Homeworks academic writing service


An overview of the characteristics of taxes and methods of taxation

Bring fact-checked results to the top of your browser search. Principles of taxation The 18th-century economist and philosopher Adam Smith attempted to systematize the rules that should govern a rational system of taxation.

The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.

The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of paymentthe manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person.

  1. Later justifications have been offered across utilitarian, economic or moral considerations. This can take the form of a value-added tax VAT , a goods and services tax GST , a state or provincial sales tax or an excise tax.
  2. Every tax ought to be so contrived as both to take out and keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state. Taxation is legally different than extortion or a protection racket because the imposing institution is a government, not private actors.
  3. In other words, through the means of taxation consumption should not be allowed to increase in proportion to increase in incomes. Early taxes were used to support ruling classes, raise armies and build defenses.
  4. Sales tax is based on a percentage of the selling prices of the goods and services and is set by the state.

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.

Every tax ought to be so contrived as both to take out and keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state.

Types Of Taxes

From the first can be derived some leading views about what is fair in the distribution of tax burdens among taxpayers. What follows is a discussion of some of the leading principles that can shape decisions about taxation.

Horizontal equity The principle of horizontal equity assumes that persons in the same or similar positions so far as tax purposes are concerned will be subject to the same tax liability.

In practice this equality principle is often disregarded, both intentionally and unintentionally.

Six Principles or Characteristics of a Good Tax System

Intentional violations are usually motivated more by politics than by sound economic policy e. The ability-to-pay principle The ability-to-pay principle requires that the total tax burden will be distributed among individuals according to their capacity to bear it, taking into account all of the relevant personal characteristics. The most suitable taxes from this standpoint are personal levies income, net worth, consumptionand inheritance taxes.

  1. Others argue that income transfers and negative income tax create negative incentives; instead, they favour public expenditures for example, on health or education targeted toward low-income families as a better means of reaching distributional objectives.
  2. In times of need, the government would decide to sell government assets and bonds , or issue an assessment to the states for services rendered.
  3. In a developing economy such as ours, taxation should serve as an instrument of economic growth. A tax system must also ensure economic stability.
  4. This requires that the rates of progressive direct taxes on income, wealth, expenditure, capital gains etc.
  5. It is intended to bring about rapid economic growth, reduce inequalities of incomes, promote stability and to achieve other socio-economic objectives.

Historically there was common agreement that income is the best indicator of ability to pay. Some theorists believe that wealth provides a good measure of ability to pay because assets imply some degree of satisfaction power and tax capacity, even if as in the case of an art collection they generate no tangible income. The ability-to-pay principle also is commonly interpreted as requiring that direct personal taxes have a progressive rate structure, although there is no way of demonstrating that any particular degree of progressivity is the right one.

Because a considerable part of the population does not pay certain direct taxes—such as income or inheritance taxes—some tax theorists believe that a satisfactory redistribution can only be achieved when such taxes are supplemented by direct income transfers or negative income taxes or refundable credits.

Others argue that income transfers and negative income tax create negative incentives; instead, they favour public expenditures for example, on health or education targeted toward low-income families as a better means of reaching distributional objectives. Throughout much of the 20th century, prevailing opinion held that the distribution of the tax burden among individuals should reduce the income disparities that naturally result from the market economy; this view was the complete contrary of the 19th-century liberal view that the distribution of income ought to be left alone.

By the end of the 20th century, however, many governments recognized that attempts to use tax policy to reduce inequity can create costly distortions, prompting a partial return to the view that taxes should not be used for redistributive purposes.