What does a Good Tax System Require?

What does a Good Tax System Require?

Matti Myrsky

Professor Matti Myrsky, Eastern University of Finland

1 The purpose of the study

The question of the qualities for a good tax system is universal. Tax systems
are under constant development. The process is however inconsistent since
no guarantee can be given that constant change would build a better whole.
This feature is in close connection to the democratic political process. The re-
sult is often a complicated whole, where the optimality in the perspective of
e.g. economical efficiency can be questioned. For this reason, these so-called
qualities of a good tax system should always be taken into account when
functioning tax systems are planned or evaluated. These qualities include cer-
tain criteria, which should be fulfilled in a good tax system. Meanwhile, it is a
question about ideal models for legislation in general.
Fulfilling the criteria enables evaluating if a certain tax system or its re-
forms can be considered ‘good’ or ‘bad’ or something else. Because there are
so many criteria in evaluation, no tax system can simply be ‘good’ or ‘bad’.
Each tax system can only be ‘either-or’ in some perspective. Here it is worth
noticing that the concepts themselves (‘good’ and ‘bad’) are concepts of pro-
portion. According to the traditional criteria the taxation system should be ef-
ficient, just, simple and administratively functional. For decades, adjustment
initiatives and proper tax reforms have already been studied in the light of
these criteria. The main objective has been to take these points into considera-
tion when developing tax legislation. This method of study became common
from the 1980’s onward. In Finland this must be seen as a positive thing,
since all the stages of the legislative process and the reforms, at least in prin-
ciple, can be targeted by systematic evaluation.
In this study I will begin by exploring which qualities are considered re-
quired in a good tax system (Chapter 2). After that, in Chapter 3, I will high-
light some questions, which I have stumbled on in my own research. These
questions relate to the subject of the conference, i.e. Tax Expenditures. Tax
Expenditures are related to many criteria of a good tax system – especially
170 WHAT DOES A GOOD TAX SYSTEM REQUIRE?

simplicity, justice and efficiency. Finally, in Chapter 4, I will present a sum-

mary.
The topic itself is probably familiar for most people and nothing particu-
larly new will be brought op here, but since the problem is still so essential, it
is reasonable to bring it up from time to time. I will study these matters from
the point of view of a legal scholar and from a general perspective.

2 Which are the essential criteria of a good tax system?

2.1 Literature
The features of a good tax system have been discussed broadly in internation-
al literature. For instance, in the basic economic literature publication Public
Finance in Theory and Praxis (1976) (p. 225), Richard A. Musgrave and
Peggy B. Musgrave state the following:

’Economist and social philosophers from Adam Smith on, have propounded what such re-
quirements should be. Among them, the following are the major importance, although they
are not meant to be all inclusive.’

1. The distribution of the tax burden should be equitable. Everyone should be

made to pay his or her ‘fair share’.
2. Taxes should be chosen so as to minimize interference with economic de-
cisions in otherwise economic markets. Such interference imposes ‘excess
burdens’ which should be minimized.
3. Where the tax policy is used to achieve other objectives, such as to grant
investments incentives, this should be done so as to minimize interference
with the equity of the system.
4. The tax structure should facilitate the use of fiscal policy for stabilization
and growth objectives.
5. The tax system permit fair and non-arbitrary administration and it should
be understandable to the taxpayer.
6. Administration and compliance costs should be as low as is compatible
with the other objectives.

