This working paper reviews the key economic concepts underpinning the design of tax, or revenue, systems using examples from South Carolina and other states.

The discussion is centered around three principles of revenue system design. Principle 1 is that government revenue must be studied and evaluated as an integrated system, rather than as individual revenue elements. Revenue and expenditures are interdependent. Changes to the revenue system can alter the distribution of income and wealth as well as the package of taxes and services facing individuals and firms. Principal 2 is that the revenue systems of state and local governments must be considered together. State and local governments may share some revenue sources, and changes at the state level may have a significant impact on local revenue and expenditures. Principal 3 is that revenue systems should be evaluated against the criteria of efficiency, equity, and adequacy.

The paper explains a number of economic concepts that factor into revenue system design. For example, the differences between taxes and fees and charges and the role of each in the revenue system are discussed. Key concepts such as tax expenditures, tax exporting, and tax earmarking are defined and their impact on South Carolina's revenue system is examined. The effect of revenue systems on the distribution of the tax burden among households of different income, and between households and business firms, is discussed. Issues in taxation associated with the competition for business location are also discussed.

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