How Do You Make The Tax Change Correct Right From the Start

Before any tax-related policy is implemented, it must be subjected to a thorough examination to determine if it's the most efficient option for achieving the policy goal with a reasonable cost. The amount of tax-related changes that are currently or in the near future will be in the works is staggering, and we're concerned regarding whether they'll go through sufficient analysis to determine whether they will be simple, efficient, and effective in achieving the objectives of the tax system without making tax administration more complicated.

Set the goals and investigate the options.

One of the first steps to getting the tax changes right is to define the goal of the tax policy to be achieved. Perhaps, for instance, the goal is to boost the use of green methods and equipment to decrease pollution and other negative environmental impacts.

With this thought in mind, it is now time to consider whether tax initiatives or an incentive is the most effective way to get the desired outcome. In the past, policymakers in Canada appear to have had an interest in using the tax system over other options, like direct funding, grants, or other subsidies.

Evaluate the design options that you can consider, including practical issues.

If a tax overhaul is thought to be the best option, all possible design options must be thoroughly analyzed from both practical and conceptual viewpoints to find which option has the greatest chances of success. Whatever the theoretical merits of the idea might be, it is unlikely to have any chance of success if it is difficult to implement.

Complexity and effectiveness must be balanced.

The analysis should ensure that the tax change is carried out in a manner that is balanced between efficiency and the level of complexity. Sometimes, a tax policy could be designed to prevent certain behavior in general or to deter people from taking benefit of a larger beneficial tax reform. This is often an exchange of benefits—if everything that is possible is made to make sure that a rule's integrity is guaranteed, it could be so complicated that taxpayers may be unable to comprehend and implement. This may deter taxpayers from adhering to the law or force the rule to be applied incorrectly which could render the rule useless.

Be on the lookout for collateral damage.

If rules are not sufficiently defined, they can be caught by certain taxpayers or facts without intention. Tax policymakers should be aware of these kinds of collateral damages for instance, when they set rules to prevent certain outcomes or raise the reporting obligations.

Tax administrations may also suffer unexpected effects from the broader range of tax regulations. For instance, with each amount of complexity that an amendment to tax rules adds in the tax code, the aim of simplifying and automating tax return filing for the vulnerable Canadians is further beyond reach.

Be prepared for windfalls, and use effective measures.

When deciding on tax incentives to stimulate certain types of behaviors or investments, the government must be able to be aware of the potential for tax gains—that is, taxpayers shouldn't get tax benefits in exchange for actions they would have otherwise done.

In the same way, tax incentives are only allowed if it is proven that they will actually encourage the actions desired by taxpayers.