The criteria for a good tax system have also been observed in the so-called
Meade Committee’s report. (Meade Committee, The Structure and Reform of
Direct Taxation of a Committee chaired by Professor J.E. Meade, 1978).1 The

1. The report in question says (p. 23): ‘the choice on tax structure must take into account
many factors; the effects on economic incentives; its fairness between persons of sim-
ilar taxable capacity; its effects upon rich and poor; whether it is compatible with de-
 MATTI MYRSKY 171

problem in question has also been brought up in the newest tax review of
James Mirrlees, the British winner of the Nobel Prize in economics. (Institute
for Fiscal Studies, Mirrlees Review – Reforming the Tax System for the 21st
century, 2011).2 Because Mirrlees’ report also includes reviews from
Meade’s report, I will later concentrate on Mirrlees’ newest work. The crite-
ria are mainly brought up in the economic discourse, but a portion of them
belongs to the traditional jurisprudential approach. The report in question
suits well to the subject at hand, which can be seen in the summary statement
of the review:

‘The challenge in this review has been to design a tax system that can raise the revenue
that government needs to achieve its spending and distributional ambitions whilst minimiz-
ing economic and administrative inefficiency, keeping the system as simple and transpar-
ent as possible, and avoiding arbitrary tax differentiation across people and forms of eco-
nomic activity.’

The presentation of Mirrlees’ review starts by mentioning Adam Smith’s four

main principles in his work Wealth of Nations (1776):

1. The Subject of every state ought to contribute towards the support of the
government, as nearly as possible, in proportion to their respective abili-
ties.
2. The tax which individual is bound to pay ought to be certain and not arbi-
trary.
3. Every tax ought to be levied at the time, or in the manner, in which it is the
most likely to be convenient for the contributor to pay it.
4. Every tax ought to be contrived as to take out of the pockets as little as
possible, over and above that which it brings into public treasury of the
state.

In the report the ideal tax system is widely studied and justified. In this study
I will not go into details, however, the following three ‘commands’ are given
to the designers of a good tax system: First, consider the system as a whole;
second, seek neutrality; and third, achieve progressivity as efficiently as pos-
sible. In the end of the report the qualities are presented in tax types as fol-
lowing:

sirable international economic relations, and its simplicity ease of understanding, and
absence of excessive administrative costs’
2. The review can be found on the website of the Institute for Fiscal Studies:
http://www.ifs.org.uk/mirrleesReview (14 August 2012).
172 WHAT DOES A GOOD TAX SYSTEM REQUIRE?

Taxes on earned income

A progressive income tax with a transparent and coherent rate structure.
Single integrated benefits for those with low income and/or high needs.
A schedule of effective tax rates that reflects evidence on behavioral respons-
es.

Indirect Taxes
A largely uniform VAT

– with a small number of targeted exceptions on economic efficiency

grounds
– and with equivalent taxes in financial services and housing

No transactions taxes.
Additional taxes on alcohol and tobacco.

Environmental Taxes
Consistent price on carbon emissions.
Well targeted tax on road congestion.

Taxation of savings and wealth

No tax on the normal return of to savings.

– with some additional incentive for retirement saving

Standard income tax schedule applied to income from all sources after an al-
lowance for the normal rate of return on savings.

– with lower personal tax rates in income from company shares to reflect
corporation tax already paid

A lifetime wealth transfer tax.

Business Taxes
Single rate of corporation tax with no tax on the normal return on investment.
Equal treatment of income derived from employment, self-employment, and
running of a small company.
No tax on intermediate inputs.

– but land value tax at least for business and agricultural land
 MATTI MYRSKY 173

Next, I will shortly study the contents of a few of the criteria more accurately.
First, it is important to point out that the qualities of a good tax system – a
sort of tax structure design – is a different thing than the material goals set on
the tax. Or is it? What about e.g. tax objectives to support economic growth
or to promote employment? Do these belong to the good qualities or to the
goals, or possibly to both simultaneously? The good qualities, actually the
most essential qualities entail the need for sufficient tax revenue. Since all the
public services are mainly financed by tax revenues, the amount of taxes
should thus remain stable. A good tax system does not levy tax on compo-
nents caused by inflation either. In this context, the state of international
competitiveness is interesting. Nowadays, a frequent question concerns a
specific good quality. Goals are brought up after the consideration, which
goals and actions must be taken in each tax system in order to achieve it. In
any case, many goals come and go as the economic situations and political
cycles change, but the criteria used to evaluate a tax system remain relatively
unaltered. On the other hand, it is clear that even the criteria and their indi-
vidual importance vary; the qualities of the tax system in the 19th century are
not entirely the same as the qualities in the 20th century.

