Public Finance Administration Chapter 2 Revenue Choices: Pil

Public Finance Administration Chapter 2 Revenue Choices: Pillars to Guid

Public Finance Administration Chapter 2 Revenue Choices: Pillars to Guide the Manager The Three Pillars of Support Equity – The fair distribution of tax burden amongst the population, the fair access to benefits derived from taxes for all Neutrality – The minimizing of effects taxation has on free markets in a capitalistic society Administration – The ability to effectively levy, collect and account for taxes Known as “Three Pillars of Support” because ensuring taxes & fees adhere to these principles as closely as possible neutralizes opponents of revenue generation and helps promote the greatest possible number of proponents for the government Choices that Promote Fairness Equity – the idea that taxes are fair to all Horizontal equity – taxes on people within the same economic/social circumstances are similar; i.e., property taxes would not vary wildly amongst similar sized houses within the same neighborhood Progressive vs. Regressive taxation Progressive – those with a greater ability to pay, pay a greater percentage and absolute level of taxation; Federal income taxes is an example of progressive taxation (in theory) Regressive – those with less ability to pay absorb a greater proportional share of their income than those with greater income levels; Sales taxes, for example Choices that Promote Fairness (cont.) Equity in practice Benefits received principle – those that derive the greatest benefits from the service should pay the greatest share of the cost Often it is not easy to demonstrate who receives the greatest benefit from services; for example, do poverty-stricken neighborhoods that absorb more use of police services obtain the greatest benefit, or do rich neighborhoods that avoid having their houses burglarized by a robust police force profit the most? Ability to pay principle – those that have the most amongst us should absorb a greater share of the cost of providing the service This approach often causes backlash amongst citizen groups most likely to vote, and thus puts great pressure on politicians and government administrators Choices that Promote Fairness (cont.) Benefits-based levies – Generally user fees, directly assigns costs to those who use the service – water rates, recreational activities, hotel taxes, etc. Can be problematic in that those without the ability to pay can be excluded from government-sponsored activities that theoretically should serve all citizens, or can be used to fund other functions of government that tax increases cannot Tax exemptions – Interest groups often agitate for special taxation status for their members, which may or may not represent value to the greater community as a whole Examples: mortgage interest deductions, sales tax holidays Choices that Strengthen the Local Economy Tax neutrality – The idea of levying taxes and fees in such a way that private behavior is not affected; in reality, no tax can ever be completely neutral, as redistribution of funds will always have some effect on human behavior and the economics of “free” markets Example: Sin taxes are increasingly popular as a way of generating income from “sinners” – cigarette tax, alcohol tax, etc – but increases in tax often reduces the amount of revenue generated as individuals stop smoking, or purchase alcohol from cheaper jurisdictions; the revenue depends upon people doing exactly what, theoretically, the government says it is trying to dissuade Taxes are generally least objectionable if they are similar in type and nature to nearby jurisdictions and similar governments; few citizens will support “unique” taxes, no matter how much ‘better’ they may be than other options Levying taxes and user fees must always be done in the context of alternate choices available to the tax payer; if the tax can be easily avoided, or result in other consequences more detrimental than the service gained by the tax, it should probably be reconsidered. Choices that Facilitate Effective Administration Notification – the idea that the payer is clearly told what the tax is, how it is to be paid, and how it may change depending upon what conditions Example: property taxes often generate significant opposition because homeowners have great difficulty understanding how the tax rate is generated Collection – the idea that taxes are easy to collect and do not cost more to collect than they generate Some taxes are very easy to collect – i.e. it is difficult to hide real estate, and failure to pay ultimately results in property seizure – while others can be more easily cheated on or avoided – working “under the table” to avoid income taxes; buying used items to avoid sales taxes Enforcement – the idea that ensuring all applicable persons/entities pay their fair share, and that there are reasonable consequences for “cheating the system” Putting it All Together: Creating a More Resilient Local Economy Develop a strategic plan – governments should understand what taxes are palatable locally, will not undermine the local economy, and will help address issues important to those governed Strive for tax diversification – it is always better to have moderate income derived from multiple sources than greater income from singular sources to protect against economic downturns and other issues that can affect collection of one or more types of tax/fee Consider user fees whenever possible, with provisions available for those least able to pay; it promotes conservation of resources and assigns costs to those who use the most resources Promote revenue self-sufficiency – governments should avoid counting on funds from other entities to provide services and function

Paper For Above instruction

The principles guiding public finance management are founded on the three pillars of support: equity, neutrality, and administration. These pillars serve to ensure that revenue collection is fair, efficient, and capable of supporting sustainable local governance. When managed effectively, they contribute to a resilient and equitable fiscal system that fosters trust and cooperation between citizens and government.

Equity in taxation emphasizes fairness across the population, advocating for a distribution of tax burdens that is just and reasonable. Horizontal equity ensures that individuals with similar economic circumstances pay comparable taxes, such as property taxes in similar neighborhoods. Vertical equity, often associated with progressive taxation, holds that those with greater ability to pay should contribute a larger share, exemplified by federal income taxes. Conversely, regressive taxes, like sales taxes, place a disproportionate burden on lower-income individuals. The debate between progressive and regressive taxes touches on broader issues of social justice and redistributive policies, with policymakers balancing efficiency, fairness, and economic impact.

In practice, the benefits received principle posits that those who derive more benefits from a service should bear a greater share of its cost. However, applying this principle can be complex, as determining who benefits most from public services, such as police protection, can be ambiguous. Similarly, the ability-to-pay principle advocates that those with higher incomes should shoulder a larger share of tax burdens, which often faces political resistance. These principles highlight the ongoing challenge of designing equitable tax systems that are perceived as fair and that garner public support.

Tax-based levies, including user fees like water rates and hotel taxes, directly assign costs to users, promoting fairness and resource conservation. Nonetheless, such levies can exclude those unable to pay, raising concerns about equitable access. Tax exemptions, granted through special statuses or deductions, are often pursued by interest groups seeking favorable treatment; yet, these exemptions may not always align with broader community benefits, raising questions about their legitimacy and impact on fairness.

Beyond fairness, fiscal policies must consider their impact on the local economy. Tax neutrality aims to prevent taxes from distorting private behavior, supporting market efficiency. Sin taxes on cigarettes or alcohol are designed not only to generate revenue but also to discourage consumption of harmful products. However, such taxes risk reducing revenue if they successfully alter consumer habits. Governments are encouraged to implement taxes similar in nature and magnitude to nearby jurisdictions, minimizing competitive disadvantages and public resistance.

Tax collection and enforcement are crucial facets of effective administration. Clear notification ensures taxpayers understand their obligations and any changes in tax regulations. Collection efforts must be efficient, with minimal costs relative to revenue generated. Enforcement guarantees compliance through reasonable penalties and audits, ensuring that each entity pays their fair share. Failures in collection or enforcement can undermine public trust and fiscal stability.

Building a resilient local economy requires strategic planning that incorporates tax diversification, ensuring stability amid economic fluctuations. Governments should develop comprehensive plans rooted in local preferences and conditions, balancing revenue sources such as taxes and user fees. Encouraging self-sufficiency reduces reliance on external funding, fostering fiscal independence. When designing tax policies, policymakers must weigh the social, economic, and political factors to craft balanced approaches that support community needs without stifling economic growth.

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