Optimal Tax

Optimal Tax is a theory that deals with making the taxation process easily accessible and efficient. Optimal Tax largely focuses on some of the factors in tax system which constitutes a range of welfare programs for the tax system.

Optimal Tax looks after a particular set of issues on tax such as commodity tax, income tax, variations of tax rates across commodities, and the advancement programs to be implemented to improve the current tax system. The Optimal Tax System takes into account a range of features while initiating the welfare programs for the tax system. The features of Optimal Tax System are as follows:

• The first feature is to introduce a set of easily accessible tax programs such as commodity taxes along with the revenue requirement of the government to ensure convenience in the government's tax system
• The second feature is to eliminate the unnecessary heavy taxes that have high chances of affecting the economy of the country
• The third feature is to keep an eye on the responses coming from both individual and firms in the tax system. For example, individuals will be more interested in goods and other daily needs while the firms will be focusing upon the technological aspects pertinent for its production
• The fourth feature is to reduce the extra burden levied by various taxation schemes, yet raising the government's revenue at the same time
• The fifth feature is to work out the equity concerns to balance upon the tax system for a more efficient functioning

There are many distortions being observed in the sales tax system, especially in the fast-food restaurants and readymade food packets available in various departmental stores. The packed foods available in the departmental stores do not demand taxes at purchase but the price tag is fixed with the tax included. The food sold in the fast-food restaurants demand for more taxes than the packaged foods. Therefore, those who buy readymade foods are likely to pay less tax amounts while those who buy fast-food from restaurants in order to save time for food preparation, had to pay more tax amounts as the restaurants include its own tax along with the separate food taxes. This discrimination in the tax system causes a great deal of inefficiencies. The Optimal Tax System is being designed to take care of these issues to make the tax system more feasible and uniform.

The uniform commodity taxes are barely optimal but they raise the costs of goods at the same magnitude, thereby ruling out the distortions on tax system. Optimal Tax ensures a flat rate tax system in the taxes of goods but that does not include the taxes on wages. Optimal Tax theory has made the tax system highly feasible and convenient by incorporating various beneficiary schemes on the tax system.