What is a Good Tax System?
Economists and social philosophers have developed the various ideas about a good tax system. Many of these ideas came from the book Wealth of Nations written by Adam Smith. These are the canons of taxation: equity, certainty, convenience and economy. Smith said:
The time of payment, the manner of payment, the quantity to be paid ought all to be clear and plain to the contributor, and to every other person... Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it.
Requirements of a good tax system:
1. The distribution of the tax burden should be equitable or fair. This means a person has to pay tax based on his ability to pay. Others claim that tax payment should be based on benefits received.
2. Taxes should not ruin an efficient market system. Taxes increase the cost of production, and this means higher prices. Such situation discourages both buyers and sellers or producers. At a higher price, there is a decline in quantity demanded. In the case of producers, a higher cost of production is a disincentive.
3. Taxes should serve as tools in facilitating economic stability and economic growth. Taxes can greatly help solve or minimize the economic problems of inflation and unemployment. For instance, if taxes are properly spent on projects which maximize employment, then it is not only good for the jobless people but also to the national economy. And when production rises, the price level tends to fall. More production means more supply, and this is the best way to combat inflation. Regarding economic growth, the key to economic development is investments in certain economic sectors. The development of such key sectors leads to economic growth.
4. Tax administration should be efficient. This refers to the productivity of tax collection. In less developed countries
tax collection is not efficient. There are many incomes and wealth that are not reported. Another, dishonest tax collectors do not perform their jobs well. Likewise, a tax system should be understandable to the taxpayers. It should be written in simple and clear language. It is noted that some professionals and businessmen do not know what tax to pay and how much. Such problems of comprehension is even greater to the less schooled individuals.
5. The cost of tax administration and its compliance should be economical. The basic objective of taxation is to raise funds for government programs. But if the manner of raising such money is expensive in proportion to the taxes to be collected, then it is not a good tax system. Taxes should be enough to meet the needs of public services. Thus, economy is essential in the collection of taxes.
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