder a jurisdiction’s economic goals, such
as economic growth, capital formation, and international
competitiveness. The principle of economic growth and
efciency is maximized by a tax system that is aligned
with the economic principles and goals of the jurisdiction
imposing the tax. For example, a jurisdiction’s tax rules
should not pose competitive disadvantages for rms
resident in that jurisdiction relative to non-resident rms.
Economic growth and efciency are impeded by tax rules
that favor a particular industry or investment, thereby
causing capital and labor to ow to such areas for
reasons not supported by economic factors. Such action
can potentially harm other industries and investments, as
well as the economy as a whole.
The principle of economic growth and efciency is
related to the principle of neutrality in that tax rules
that distort taxpayer behavior may hinder economic
efciency. Evaluating a potential tax structure with
respect to neutrality between different forms of business
activities to ensure that the enactment would not result
in discrimination in favor or against particular ways of
doing business is vital.
Transparency and visibility
Taxpayers should know that a tax exists and how and
when it is imposed upon them and others. Visibility
enables individuals and businesses to know the true cost
of transactions. It also enables them to see what their
total tax liability is and to which level of government it is
being paid. When a tax is not visible, it is easily retained
or raised with little, if any, awareness among taxpayers
about how the tax affects them.
Minimum tax gap
Structuring tax laws to minimize noncompliance is
essential. The tax gap is the difference between taxes
that are owed and taxes that are voluntarily paid. A tax
gap exists with any tax for a variety of reasons, such as
intentional errors (non-ling, underreporting of income,
overstating of deductions, and omission of transactions)
and unintentional errors (math mistakes and lack of
understanding of the rules). Complex tax provisions
can lead to noncompliance due to errors caused by
confusion and uncertainty. Procedural rules generally are
required for all tax systems to encourage compliance.
Rules to encourage compliance might include mandatory
withholding of taxes at the source and penalties for
noncompliance. Generally, compliance measures need to
strike a balance between the desired level of compliance
against the costs of enforcement and the level of
intrusiveness of the tax.
5
Appropriate enforcement efforts are necessary to
prevent non-compliance by both lers and non-lers.
Insufcient efforts to keep the tax gap to a minimum
result in inequities and inefciencies due to the need to
offset the revenue loss with other sources.
10 Guiding principles of good tax policy: A framework for evaluating tax proposals
Accountability to taxpayers
Accessibility and visibility of information on tax laws
and their development, modication and purpose
are necessary for taxpayers. Public awareness of
tax reform activities, as well as an understanding of
proposed changes, enables broader and more well-
informed debate. Taxpayers should readily have access
to information for understanding sources and uses of tax
revenues. Transparency in the lawmaking and guidance
process helps promote an improved understanding and
respect for the system. Evaluating multiple alternatives
before deciding on any particular change is necessary.
Taxpayers should have opportunities through government
reports and hearings to gain an understanding of the
jurisdiction’s tax and budget situation.
Appropriate government revenues
Tax systems should have appropriate levels of
predictability, stability and reliability to enable the
government to determine the timing and amount of
tax collections. A dynamic and exible tax system is
necessary in order to adapt to changing needs and
technological and commercial developments. It is
important that a tax system is exible to meet the
current revenue needs of the government while adapting
to changing needs on an ongoing basis. Thus, it is
necessary to review tax systems regularly to ensure they
are supportive of the jurisdiction’s goals (or not hindering
their attainment), appropriate for new business models,
and capable of generating appropriate revenues.
Further, the complementary nature of a tax system
among relevant jurisdictions is important. That is, giving
consideration to how tax bases are determined within the
national or global economy and the effect that changes
in a tax system have on other tax systems is important.
Consideration of fairness among jurisdictions is important,
including revenue generation for the appropriate
government for activities that involve multiple jurisdictions.
In order for required spending to occur, governments
need assurance that tax revenues are available
and stable. Tax revenues need to support general
government spending needs, thus for example,
earmarking tax revenues for a specic purpose warrants
express justication. Regarding stable revenues, typically,
a mix of taxes provides a more stable and exible tax
base because different types of taxes are affected
differently by changes in the economy. For example, in
an economic downturn causing unemployment, income
tax revenues will decline. If the government is collecting
other types of taxes that are less affected by decreased
employment or if the effect will not occur as quickly,
government revenues in total are less adversely affected
than if the government relied solely on an income tax.
It is important that a tax system is
flexible to meet the current revenue
needs of the government while
adapting to changing needs on an
ongoing basis.
