15. Income Taxes—Design and Evidence

The design of the income tax is embedded in defining its base—what deductions, allowances or credits are allowed, rate structures—the degree of its progressivity, as well as the basis of payroll taxes—pay as you go (PAYG) or fully funded (FF). Many countries use withholding to facilitate tax compliance on interest and dividend or other incomes which comprise deductions in income tax returns. Taxing wealth was historically important though the quality of implementation receded and countries began abolishing it. With increasing need for fiscal resources, it has re-entered academic discussion. The scaling back of taxes on inheritance, gifts and estates are also being reconsidered. Other taxes include a minimum tax on the well-off, and a presumptive tax on hard-to-tax taxpayers based on the observed standard of living for an individual or, for a small factory owner, his floor space, number of employees and electricity use. At the local level, the most prevalent is the property tax. Some countries have taken time to appropriately structure a property tax for want of a cadastral survey though it is now common to find it at least in large cities in emerging economies. These taxes, and variations thereof, are considered in this chapter.