Friday, December 5, 2008

The Efficiency of a Tax System - Overview

Tax Efficiency

The Efficiency of a Tax System - Overview

The efficiency of a tax system refers to the relative costs it imposes on taxpayers. There are two costs of taxes beyond the monetary payments from taxpayers to the government. The first cost arises as taxes alter incentives and behavior. The second cost is the administrative burden of complying with the tax laws. If these two costs are relatively low, then the tax system is efficient. If these two costs are relatively high, then the tax system is inefficient. Inefficient taxes cause an inefficient allocation of economic resources and thus are generally considered to be less desirable than efficient taxes.

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