1111
Challenges
Various challenges exist to incorporating all of the
guiding principles of good tax policy into any tax system.
A number of these challenges stem from the desire
to use the tax law for more than raising revenue, for
instance, to implement social or economic policies
(such as by limiting certain deductions and credits to
individuals with income below specied amounts). In
addition, frequent changes to the tax law challenge the
principles of certainty and simplicity. The more changes
that are made, the greater the difculty taxpayers,
practitioners and government tax administrators have
in understanding the tax consequences of transactions.
Also, it becomes more difcult for tax agencies to issue
guidance in a timely manner when there are hundreds of
tax law changes every few years.
A key challenge is the reality that achievement of all of
the principles is not possible to the same degree for
all proposed tax changes. For example, to exclude a
particular type of economic benet from taxation may
satisfy the simplicity principle, but not the equity or
neutrality principles. Thus, lawmakers must carefully
balance the guiding principles to achieve an optimal law.
A number of these challenges stem
from the desire to use the tax law for
more than raising revenue, for instance,
to implement social or economic
policies.
12 Guiding principles of good tax policy: A framework for evaluating tax proposals
13
Conclusion
A framework of appropriate tax principles is needed to analyze proposals
to change tax rules and tax systems in order to best ensure an effective tax
system based on good tax policy. The challenges that exist to incorporating
the guiding principles of good tax policy are not insurmountable. It takes a
concerted effort to consider these principles in any type of tax law change
– both major and minor.
We encourage policymakers to work to improve our tax systems to better
incorporate the principles outlined in this tax policy concept statement and
will continue to offer assistance in this important endeavor.
14 Guiding principles of good tax policy: A framework for evaluating tax proposals
Bibliography
AICPA, Blueprint for Tax Simplication, April 1992.
AICPA, Tax Policy Concept Statements:
1. Guiding Principles of Good Tax Policy: A Framework for Evaluating Tax
Proposals
2. Guiding Principles for Tax Simplication
3. Guiding Principles for Tax Law Transparency
4. Guiding Principles for Tax Equity and Fairness
Department of Treasury, Tax Reform for Fairness, Simplicity, and Economic
Growth, Volume 1, November 1984.
Government Accountability Ofce (GAO), Reducing the Tax Gap – Results of a
GAO-Sponsored Symposium, June 1995, GAO/GGD-95-157.
Government Accountability Ofce (GAO), Understanding the Tax Reform Debate:
Background, Criteria, & Questions, September 2005.
Joint Committee on Taxation (JCT), Description and Analysis of Proposals to
Replace the Federal Income Tax (JCS-18-95), June 5, 1995, pages 58-83.
Joint Committee on Taxation (JCT), Federal Tax Treatment of Individuals
(JCX-43-11), September 12, 2011, pages 24-29.
National Conference of State Legislatures, Principles of a High-Quality State
Revenue System, Fourth Edition, June 2007.
Organization for Economic Co-operation and Development (OECD), Addressing
the Tax Challenges of the Digital Economy, 2014, pages 18, 25-26, 30-32, 149-151.
15
Notice to readers
Tax Policy Concept Statements of the AICPA Tax Division are issued for the general information of those
interested in the subject. They present the conclusions of the Division, as approved by the Tax Executive
Committee. The Tax Executive Committee is a senior technical body of the AICPA authorized to speak for the
AICPA in the area of taxation.
Tax Policy Concept Statements are intended to aid in the development of tax legislation in directions that the
AICPA believes are in the public interest.
Tax Policy Concept Statements do not establish standards enforceable under the AICPA’s Code of
Professional Ethics and are not intended for that purpose.
This statement stems from a tax policy and reform project started in the mid-1990s on possible avenues
for the AICPA to help shape and inform congressional tax reform activities underway at the time. Ofcially
released in 2001, this was the rst in a series of tax policy concept statements issued by the AICPA Tax
Division on tax policy matters. It is intended to aid in the development and improvement of tax laws in
directions that the AICPA believes are in the public interest.
Tax policy concept statements are approved by the Tax Executive Committee of the AICPA Tax Division after
development by an assigned committee, technical resource panel, or task force.
This statement was originally developed by the Fundamental Tax Reform Task Force with input from the
1998–99 Tax Policy and Simplication Committee and the 1999–2000 Tax Legislation and Policy Committee.
It was approved by the 2000-01 Tax Legislation and Policy Committee and the 2000–01 Tax Executive
Committee. The statement was updated in 2017 and approved by the 2016–17 Tax Executive Committee.
16 Guiding principles of good tax policy: A framework for evaluating tax proposals
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