2.2 Evaluation of the criteria

Economists and legal scholars are largely studying similar phenomena, but
some differences can be noticed. For instance, lawyers usually emphasize
matters, which involve legal protection and the judicial system, whereas
economists find efficiency and neutrality the most essential questions. These
also include externalities. I will present a few criteria, which are more em-
phasized in tax law literature.
Administrative efficiency and simplicity are qualities, that belong to a good
tax system. The collection and disbursement of taxes should take place with
the lowest possible cost, e.g. tax revenue must be collected in an efficient
way. Furthermore, compliance of law should be at the lowest possible cost.
The more simple and efficient the tax system is, the ‘cheaper’ it becomes. To
the tax administration these costs result from assignment, succession and
monitoring of tax, the compulsory notification of the taxpayer and the re-
quired special accounts. Also, the time used for the taxation procedure must
be added to the financial expenses in calculating the cost. A simple taxation
can partly increase the equality of the system, because then the taxpayer has a
better change of evaluating the effects of taxation. A complex tax system
complicates the evaluation and requires more resources. The efficiency of the
taxation decreases when it includes exceptions and deductions. These also
narrow the tax base.
In addition to simplicity it is also important for the taxpayer that the tax
system is predictable. This creates a possibility for future evaluation of the
174 WHAT DOES A GOOD TAX SYSTEM REQUIRE?

economic behavior of tax treatment since it affects the decisions of house-

holds and corporations at the present. Predictability is especially appreciated
when one is making decisions in the long run. Predictability requires continu-
ity from tax policy, which should be taken into account in tax reforms.
Transparency is also essential in a good tax system. The transparency and
clarity of the tax system suffer, if taxation has a lot of exceptions and deduc-
tions. These reduce the tax base, in which case taxes per GNP must be in-
creased in order to gain the same amount of tax revenue. This is regretful, for
a rise in taxes per GNP increases distortions caused by taxation. An extensive
tax base and clarity in taxation decrease possibilities for illegal tax planning
and tax sheltering.
A good tax system must be in unison with EU-law. A feature in a good tax
system is that it can be articulated with foreign tax systems. This is marked
by an extensive and functional tax treaty network and the fact that the struc-
tures of the tax systems have much in common.
The tax system should be as flexible as possible as the macroeconomic
factors change. It is also important to emphasize the fairness of the tax sys-
tem. If the majority of taxpayers regard the tax system as unjust, the credibil-
ity of the tax system and its ability to function suffer. The lack of fairness
might result in emphasized and aggressive tax planning, tax sheltering and in
worst-case scenario in tax mutiny. The qualities pursued for the tax system
contain an ecologically secure base. This means that environment-related
taxation must be in unison with the principles of sustainable development.
The significance of this criterion is clearly emphasized.
Many of the qualities mentioned above can collide with each other and
choices and compromises must be made between them. Even though the in-
come-dividing tax policy increases efficiency sometimes, income distribution
and the aim for efficiency usually collide. When dividing income through
taxation distortions are usually caused at the same time. The relevant question
in this context is about how the smallest possible distortions can be achieved,
within the given aim of income distribution. The amount of tolerance for the
sake of income distribution is fundamentally based on the values in society.
Taxation must therefore always seek a functional balance between these two
goals. In practice, this always means making a choice. The existing tax sys-
tems have not been constructed straightforward and there is no omniscient
and autocratic ‘taxation architect’.
Taxation policy in practice cannot be built only depending on these crite-
ria. Some of the criteria are also open to interpretation in many ways and they
might entail many assumptions. For instance, it is unclear how differently the
concept of ‘encouraging’ could be interpreted on different occasions.
 MATTI MYRSKY 175

