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Efficiency
3.23. The ‘economic and efficient’ use of national resources is of course a longstanding and by now almost conventional objective of public policy: the phrase was long central to the terms of reference of the Tariff Board and is now in those of the Industries Assistance Commission.
3.24. Narrowly interpreted, efficiency requires that the resources available for public use be as nearly as possible equal to the resources withdrawn from the private sector: that is, that the process by which resources are transferred involve minimal ‘waste’. One example of such waste has already been mentioned in the context of simplicity objectives: the cost of administering and complying with the tax law is a ‘deadweight’ cost to the community and ought to be minimised. Waste can however also arise where the tax system is such as to encourage individuals to substitute things they value less for things they value more, or business to continue to use or to substitute productive processes that are technically less efficient for productive processes that are more efficient. In so far as it can be presumed that, left to their own devices, individuals will spend their incomes wisely, and business will choose the most efficient means of production, the minimisation of waste requires that the tax system should not influence individual and business choices. This is the requirement that the tax system should be neutral. Thus the tax system should not interfere with the manner in which an individual spends his income by changing the relative prices of the goods he buys; it should not alter the relative rewards of the different types of work between which he has to choose, or the relative attractions of work and leisure, or the relative returns from different modes of investment; it should not alter the relative attractiveness of different types of business organisation, or the relative prices of productive resources; and it should not discriminate between different types of production.
3.25. But it cannot always be presumed that consumers will spend their incomes wisely; and even when they do, consumers and producers alike may fail to take adequate account of the effects that their activities have on others, of what economists have come to call ‘externalities’. The efficiency of the use of available resources can sometimes be improved by departures from neutrality, by government interventions to alter what would otherwise have been the outcome of private market operations. There are many such interventions by government through, for instance, tariffs, subsidies, monetary control and marketing organisations. But the tax system is an alternative instrument. Tax concessions may aim at increasing the output or consumption of goods and services the government wants to encourage. Similarly, taxes can be used to discourage the output, or increase the prices to consumers, of commodities whose unrestricted production or consumption might otherwise have harmful effects, for example on health or urban development. Taxes can also be employed to charge the users of facilities, such as roads, on the use of which it is otherwise difficult to impose a price. Discriminatory taxes of these kinds will here be called ‘efficiency taxes’.
3.26. The Committee is persuaded that neutrality should be the general aim when efficiency is under consideration.
Departures should be made only in a deliberate and explicit way for proven, explicit and quantified purposes and after
it had been shown that other approaches (such as regulation and subsidy) are likely to be less effective for the end
chosen. In the Committee's view, when there are circumstances warranting encouragement for a field of activity by
means of a reduction in tax, any such
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reductions should be granted only for a specified purpose and a
limited period, thereby ensuring periodical review.