Certainty in tax

This paper examines certainty which, along with simplicity and stability, is one of the cornerstones of a good tax system: but why is it important? How can policymakers encourage certainty? Are there occasions when an uncertain outcome might be unavoidable, or even justified?

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Certainty is one of the three fundamentals for policymakers to consider when trying to design and implement a good tax system, alongside simplicity and stability. Together they make up the three overarching principles that policymakers should have in mind every time they consider a change to the tax system, and they are the three key benchmarks that taxpayers can use to assess the effectiveness of government in maintaining and improving those systems. 

Without certainty, neither governments nor taxpayers can effectively budget or plan for their future actions. Yet every system incorporates uncertainty to some degree, whether unavoidable or deliberate, and it may even be encouraged by governments. 

This report explores the ways in which tax outcomes can be uncertain, and whether there is any scope for system designers to reduce uncertainty. The reliance of taxation on legal and accounting records can serve to introduce doubt into predictions of tax treatment where the statutory language and accounting definitions do not coincide. 

The scope for abuse of uncertainty and the impact of anti-avoidance rules is discussed, along with the mechanisms by which tax administrations can ensure that compliant business is not disadvantaged as a consequence of others’ exploitation of uncertainty. 

The tension between simplicity and certainty is exacerbated by the differing needs and priorities of different classes of taxpayer, and increases the importance of considered policymaking by system designers. A tailored and pragmatic compromise may be unavoidable, but that does not excuse legislators from their underlying obligation to design taxes carefully and thoughtfully.