2.3 What are the qualities of a good financial system?

When evaluating the qualities of a good tax system, it is also important that
the joint effect of the public sector’s expense and income section is taken into
account whenever decisions are made. One should not concentrate merely on
taxes. It would rather be wise observe the entirety when aiming for neutrality.
Even though taxation policy aims at neutrality, government officials are usu-
ally, one way or another, involved in supporting pursuits of corporations and
individuals. This is hardly likely to increase neutrality and efficiency. For this
reason the question about the qualities of a good tax system should be ex-
tended to a question of the qualities of a good financial system or finance pol-
icy as a whole.3
Tax law is a part of financial law, while the other part consists of financial
administrative law. It is important to note the connection between the source
of money and spending. For instance, a public debt means a transferred tax.
In this way tax law as a branch of law connects with the assignment determi-
nations of the state, municipalities and other public corporations. In tax law it
is not only a question of the income base of the society but also of the tasks of
the society in general, e.g. how we invest the money and why. The taxpayers
are usually, in one way or another, recipients of different public services and
benefits. The essential set of questions concern the idea of taxation itself:
Why do we pay taxes? This way the various goals of taxation become essen-
tial.4
In the course of time, as taxation has acquired other than fiscal goals, the
question has been raised whether the society could support the objectives in
other ways than through the tax system and whether or not taxation is a rea-
sonable tool to fulfill the goals. Growth policy and the support of investments
offer examples. In this connection a considerable concept is the main subject
of this year’s conference, i.e. Tax Expenditures. A Tax Expenditure, which is
given through the tax system, is an indirect expenditure included in the tax
system as a deviation from the normal or ‘bench-mark’ tax rate when differ-
ent economic and socio-political goals are carried out. Consequently, the
government loses tax revenue. Usually these kind of reliefs in the tax system
are comparable with the direct expenditures, which are paid from the budget
assets. Each separate Tax Expenditure inflicts a certain tax income loss to the
public sector. The extent of Tax Expenditures are measured with the amount
of lost tax revenue. Essential in this case is, what the basic structure of normal
taxation is like, e.g. the so-called normative tax system. Also, it must be

3. In this case the good qualities could also include that tax revenue should be used as
appropriately as possible.
4. Other than fiscal objectives, see The non-fiscal purposes of taxation. Yearbook of
Nordic Tax Research (2009).
176 WHAT DOES A GOOD TAX SYSTEM REQUIRE?

solved which decisions, that depart from this system, can be considered ex-
penditures and which not. Tax Expenditure problems stretch to all tax law.5
In the next chapter I will cover a few specific questions to serve as exam-
ples. These questions have raised the problematic issue of the subject of the
seminar.

3 Examples

3.1 How should people in weaker positions be supported?

Taxation and social security have an essential impact on citizens. These basi-
cally determine the rules of living and the amount of resources in use. Taxa-
tion also effects the social security, because taxation is one of the most im-
portant financing forms of it. On the other hand, taxation directly affects the
level of benefits, which are taxable in most cases. For this reason it is neces-
sary to note their effects on income transfer systems and vice versa when
considering e.g. family taxation issues, different deductions in personal taxa-
tion or questions of tax exemptions between different income levels.

3.1.1 Taxation and income transfers

Income taxation, income transfers and the payment policy of public services
have not originally been constructed as a whole, nor have taxation policy and
social policy been otherwise substantially coordinated with each other. How-
ever, these segments of politics essentially affect the welfare of individuals,
families and resources in use, which are formed from various capital flows.
Political pressure, development work and new legislation are usually focused
either on the taxation or the social side, without acknowledging the joint ef-
fects of different actions. The result could end up being a system that no one
hoped for. The more versatile systems are developed and brought into use,
the harder it is to realize them in practice. If the starting point is unclear, the
decision-making can hardly be easier.
Sector limits and know-how of experts lead to the disintegration of income
problems. This does not help to improve the evaluation of joint effects in dif-
ferent procedures. Nevertheless, these certain joint effects are essential for in-
dividual citizens. The welfare of an individual depends on the relations be-
tween his real disposable income and his necessary expenditures. To pursue
social politics intentionally is hard. As an example, the equalization effort of
income distribution with progressive taxation in tax and income transfer sys-
tems can be mentioned. When the citizens have a two-sided relationship to

