What is a Tax Policy?

A tax policy is a government or taxation organization's approach to creating and managing taxes. Tax policy determines who will be taxed, at what rate, and for what reasons. Tax policy is an endlessly controversial issue among politicians, economists, businessmen, and citizens; while most agree that some amount of tax is necessary, the finer points of taxation, its effects, and uses are a constant area of debate.

Governments and organizations use taxes to finance programs and expenditure, presumably for the benefit of all taxpayers. Militaries, roads, schools, and assistance programs are all funded largely through taxes levied by the government. Organizations, such as unions, may also levy taxes in the form of dues, in order to provide services for members. Without tax revenue, governments and organizations would have no means of creating programs or assisting members, rendering them essentially powerless.

Creating tax policy is a complex process that can have numerous effects. If a tax on businesses is proposed, there is a possibility that it could hurt business profits, lead to increased unemployment, and disproportionately damage smaller businesses with less disposable profit. In creating the final tax, policymakers must try to determine if the benefits of the tax will be likely to outweigh the liabilities. In order to achieve this benefit-weighted balance, exemptions may be added to protect small businesses, or graduated rates of taxation may be created to ensure that businesses with the highest profits contribute a fair amount.

As a result of this compromising process, tax policy often becomes endlessly complicated. What starts as a simple idea may turn into dozens or hundreds of pages of regulations, loopholes, exemptions, and amendments. Some experts suggest that tax policy often suffers the problem of too many cooks in the kitchen, as each voting member insists that his or her personal plans be folded into the tax. The result, unfortunately, is that citizens outside of the tax creation process are often hopelessly confused by policies, which can lead to serious errors in the calculation and payment of taxes.

Few agree on a “correct” form of tax policy. Depending on the social and political climate, citizens and lawmakers may favor high taxes to pay for more services, or low taxes to allow for more individual choices. Some countries, such as Norway and Denmark, have extremely high levels of personal income tax, but provide many government services such as extended paternity leave, health insurance, and worker benefits such as paid vacations. In comparison, countries such as the United States have much lower individual tax rates, but offer fewer services.

Tax policy is a constantly evolving issue that is impacted by macroeconomic changes, market shifts, natural disasters, and political regime changes. Except for basic principles, such as the famous “no taxation without representation,” tax policies may shift from year to year to reflect changes in the financial and political climates. A complex subject, understanding and creating tax policy can be the focus of entire careers in the political, legal, or financial professions.