Economic Lessons for Tax Policy Advisers

Abstract

This paper aims to provide tax policy advisers with some lessons from the general economics and public economics literatures relevant for the design of ‘good tax policy’ in relatively developed OECD economies such as New Zealand. It is aimed at those with limited or no background in economics (in general or in the economics of taxation in particular) who are tasked with understanding, devising or advising on, tax policy in practice. In addition to focusing on general lessons from the economics and tax theory literatures, it highlights some specific lessons for particular taxes, including personal income and indirect taxes. The paper is not intended as a guide for the design of specific tax policies, but rather provides some first-principles background, supported by examples, of how to think about setting tax policy in economically sensible ways (and avoid common pitfalls). More detailed background literature is also sign-posted.