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Reaction Paper On Taxation

The document discusses issues related to taxation and tax reform. It describes taxation as influencing political and economic life by creating incentives. A key issue is whether taxation provides public goods fairly relative to the taxes paid. Tax reforms aim to address problems like free-riding, where non-taxpayers benefit from public goods. However, redistribution through reform is difficult due to resistance from those who benefit under the current system. Additionally, the impacts of tax reforms are uncertain due to their indeterminate nature.

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125 views3 pages

Reaction Paper On Taxation

The document discusses issues related to taxation and tax reform. It describes taxation as influencing political and economic life by creating incentives. A key issue is whether taxation provides public goods fairly relative to the taxes paid. Tax reforms aim to address problems like free-riding, where non-taxpayers benefit from public goods. However, redistribution through reform is difficult due to resistance from those who benefit under the current system. Additionally, the impacts of tax reforms are uncertain due to their indeterminate nature.

Uploaded by

zarah
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Reaction Paper: The Politics of Taxation and Tax Reform by Amado M.

Mendoza, Jr.

I. Summary
In the article The Politics of Taxation and Tax Reform, Amado Mendoza talks about the
issues stemming from taxation and whether or not tax reforms will effectively address such
issues. Mendoza begins his discussion by describing taxation as “a compelling phenomenon
precisely because it is where the politics meet the economics . . . the way in which a nation
taxes creates incentives that pervasively influence the way in which political and economic
life become organized” (Bates as cited in Mendoza n.d., p. 1). This description introduces
one key topic regarding the concept of taxation – the topic on the provision of public goods
by the government in exchange of the amount extracted from citizens’ total revenues. The
basic question posed here is whether or not the taxation scheme used by the state works in
favor of the taxpayers – that is, the distribution of public goods is relatively fair to the
amount of tax that taxpayers shell out. This provision of public goods then stems to one issue
– the issue of free-riding. According to Mendoza (n.d.), the nature of public goods
themselves allows free-riding, a situation in which “non-taxpayers can also enjoy the benefits
of public goods because it is difficult or even impossible to restrict the consumption of public
goods to actual taxpayers” (p. 6).
In order to further understand the issues around taxation, it is important to note that
there’s a difference between consensual and coercive taxation. According to Mendoza (n.d.),
consensual taxation constitutes a better institutional technology. There are also other several
benefits of consensual taxation in comparison to coercive taxation: first, tax payment and
collection become less onerous and costly; second, parliament stimulates the search for
policies that benefit parties; third, taxpayers would be more ready to approve emergency
requests for war funds; fourth, an organization that represented taxpayers would be relatively
effective at overseeing revenue and public expenditure process; and lastly, kings are
encouraged to promote prosperity as they develop a stake in the prosperity of their citizens.
It is also in this consensual approach that taxation is seen as “a price for public output
consumed by voters, and on institutions or methods designed to link the fiscal expenditure
sides of the budget” (Winer and Hettich as cited in Mendoza n.d., p. 5). On the other hand, in
the coercive approach, taxation is seen as “the coercive capture of resources to finance
largely unspecified government activities and programs” (Mendoza n.d., p. 5). According to
Mendoza, taxation has its essentially coercive nature. Taxes are collected by states and non-
state entities because they have the coercive facilities to do so. Besides, if the payment of
taxes are voluntary, the total revenue collection is expected to be zero or close to nil.
In dealing with the issue of free-riding and other issues regarding taxation, Mendoza
emphasizes tax reforms particularly the redistribution scheme. Redistribution is defined as “a
process where resources will be taken away from a set of people and given to another set of
individuals” (p. 7). However, the problem with redistribution is that the government will be
unable to or will find it difficult to do offer different tax prices to different groups of people
because taxpayers will most likely misrepresent their willingness to pay for public goods.
Furthermore, once coercion is applied, “people will invest in politics in order to secure or to
defend against economic redistribution” (p. 9). In trying to determine the effectiveness of tax
reform, Mendoza notes that tax reforms have the potential of being innovative – this means
that it can introduce new types of taxes. However, the creation of new taxes also has an
uncertain impact and there is no certainty that the tax reformers will be able to close the
loopholes in the tax system. Tax reform risk is also indeterminate in its own accord. “The
essence of the politics of tax reform is the indeterminacy of the impact the reform will have
upon particular classes and types of taxpayers” (Ascher as cited in Mendoza n.d., p. 9).

