What are the principles of a good tax system?

(i) Equity – a good tax system must ensure that tax burden is equally distributed. That is everyone should be made to pay his fair share.
(ii) Economical – a god tax system must ensure that both the costs of collecting taxes to
the government and the costs to tax payers of meeting their tax obligation are minimized.
(iii) Avoidance of excess Burden – taxes should be chosen so as to minimize interference
with economic decisions in otherwise efficient markets.
If a tax diverts resources into the public sector such that it clearly imposes a
burden on the economy that can be equated only to the revenue raised we say that
the tax is free of excess burden.
But where the imposition of a tax e.g. excise tax levied on a particular commodity
provides an incentives to a consumer to reduce his purchases of taxed as opposed
to untaxed goods to minimize his tax liability. This reallocation of resources
induced by the tax is the nature of the excess burden over and above the revenue
raised.
A desirable goal of a tax system is that it should minimize this excess burden
caused by diverting a given amount of resources into the public sector. This can
be accomplished by choosing those taxes that do the least to distort economic
behavior. Thus a system of selective excise taxes that raise the price of some of
goods but not others will do move to distort relative prices and hence consumer
purchaser than will a general sales tax that raises the price of all goods on which it
is imposed uniformly.
(iv) Awareness – a good tax system should be understandable by the taxpayer. The move
he is aware of the tax burden, the better he is able to judge the amount of public goods
and redistribution he waits against their tax costs and the better equipped he is to vote
for the size of the public sector he wants.
(v) Elasticity – by elasticity is meant that a tax‘s revenue yield should be sensitive to
changes in economic conditions without deliberate changes in rates. It is important
that the principle of elasticity be fulfilled for at least two reasons. First elasticity
enables government to finance the rising demand for public expenditures without the
disturbance of frequent rate changes. It is worth noting that if a tax is highly elastic
with respect to real income, the ratio of government revenue to GNP will raise as real
GNP rises. Second elastic tax yields function as an automatic stabilizer for fiscal
policy purposes.
(vi) Certainty – there are several different interpretations that can be given to the principle of certainty. One interpretation, which is perhaps the most fundamental, concerns the ease with which the individual taxpayer can compute his own tax liability. The law with respect to the payment of taxes should be made specific as to how much the tax payer should pay, on what he is paying and when he is to make
payments. Adam Smith regarded a small degree of uncertainty as a much greater evil than ?a very
considerable degree of inequality in that it give the taxing authorities discretionary
power in assessing taxes against individuals. An alternative interpretation of the certainty
principle applies not to the taxpayer but to the taxing authorities. According to these
criteria a desirable feature of a tax is that its yield should be relatively certain so that the
taxing authorities can estimate their budget requirements more accurately in the light of
proposed expenditures.
(vii) Convenience – a further principle of taxation is that tax payment should be
convenient, that is the time and manner of payment should be made as desired as possible for the taxpayer. It was in accordance with this principle that he system of withholding in payment of income taxes was adopted by government. Prior to that time, taxpayers were required to pay one lump sum on income earned throughout the
year. The Long between the earning of income and the payment of taxes proved to be a burden to most taxpayer. Thus the system of withholding by assuming that taxes were paid as income was earned eliminated the need to accumulate tax liability and hence reduced evasion in the payment of taxes.

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maurice.mutuku answered the question on July 14, 2017 at 05:40