Tax efficiency
Economic theory evaluates how taxes are able to provide the government with required amount of the financial resources (fiscal efficiency) and what are the impacts of this tax system on overall economic efficiency. If tax efficiency needs to be assessed, tax cost must be taken into account, including administrative costs and excessive tax burden also known as the dead weight loss of taxation (DWL). Direct administrative costs include state administration costs for the organisation of the tax system, for the evidence of taxpayers, tax collection and control. Indirect administrative costs can include time spent filling out tax returns or money spent on paying tax advisors.
For the economic theory of tax efficiency, see Excess burden of taxation.
Achieving an ideal tax system is not possible in practice. However, there is an effort to find the optimal form of taxation. For example personal income taxation should guarantee a high level of equity through progressiveness.
A financial process is said to be tax efficient if it is taxed at a lower rate than an alternative financial process that achieves the same end.[1]
Passing one's assets onto one's heirs using a Grantor Retained Annuity Trust, for example, is potentially more tax efficient than simply letting the heirs inherit the assets directly.
Impact of taxes[edit]
The important question is who actually pays the tax. It does not always have to be the entity that pays the state taxes. By the tax impact is meant who ultimately pays a certain tax meaning who is subject to the tax burden.
The tax subject can shift its cost to other entity (tax shift forward to consumer - VAT, backward shift of the tax to supplier or even employee). The possibility of using the tax shift is given by the flexibility of demand and supply in the market of goods on which the tax is imposed. If demand is relatively inelastic, it is easier for sellers to shift the tax to the buyer. However, if the demand is relatively inflexible, the tax will fall on the seller. The targets of the tax may coincide with its real effects. For example taxing luxury goods may result in a reduction of the revenues of luxury goods producers, not an actual increase in the tax revenue.[2]