5. See more accurately Kalle Määttä, Tax Expenditures. Between accuracy and practi-
cality 24 May 2012 (Hanasaari).
 MATTI MYRSKY 177

the government, on one hand as a taxpayer, on the other hand as recipients of

benefits, the equalizing effort of the public sector is hard to clarify. This mat-
ter is truly complicated politically as well as technically. The question is what
the income distributions within a life cycle of an individual and what the in-
come distributions between individuals is like and how the question of in-
come distribution of different generations is solved. In Finland this problem
has existed since the 1990’s. Legislative changes have been made but the
problem has not been solved. Nowadays, the motives for high and effective
marginal taxation levels are mainly income support, adjusted unemployment
benefit, housing benefit and the marginal tax of the income taxation. The tax-
exempt social benefits are also relevant. Although the biggest so-called
‘traps’ originate from the insufficient coordination of taxation and income
transfer, it is noteworthy that different traps or ‘steps’ also can be born within
the income transfer system as well as within the tax system. In the upcoming
years the solving of the problem of fitting together the tax and income trans-
fer systems in a more coordinated way will be continued. However, it is un-
likely that tax and income transfer systems would be integrated, for instance
on the basis of some basic income model in the near future. On the other
hand, the features of negative income taxation are already included in the cur-
rent system: If an individual receives transfer payments but does not pay tax-
es, it becomes a question of negative tax (income support system). Compared
to a causal system it could be unjust, because it would put into a similar posi-
tion someone, who does not have an acceptable reason and someone, who has
an obvious reason. But then again it would not compensate the acquisition or
cancellation of the reason. For this reason, it is clear that a causal system must
always exist alongside with some kind of basic income model.

3.1.2 Deduction system

The deduction system’s essential purpose is to correct the taxation so that the
taxpayer pays taxes as accurately as possible in proportion to his or hers fi-
nancial abilities. The deduction is calculated based on the taxable income,
which is the final aim. The current system of deductions has been constructed
over a long period of time. Income taxation deductions are made from per-
sonal taxation and taxation of businesses. Their role is different, since in taxa-
tion of businesses the taxable net income is usually the only one calculated.
In the following I will only study the deductions in personal taxation.
Amending the deduction system is a good political option for achieving
different socio-political goals. For Finland, for instance, it is worth mention-
ing the promotion of employment through amendments in the deduction sys-
tem and entirely new deductions. There are several other new deductions to
mention, e.g. the household deduction and the deductions on student loans
and student grants. Still, the impression from the latest reforms is that deduc-
178 WHAT DOES A GOOD TAX SYSTEM REQUIRE?

