Distortionary tax systems

Visualization of narrower problems
Inequitable tax systems
Unfair taxes
Unequal graduation of income tax
Restrictive tax structure
Inappropriate tax assessment
When government needs to reduce public deficits, the economic cost of raising more revenue is weighed against the cost of public spending. The temptation in the short-run is to rely on [ad hoc] increases in taxation because they are administratively and politically convenient. But in many countries this has led to complex and highly distortionary tax systems that not only fail to collect sufficient revenue but also damage long-term growth and increase the burden on the poor.
Taxation on the earnings and property (via direct and indirect taxes) of lower to middle-wage earners may take away anything from one-half to two-thirds of their pay. Increased taxes reduce savings, reduce bank capital available to stimulate economic growth, and have caused bank failures. Similarly, taxes on business for both international and local trade have mounted so drastically that 80 to 90% of gross income after costs and expenses may go to various taxes, and in the case of international trade, to various governments as well. Many governments maintain very low taxes on rural land allowing underuse, on the other hand settlers are allowed to establish title to "virgin" land - forests - by converting it to farmland.

[Developing countries] When there are considerable economic inequalities, indirect taxes on income and wealth exert less restraint than direct taxes on socially wasteful consumption, yet the majority of developing countries collect 70% or more of their tax revenue from indirect taxation (customs duties, for example). In addition, exemption levels tend to be higher than they need be. In some developing countries, personal incomes up to a multiple of ten or twenty times the average per capita income remain altogether exempt from income tax (compared with from one to three times in developed market economies). In particular, the tax shelter enjoyed by wealthy landlords is an obstacle to overall economic progress.

1. All tax systems are considered inequitable by those taxed; although few dispute the need for taxes, they do dispute the amount that they must pay. However there is a difference among the classes in that the majority of citizenry do not earn enough to be able to save for crises such as major illnesses, or socially desirable improvements in their circumstances (such as their children's education), or for retirement. All tax systems are inequitable when taxing authorities, whether local or national governments, cannot be restrained by budget and public debt limits, and are not accountable for armaments, while the poor suffer from lack of adequate food, shelter and medical care, and while unemployment is left to so-called market forces to rectify.

2. But these advantages can be attained only if private wealth is not drained away by crushing taxes of every kind. For since the right of possessing goods privately has been conferred not by man's law, but by nature, public authority cannot abolish it, but can only control its exercise and bring it into conformity with the commonweal. Public authority therefore would act unjustly and inhumanly, if in the name of taxes it should appropriate from the property of private individuals more than is equitable. (Papal Encyclical, Rerum Novarum, 1891).

(D) Detailed problems