Modern Tax Policy: New Ways to Promote Fairness and Efficiency


This challenge was introduced by Carina Neisser, Researcher, ZEW Centre for European Economic Research


“In this world, nothing can be said to be certain, except death and taxes,“ wrote Benjamin Franklin in a letter in 1789. Is this still a certainty in a globalised world? Revelations like the “Panama Papers” or about the tricks football players like Christiano Ronaldo and others used to evade taxes let us have doubts. Taxes are indispensable to provide public goods and services like schools, hospitals and roads. For modern welfare states, taxes are the primary instrument to redistribute income and to ensure that those in need are provided with essential supplies.


The German tax law connects a fair taxation closely with the principle of economic capacity. This principle requires that the taxation is oriented towards the capacity of the respective taxpayer. Thus, Germany has a progressive tariff on income tax. It means that those who have a higher income are burdened with a higher tax rate while families with children may set off the costs of child care against their tax liability.


However, in contrast to this fundamental principle, many people with high incomes try to evade their tax obligations with the help of tax and financial consultants. It is unclear whether this behaviour results from personal interests or a differing understanding of a fair taxation. Undoubtedly, there is a blurry line between legal tax avoidance and illegal tax evasion.


The state has a set of different tools at hand to prevent an uneven share of tax burden. Existing loopholes, for instance, can be closed. To deter tax evasion, higher penalties were defined and, time and again, the financial authorities bought CDs with the names of tax evaders, which have led to an increase of voluntary declarations. Also, new findings of behavioural economists point to new approaches. By nudging and a better information policy on how tax money is spent the tax morale of the citizens could improve.


Can “legal” be synonymous with “fair”? How could we solve the tax coordination and cooperation problems between sovereign states? What other concrete options – besides higher penalties – has a state to raise the tax compliance? How could tax enforcement be enhanced? Are there other opportunities to raise the tax morale of the society?

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