tions have not increased dramatically in quantity, although the deductions

have clearly grown in numbers.
When examining new deductions in particular, the impression that deduc-
tions are very complex cannot be avoided. The student loan deduction even
entails a new deficit concept: tax deficit of the student loan deduction. This
can make the invocation of the deduction possible in the upcoming years; if
in consequence of the exiguity of taxable’s income there will not be enough
tax to pay. What makes deduction interesting is that the expenditures of edu-
cation investments can reduced in taxation. In the late 1980’s a considerable
remodeling of the deduction system was made in connection to the big tax re-
forms. Many of the deductions were removed in order to widen the tax base.
Now the direction seems to be the opposite, although any ‘deduction rushes’
can hardly be expected, seeing as it would not be desirable on account of the
strive to simplify the tax process. The calculation of an individual’s taxable
income is turning out to be a complicated operation and it is ‘behind’ many
deductions and multiplications.
There are many independent reasons for the complexity of the deduction
system, e.g. the differentiated income tax system, which requires deductions
to be made separately for capital income and earned income. It also appears
that taxation might be used as a guidance tool in personal taxation more often
than before. This is a way to try to impact the behavior of taxpayers (e.g. the
student grant deduction). This is more or less paradox considering the devel-
opment of the taxation of businesses, which has been aiming at a more neu-
tral taxation and respectively at deduction of social adjustment of goals.
The more complicated the deduction system is, the more non-transparent
the system turns in to and the harder it is to get a clear picture about who a
Tax Expenditure in the deduction system concerns. It is unclear if the money
always goes to the right people. The big question remains: Should the ex-
penditure be realized as a form of deduction or in some other way, e.g. as a
direct income transfer? What is the appropriate way to improve the social se-
curity of disabled people? Should it be realized through the deduction system
or the disabled service? The deduction system also affects the tax base and
the more deductions are made, the narrower the tax base becomes. In its turn,
this reduces the amount of taxes to the taxpayers. The connection between
natural deductions and tax-free reimbursements is also interesting. If tax-free
travel allowances are allowed in taxation, then in this respect there is no need
to make natural deductions. The compensation for the taxpayers as a deduc-
tion is in any case more profitable, because the value of the deductions in tax-
ation is smaller than the travel allowance for the taxpayer. Also, a big ques-
tion is to what extent the taxation really does allow the deduction of living
expenses, although the prohibition of this deduction does exist, e.g. the right
to deduct industrial association fees or paid household services.
 MATTI MYRSKY 179

The basis for household deduction can consist of usual household work
and maintenance. The deduction right is also extended to work made in a
household that has been used by the taxpayer’s late partner’s parents, foster
parents or their relatives or partners. The deduction is without doubt socio-
politically well justified (promote employment, hinder underground econo-
my), but it could in its current form make the allowance system of the society
far too complex. The question can be raised whether or not this matter-of-
factly is a matter of living expenses. What about the payment fees of daycare,
that parents have to pay while working? Is it, too, a matter of living expenses,
a matter of acquisition of income or the costs of retention, all of them or
something else? Another example worth mentioning is the right to deduct in-
dustrial association fees. In practice this deduction finances living expenses
while the worker gets free benefits and free time travel insurance. Altogether
it appears that the line between deductions and living expenses is becoming
yet more invisible. Still, the question on deductions is: What are the objec-
tives and how can they be met? Are the desired political goals realized
through the deduction system, by using direct income transfer or by social
services or by combining all of these, like it is done at the moment? So far the
mixed alternative has been proven to be the best.
In any case, it is essential that the deduction system should not be studied
as a separate unit without taking other questions of taxation into account, like
family taxation. On the other hand, organizing the family taxation cannot be
studied disconnected from the deduction system either. Especially important
is that deductions should not be studied disconnected from the income trans-
fer system nor from the service system of the society. The tax system does
not always notice the impact of the income transfer system nor does the in-
come transfer system always notice the impact of the tax system. The joint
effect of deductions and income transfers could then be left unclear, even
though they are granted for the same purposes.

3.2 How should non-profit activity be supported?

An essential question on the taxation of non-profit organizations is why their
taxation differs from the taxation of other organizations? Are the tax-exempt
treatment of the non-profit organizations justifiable?
Non-profit organizations have great significance in the activities of a civic
society nationally and internationally. Within these limits a great deal of ac-
tivity with significant economic importance also takes place. The direction of
general social development is that the activity of non-profit organizations and
the third sector’s significance grows further. Non-profit organizations have
various activities. They can, e.g. complete services which are provided by the
society. The Nordic welfare state has been constructed in a manner that the
public sector has taken care of many different ‘good’ matters, e.g. task con-
180 WHAT DOES A GOOD TAX SYSTEM REQUIRE?

