[1] 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.
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.
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".
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.
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.
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.
The difference between the two is made up by any financial or managerial benefit derived by the taxpayer from tax compliance.
However, there is a possibility to define some indisputable examples of costs, that are directly connected to the compliance of individual taxpayers.
Other types of compliance costs, such as the negative psychological effects on taxpayers as a result of the attempts to comply with the current tax policy, or many types of social costs, are very intangible, and it is, therefore, hard to quantify them, even though the effect of their existence is visible, especially for individuals and small businesses.
When attempting to implement economic policies and projects, the measurement of the net benefits of different groups are needed and to consider that the project/policy is the Pareto improvement.
If net positivity can not be clearly determined, other factors are utilised: The compensation principle, the inverse proportional of measures of efficiency and equality, and the weighted benefits approach.
[15] Member states are to take full control of which tax system they want to impose, as long as they respect the rules of the EU.
There is a possibility for tax field action of the EU under the principles of subsidiarity and proportionality,[15] and also under the assumption that the member state in question was not able to provide an effective solution, therefore there is need for support in terms of coordination for example.
As a part of the EU's objective to empower its citizens to play a full part in the market, the organization announced in 2020 that the objective is to ensure that tax rules do not discourage individuals from benefiting from the internal market.
As many people in developing countries are often paid wages based on the time they spend at work (volatile value), and many are paid in cash which lowers the government's ability to track such money-flows, it is difficult to keep record of any reliable data on income and wealth distribution in the country.
This leads to a situation in which the policymakers are unable to create statistic or models that would allow them to propose changes to the current tax system (mainly income taxes in this case) in the country, that would improve the situation (mainly the efficiency vs. equity trade-off).
This lack of information is supported by the fact that just like in the case of incomes, most spending is done in cash which is, again, more difficult to keep record of.
The path to an improved tax systems in developing countries is a long and a demanding one, but it can be done.
This should be changed, but at the same time, the measures used should not make it less beneficial for foreign investors to bring their money to the country.
This is a tax with a large potential but it is one which currently only brings a small portion of money to the government's budget in many developing countries.
There is a document made by the OECD designed in order to assist developing countries in transforming and improving their tax systems.