Principles of a Good Tax System

To design effective taxation system, economist adopted some key principles for such system, how to raise highest level of revenue with least possible damage to the economy. Therefore principles below maybe perceived as a bench mark to assess the quality of implemented taxation system.

  1. Efficient: A tax system should raise enough revenue such that government projects can be adequately sponsored, without burdening the tax payer too much, or not incentivizing investment or work.
  2. Understandable & Simplicity: People will be more willing to comply with tax laws if the system is simple and easy to understand.The system should not be incomprehensible to the layperson, nor should it appears unjust and complex.
  3. Equitable & Fairness: The tax system needs to ensure that all taxpayers share the tax burden on equal and fair basis. People with similar financial circumstances should receive the same tax treatment. In other words, all high-income earners, whether they are individuals or corporations, pay their fair share of tax. Also, similar products should be subject to the same rate of sales tax.Taxation should be governed by people’s ability to pay, that is, wealthier individuals or firms with greater wealth and incomes should pay more in tax while those with lower wealth and incomes should pay comparatively less.
  4. Benefit Principle: Those that use a publicly provided service (which is funding primarily through taxation)
  5. Economic Growth: Good tax system should invigorate economic growth and stimulates the level of economic activities.
  6. Stability: The tax should not largely fluctuate from year to year.
  7. Equality: Tax payments should be proportional to income
  8. Certainty: Tax revenue for the year ahead should be very close to the budget revenue from tax.
  9. Convenience of payment:  Taxes should be collected at a time and in a manner convenient for taxpayer.
  10. Economy of collection: Taxes should not be expensive to collect and should not discourage business.
  11. Jobs: Tax system should encourage people to take jobs even if the state benefit is generous.

 

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