cerning social services, health and education, which have been financed with
tax money. However, a welfare state does not always properly manage the
tasks, which have been given to it during the decades, anymore. On a global
level, factors like the decline of the state of the environment, malnutrition,
rules of international trade and development work have influenced the rise of
the third sector. The subject of taxation of non-profit organizations has arisen
in tax political debates from time to time.6 It is merely a question of an inter-
national phenomenon, where the decision models differ nationally even if
they still have some common features. In economics there may not be a uni-
form theory or a vision about the principles of taxation. There is hardly an
unambiguous view to be presented.
The tax exemptions of non-profit organizations can be justified through
the fact that the organizations have so been able to support science and art,
help those in distress or work in some other way for the public good in a con-
siderable fashion. One can justify the tax exemptions through the fact that
these organizations maintain services, which – if the organizations would not
exist – public enterprises would be forced to take on. If this became reality, it
would mean that the funds collected by taxation would be spent on this pur-
pose. When these activities are declared tax-exempt, some sort of settling oc-
curs. The public sector loses some tax revenue, but obviously saves even
greater expenses. One can also point out plenty of arguments against the tax-
exempt treatment. The essential one is the competition distortion for other en-
trepreneurs. The support can be given directly as allowances or through tax
expenditures. The support given through the tax system follows from devia-
tion in the structure of taxation. This can happen, e.g. by releasing someone
from tax liability or by leaving certain incomes tax-exempt. The tax expendi-
ture is created to support those who are liable to pay taxes or indirectly some-
one else in the household. The evaluation of the amount of the tax expendi-
ture is not a simple task. One option would be the direct support of the organ-
izations and the cancellation of Tax Expenditures as a tax exemption. This
may already be a politically excluded option. One cannot either indicate that
the activities, which are run by non-profit organization, would thus become
more beneficial to manage. The system is mixed. Non-profit organizations
receive sizeable allowances from the public sector, but then again it is given
also in the form of Tax Expenditures.
However, the present model of activity can be criticized, because the tax
expenditure falls upon a wide group of organizations and also upon organiza-
tions, whose activity would not be supported by allowances, if their activity
were taxable. The thought of a settling phenomenon does not always come

6. See publication Skattefria institutioner. NSFS nr 34 (1996).

 MATTI MYRSKY 181

true, for one can expect that the expenditure focuses also on such organiza-
tions and on their activities, which would not be supported, if these activities
were put on the ‘same line’ with the society’s other expenses. It is not easy to
grasp the whole picture of Tax Expenditures and their amounts in different
forms. To the support that occurs through taxation cannot be presented a doa-
ble option of direct support that would be aimed only at certain organizations,
whereas other organizations would be held liable to pay taxes as normal. This
may originate from the fact that in the option of direct support the big prob-
lem is organizing it. Organizations would be forced to claim expenditures pe-
riodically, so that the state of the activity would always be clear. In addition,
the usage of the expenditures would have to be supervised, which would
cause more work and it could also be complex to control.
The question about non-profit organizations’ taxation is closely connected
to the importance of civic society and with safeguarding its activities’ re-
quirements. Various independent players, like foundations and ideological
organizations, could be capable of taking care of many socially significant
tasks more flexibly and more efficient than the administrative apparatus of
the state and municipalities. The cost of this is narrowing the tax base in in-
come taxation by Tax Expenditures. This is lastly a question of socio-political
functionality. Should the tax-exempt treatment of non-profit organizations be
diminished, this could result in the growth of expenses in the public sector
and in the expansion of the administrative apparatus. The funds collected by
taxation would be outside of the activities of the organizations. There is no
reason why taxation should be used in this respect to ‘recycle’ the resources
via the public sector. This would hardly widen nor encourage independent in-
itiatives and civic society, but it would mean emphasizing statism.7
From a wider prospect, the third sector produces plenty of public goods.
Within its limits it is possible to support the underprivileged, e.g. by arrang-
ing work opportunities or by promoting rehabilitation or leisure activities.
This way social stability, communal spirit and the society’s and its members
welfare can be increased. Non-profitability enables a widely recognized ac-
tivity of the third sector and civic society. In the form of tax-exemption and
Tax Expenditure people are encouraged to practice non-profit activities. The
third sector can channel spontaneous energy of the voluntary citizens to a
communal use – this must only have suitable legislative terms and required
incentives. Voluntary work includes an enormous source of strength. The
market forces do not often solve the problem of public services and this natu-
rally leads to their low-level production. That is why the society should sup-

