Neutral taxes

Updated: Aug 20, 2021

Taxes which do not cause inefficiency by distorting the structure of incentives. Neutrality is often proposed as a desirable property of a tax system. Poll taxes and lump-sum taxes on economic rents are neutral, but it is hard to find other examples. Direct taxes can avoid discrimination between occupations, but cannot avoid giving incentives to leisure and do-it-yourself activity rather than ptiid employment, and to a shift to the hidden economy. Value-added tax could avoid distorting the choice between different goods and services if imposed at a uniform rate, but would still distort the choice between leisure and consumption.

Reference: Oxford Press Dictonary of Economics, 5th edt.

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James Knight
Editor of Education
James is a lead content editor for Invezz. He's an avid trader and golfer, who spends an inordinate amount of time watching Leicester City and the… read more.