Efficiency as a Principle of Taxation
// July 11th, 2009 // Taxation
Former US President Theodore Roosevelt once said, “Practical efficiency is common, and lofty idealism not uncommon; it is the combination which is necessary, and the combination is rare.” In a very close manner, this is still true when economists deal about efficient taxation.
Aside from fairness, efficiency is the other big principle of a good tax system.  In a broader sense, this refers to the ability to spend the least amount of resources to yield the maximum desired output.  Efficiency is measured by taking into consideration the administration cost, cost of compliance, and the concept of excess burden.
Running every government activity – especially one which is nationwide in scale – costs money. Tax collection costs money and other resources to be administered, hence the term “administration cost”. To collect taxes and other types of revenue is costly. The idea is, the government must be able to collect a lot more than what collection costs. No system is a hundred percent efficient, but costs of administration must be minimized and at the same time yield favorable results.
Compliance cost refers to the monetary and non-monetary cost citizens spend in order to follow the tax system. Paying taxes costs citizens both money and time, in order to avoid penalties or more costs because of non-compliance with the system.
The concept of excess burden is best depicted when consumers decide to buy less of the goods with higher tax imposition, just to be able to finance other goods with fewer taxes. When the behavior of citizens is influenced by the different taxes on goods, it means that these people avoid availing excess burden as much as tolerable.
Oftentimes, better efficiency is achieved by sacrificing fairness, and vice versa. A good tax system considers closely the trade-off between the two principles.
