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1. Equity:
The distribution of the tax burden should be equitable. Everyone should be made to pay his or her ‘fair share’.
2. Neutrality:
Taxes should be chosen so as to minimise interference with economic decisions in otherwise efficient markets. Such interferences impose ‘excess burden’ which should be minimised.
3. Efficiency:
Where tax policy is used to achieve other objectives such as to grant investment incentives, this should be done so as to minimise interference with the equity of the system.
4. Certainty:
The tax which each individual is bound to pay ought to be certain and not arbitrary. The time of the payment, the manner of payment, and the quantity to be paid, all ought to be clear and plain to the contributor, and to every other person.
5. Economy:
Every tax ought to be so contrived as to both 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. Administration and compliance costs should be as low as is compatible with the other objectives.
6. Simplicity:
The tax system should permit fair and non-arbitrary administration and it should be understandable to the tax-payer. It means that the tax-system should be easily comprehensible to the tax-payer, i.e., its nature, method and basis of estimation should all be easily followed by each tax-payer.
7. Convenience:
Every tax ought to be levied at the time, or in a manner in which it is most likely to be convenient for the contributor to pay it.
8. Productivity:
A tax system to be thoroughly sound and enduring must be able to generate enough revenue to meet the requirements of the government.
9. Elasticity:
In the system, there should be a capacity to respond quickly to the changes in the demand for revenue.
10. Diversity:
The tax system should be such that it depends on a number of taxes, so that every class of citizen may be called upon to contribute something towards the state revenue.
11. Fiscal Objectives:
The tax structure should facilitate the use of fiscal policy for stabilisation and growth of objectives.
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.
