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I've had this question for quite a long time by now ; wouldn't it be far more efficient in terms of administrative costs and beuraucratic efficiency to exempt public spendings from its taxes?

Of course it doesn't make sense to exempt the entirety of the public sector from taxation, since there are for example state owned enterprises like national rail/airport services or power generation /distribution services dealing with the private sector/individuals which generates income/added value just like any other private businesses, so taxing that income makes perfect sense.

Though when it comes to government spendings and its taxation, I can't think of other implications of it rather than we're just moving an egg out of one basket (in this case the executive branches and their budgets) to the other (respective tax services of each country). For a government spending for some kind of goods or services they purchase, be it a service of public workers as an employee of public services or acquisition of required goods or services from a private sector for a government project, we would be able to generalize one such spendings in two parts : the cost of the goods and/or services itself and the tax that occurs from the transaction. The former will be transferred from the government to the provider of the service or goods, be it a wage of individual public sector workers or goverment contracts to private businesses. The latter will end up at tax service through the transaction from the government to the provider of services/goods, then back to the goverment. Then that tax will again be allocated to each executive branches in form of a budget, which they will spend, get taxed, and the cycle repeats itself.

So from a purely economic sense, what are the reasons we can't get rid of the latter? I've seen some social implications of taxing the public sector which I fully understand, though was currious if there are more economical reasons as well for taxing government spendings. For clarifications, by tax I'm purely talking about income/added value tax of the provider of services and goods to the goverment, from the government spedning. By this I'm not arguing that we should for example exempt public sector workers from consumption tax.

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There are no economic reasons. From pure economic perspective it makes no sense that public officials pay income tax on income derived from their work (as opposed to income from any other activity). Government could just as well just pay everyone who works for government their after tax income.

However, the savings on administration would be very miniscule though since administration of taxation can have high fixed cost, but cost per any additional individual is extremely small (especially in today's information era). Moreover, administrative costs of taxation are not even considered big issue in economics as they are dwarfed by the deadweight loss created by the tax in the economy (e.g. see the size of marginal excess burden in Jacobs 2014 pp38 table 2.1). So administrative savings here would be minimal, and my guess is that even if all public officials would receive the same net salary voters would find the idea that there is group of people exempted from tax too unpalatable to ever support.

The same argument could be actually even extended to consumption taxes. Ultimately all income is consumed, saving is just postponed consumption. However, when it comes to consumption taxes it would be practically difficult to verify whether someone is employed by the government or not. Although government could issue some sort of card that could be scanned at stores it would be likely abused in a way where everyone who has a family member working for a government would ask them to buy any consumption bundle they desire without tax, which would create distortions without raising enough revenue. So this would simply not be practically feasible (this is why you don't see progressive consumption taxes either).

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  • $\begingroup$ Thanks for the answer! So in short, it's not worth all the hassle, since what we gain from abolishing taxation to the public sector is too miniscule. I actually haven't expected that, though as you've said, a lot of the government are digitalized nowadays, which I think makes sense as well. I've asked this question elsewhere as well and one of the answers I've got basically was that it might even add more complexity to the whole taxation system rather than reducing it, which now that I think about it, makes sense as well. $\endgroup$
    – MK.s
    May 8, 2023 at 20:25
  • $\begingroup$ @MK.s You are welcome. I do not think it would add that much complexity to the code for income tax (vat is another matter), because you can just have one clearly distinguishable group (by employment status) that does not pay it and that is not expensive to check. In general many laypeople are surprised by this but tax administration cost even pre-computer era was never significant in last 2 centuries (pre-industrial revolution it was expensive mainly due to lack of ID's and records). You sometimes hear this argument from people who are against new taxes because this argument sounds plausible $\endgroup$
    – 1muflon1
    May 8, 2023 at 20:38
  • $\begingroup$ but it is actually myth in modern societies. The entire IRS budget is only about 0.003% of US budget and IRS is quite inefficient compared to EU agencies. This is not to say that there aren't good economic arguments against excessive taxation. Taxes create deadweight loss to the economy that is usually several orders of magnitude larger than administrative cost, but this is a concept that is much harder for laymen to understand so it is rarely invoked in public debates and people use the administrative argument instead which makes no sense in modern era $\endgroup$
    – 1muflon1
    May 8, 2023 at 20:40
  • $\begingroup$ I see. The size of the administrative cost of the tax-system, or more to be exact how small it is, is really something that I've never expected. In my mind, for some reason, I had this perception that tax service would need to consume a heft resource for it to function adequately, though that might have been skewed on my case largely due to my knowledge concerning how taxation worked in the pre-modern societies and how hard it was to make administrative powers to make taxation effective. $\endgroup$
    – MK.s
    May 9, 2023 at 20:31
  • $\begingroup$ @MK.s no worries many people have this perception. Indeed before modern bookkeeping and information systems taxation was very difficult that's why most countries had very small taxes in the past (for example Roman empire had tax rates of about 1-3% and what was taxed was mostly immovable and easily verifiable stuff such as buildings) and even collecting this tax was very difficult for romans so they had to outsource it to 'tax farmers', but in present day its a moot point the costs are so small that they couldn't be even be visible on a pie chart plotting gov budget $\endgroup$
    – 1muflon1
    May 9, 2023 at 21:08

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