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Principles of A Good Tax System

The document outlines the principles of developing a good tax system, based on Adam Smith's four key principles of taxation: equity, certainty, convenience, and economy. It also discusses additional principles such as diversity, flexibility, simplicity, elasticity, and productivity, emphasizing the importance of fairness, clarity, ease of compliance, and efficiency in tax collection. Overall, a well-designed tax system should minimize costs for both taxpayers and authorities while ensuring adequate revenue generation.

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27 views11 pages

Principles of A Good Tax System

The document outlines the principles of developing a good tax system, based on Adam Smith's four key principles of taxation: equity, certainty, convenience, and economy. It also discusses additional principles such as diversity, flexibility, simplicity, elasticity, and productivity, emphasizing the importance of fairness, clarity, ease of compliance, and efficiency in tax collection. Overall, a well-designed tax system should minimize costs for both taxpayers and authorities while ensuring adequate revenue generation.

Uploaded by

nxvpbdr795
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Principles of Developing a Good

Tax System

10/16/2020 MGOGO A. 1
Good Tax System
According to Adam Smith, it is one which
consists of the principles of taxation. He came
up with his best four.

10/16/2020 MGOGO A. 2
Principles of taxation/canons of
taxation/qualities of taxation
These are rules or laws which must be
observed when assessing, collecting and
administering taxes. Taxation system should
adhere to the certain basic principles so that it
can function effectively.

10/16/2020 MGOGO A. 3
Equity Principle
The principle states that tax should be charged
fairly (levied on the basis of fairness principle), a
tax system should be perceived to be fair by the
tax payers and it should consider tax payers
economic condition, the amount of tax must be
proportional to the level of income i.e PAYE

Theories of Equity
Benefit theory
Ability to pay theory
Sacrifice theory
10/16/2020 MGOGO A. 4
Certainty Principle
Tax should not be arbitrary, a tax payer should be
able to calculate his or her tax liability, know the
consequences for noncompliance and when and
where to pay tax .Under this principle the tax
system must be certain which means that the tax
payer must understand
How much to pay i.e the amount to be paid
Where to pay and
When to pay i.e timing of payment
Procedure for payment should be certain

10/16/2020 MGOGO A. 5
Convenience Principle
The tax system should be so designed that it
cause minimum inconvenience to the tax payer
The principle advocate that taxes should be
imposed at the right time, thus the tax payer
should be able to easily comply with the tax laws
i.e timing and method of payments example
Income tax should be imposed when the income
is received,
Expenditure tax should be imposed when the
person is spending

10/16/2020 MGOGO A. 6
Economy Principle
A good tax system will ensure that the cost of
collecting and paying tax as well as compliance
cost is minimum. Both tax payer and tax
authority should spend little resources in
implementing it, (i.e. Tax revenue collected must
exceed the cost of collecting the revenue).

An example of collection cost is administration


cost e.g. TRA staff cost, transportation cost etc.

10/16/2020 MGOGO A. 7
OTHER PRINCIPLES:
Diversity principle
The government should collect taxes from different sources
rather than concentrating on single sources of tax, the
principle state that the tax system should cover as many
tax payer as possible both in formal sector and informal
sector

Flexibility principle
Under this principle the tax system should be easily
changeable as economic condition, changes without
needing major reforms or should move in accordance to the
economic condition e.g. during Boom period higher tax rate
should be introduced and during the hardship tax rate
should be reduced.
10/16/2020 MGOGO A. 8
Simplicity principle
The theory state that tax system must be simple
to both tax payer and the tax administrator, that it
can even be understood by the common man this
will help curb corruption e.g. tax laws must be
simple to understand, should not be complicated

Elasticity principle
Every tax imposed by the government should be
elastic in nature, the government should be able to
increase revenue from taxation if required in case
of emergency
10/16/2020 MGOGO A. 9
Productivity/Efficiency principle
This means that the revenue collected from the
tax payer in the form of tax should be sufficient
to meet the government expenditure, however
the government has to ensure that in order to
raise sufficient revenue to meet expenditure, it
does not overburden the tax payers such that
productive capacity affected.

10/16/2020 MGOGO A. 10
END

10/16/2020 MGOGO A. 11

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