The design of tax systems

This chapter discusses the design of tax systems. Optimal tax theory is an area of inquiry within the field of economics that is concerned with the design of tax systems that maximise a social welfare function. Flat income tax consists of a design scheme where income is taxed at the same rate irrespective of the amount of income that taxpayers earn. The design of corporate taxation poses special issues because of the difficulty to determine the tax base, the possibility that companies make decisions to avoid taxes and the relationship between the taxation of corporate income and individual income. The design of corporate taxation is also affected by considerations for the role that business activity plays in economy. It is generally understood that a too high level of corporate taxation results in detrimental effects on income generation and growth. This argument has been popularised through the so-called 'Laffer curve', which posits an inverse-U-shaped relationship between tax rates and tax revenue.