7. On the other hand one must emphasize also that non-profit organizations are very
versatile, therefore the different tax treatment of them can be justified. One must also
keep an eye out that no one is using non-profit organizations as a tool for tax evasion.
182 WHAT DOES A GOOD TAX SYSTEM REQUIRE?

port the players in the third sector with different tax arrangements, e.g. tax-
exemptions. In Finland the non-profit organizations have always been more
or less tax-exempt, and due to this they have been able e.g. to considerably
improve the support of cultural activities, which the general Government has
been providing. The more support-giving organizations, that exist in society,
the more diverse the support becomes. In a pluralist society diverse support is
most important. It is not always desirable that all the support would be chan-
neled through the budgets of the general government and would be thus di-
vided per the political system, which might not guarantee the best expertise.
Pluralism and diversity is promoted usually best by funding from several dif-
ferent sources.

4 Summary

The subject of the criteria of a good tax system is about examining the tax
systems’ so-called meta level. This is not really a new innovation. It is a
question about what a good legislation should be like. In this respect the
problem does not concern only the legislation of taxation, but the whole judi-
cial system. But how should the qualities of a good tax system be evaluated
in relation to tax law studies? When comparing these qualities to different
approaches in tax law studies, it becomes a question of basic studies of tax
law.8 The phrasings of the questions in the basic studies are important in a
sense that the constant social changes and international developments cause
new problems to be solved, in which the tax legislation is needed to puzzle
them out. Research should lay more questions on these matters. The heave of
the essential questions is also emphasized by the fact that the regulative sys-
tem on the taxation has changed, yet it is harder to control due to the devel-
opment in the European Union.
Some qualities of the good tax system are without doubt more important
than others. On my behalf I would emphasize a wide tax base and low tax
rate. These are essential in the sense of neutrality and efficiency. This basi-
cally means the simplicity of the tax system: The less there are exceptions,
the clearer and more transparent the system is. The wider the tax base is, the
lower tax rate is needed to collect revenue for the society’s use. The more

8. This is a question that I have earlier analyzed in my article Basic Research in Tax
Law in the book Scandinavian Studies in Law. Volume 44 (ed. Peter Wahlgren)
(2003).
 MATTI MYRSKY 183

simple the system is, the easier it is to control and adjust to foreign systems.
Plurimae leges, pessima respublica.9
When we have previously asked what qualities are required for a good tax
system, the question can now be turned upside down. We can ask: What are
the qualities of a ‘bad’ tax system? The tax system is then inefficient and un-
just. It neither guarantees sufficient tax incomes nor is it ecological and it
slows economic growth. It neither adapts well to its ever-changing surround-
ings, it differs with its structure from the foreign systems and does not take
into consideration the demands required by EU-law nor do the citizens regard
it as acceptable. This kind of system is not likely to be seen and neither is a
system with all the good qualities, but the differences are worth noticing.
Only time will tell, what kind of actions the taxation policy is going to
take during the coming years in Europe. Either way, it is good to remember
the basic goal of taxation, i.e. public services are financed with tax income
and its amount must stay stable, predictable and sufficient. Especially in taxa-
tion of business it is wise to remember all the behavioral aspects (e.g. starting
up a business, investment decisions, financial choices, form of enterprises and
the geography of the companies). The main goal should be a legislation,
which fulfills the criteria of a good tax and finance system as well as possi-
ble. It will not be an easy road, for in the globalized world both the financial
capital and the production facilities are in a constant change as the return on
capital is striving to converge. The changes in economics and society and the
globalizing surroundings emphasize the importance of the taxation develop-
ment. Especially the globalization, the aging of people, technological devel-
opment, the usage of new technology and environmental matters create pres-
sure on amending the taxation emphasis and on the widening of the tax base.

9. The EU tax law makes the tax system tremendously more complicated; there is sort
of ‘hyper order’ in development.