neutral taxes

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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 any other examples. Direct taxes can avoid discrimination between occupations, but cannot avoid giving incentives to leisure and do-it-yourself activity rather than paid 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.

Subjects: Economics.

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