II. Reaction on the points stipulated in the article


The article of Mendoza on taxation and tax reforms highlighted a number of points. One
of which is on the issue of free-riding with regards to tax collection and government
expenditures. According to Mendoza, the provision of public goods in exchange of taxes
inevitably allows free-riders to benefit from the whole thing due primarily to the nature of
public goods themselves. In the article, Mendoza treats free-riding as a problem that can
possibly be solved through tax reforms. I agree with Mendoza on treating free-riding as a
problem. Although free-riders (on public goods) do not aggrieve anyone nor are they
violating any right, the problem of free-riding lies on the unfair distribution of tax burden
resulting to actual taxpayers benefiting less from the public goods they pay tax for. O’Neill
(2007), in trying to illustrate the problem of free-riding in understandable terms, speak of
free-riding as a problem only when compared to “what might have been done instead” (para.
7). If not for the non-excludability of public goods, things could have been potentially better
for actual taxpayers or an equal distribution of tax burden could have taken place. Now the
question is, why are some people inclined to free-riding? According to Diokno (2016), taking
as an example the Philippine context, the non-excludability of public goods themselves is the
driving force for free-riding. Individuals become reluctant to voluntarily support public
goods since the government will provide them anyway regardless of whether they are paying
the right amount of taxes for it. Nonetheless, excluding free-riders from the benefit of goods
is also undesirable since private provision leads to under-consumption or undersupply.
In an attempt to deal with the issues surrounding taxation, Mendoza mentions how tax
reforms particularly economic redistribution serve as the solution some states resort to.
However, Mendoza also articulates some problems regarding redistribution. According to
him, redistribution will most likely be ineffective since individuals or groups who will be
most affected by the compromises brought by redistribution will strongly resist its passing. I
do not have any contention on this point of the article. Indeed, with the presence of those
benefitting greatly from the current taxation setting will strongly resist any means of altering
it, often reducing their benefits to be shared with those who currently benefit less. Not as
easy as it seems, altering the current taxation system is actually difficult to in societies
consisting of economically advantaged and economically disadvantaged. Furthermore,
redistribution does not guarantee economic growth all in all. As Dorfman (2016) puts it, “. . .
somebody’s spending power was reduced by the exact amount that somebody else receives.
The person paying the taxes will now spend less and that missing spending cancels out the
economic boost from the eventual recipient” (para. 5). In addition to the problem with
redistribution, tax reform, in its very essence, also deals with its own problem – the problem
of its indeterminacy. Just like any other reform, there is no question as to why there is a need
for thorough analysis of any tax reform proposal before it is passed. Indeed, its impact on the
individuals affected and the on the system itself cannot be accurately predetermined. How
taxpayers will react to an alteration on the taxation system is largely based on the nature of
the tax reform itself. As Zodrow and Diamond (2008) suggest, in order to inform new policy
about the magnitudes of the possible behavioral and distributional consequences of
fundamental tax reform as well as on the direction of the response, knowledge of the
empirical consequences of the new taxation on supply, consumption, saving, and other
aspects is necessary.

III. References
Mendoza, A. M., Jr. (n.d.). The Politics of Taxation and Tax Reform. Retrieved from
https://www.academia.edu/10724330/Politics_of_taxation_and_tax_reform.
O’Neill, B. (2007, November 13). Solving the “Problem” of Free-Riding. Retrieved from
https://mises.org/library/solving-problem-free-riding.
Diokno, B. E. (2016, February 24). Efficient and effective government is a public good. Retrieved
from http://www.econ.upd.edu.ph/perse/?p=5257.
Dorfman, J. (2016, May 8). Income Redistribution Does Not Boost Economic Growth. Retrieved from
https://www.forbes.com/sites/jeffreydorfman/2016/05/08/income-redistribution-does-not-boost-
economic-growth/#5d52b8a57d21.
Zodrow, G. R., & Diamond, J. W. (2008). Fundamental Tax Reform: Issues, Choices, and
Implications. Cambridge, Mass: The MIT Press.

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