Tax and Transfer Tensions: Designing Direct Tax Structures

Direct tax structures are regularly revised and public debates over changes are typically heated. This is not surprising when it is realized that tax changes usually involve losers as well as gainers. Also, taxes affect the behaviour of individuals and families in ways that are not easy to predict, but which impose severe constraints on the ability of governments to achieve their objectives. For example, attempts to redistribute income using progressive taxes are restricted by adverse incentive effects on both low- and high-income groups. Attempts to help one group of individuals often have unintended consequences on other groups. Views about the role of a tax and transfer system also vary substantially but in debates the basic value judgements which influence policy recommendations are seldom made explicit. This non-technical paper attempts to clarify the main tensions involved in tax planning and to explain why consensus is unlikely ever to be achieved.