What Are The Principles of A Good Tax System?
Adam Smith (1910) maintained in his book titled “The Wealth of Nations” highlighted the most important set of principles of a good tax system, which he also described as the “cannon of taxation” which are still accepted generally by tax administrators across the globe. The principles of a good tax system include:
(A) EQUITY/EQUALITY OF SACRIFICES:
People should pay tax according to their abilities. This means that if tax is to be raised, it should be raised without causing undue hardship to the tax payers. For example: 10-20% of all income above a certain figure, since there are some citizens whose incomes were so low that they were obviously to pay any taxes. Similarly, Musgrave and Peacock (1984) conceived the principles of equity as equal proportion of taxation on every income that is; in principle everyone should pay the same proportion of his income as tax. This means proportional taxation or some percentage on all incomes and therefore rejected progressive taxation i.e (higher tax rates on higher incomes). It also means equal taxation of earned and investment incomes, existing private wealth and capital are exempted, taxation is limited to income only.
(B) THE PRINCIPLE OF CERTAINTY:
This principle of certainty states that the taxpayer should know how much tax he has to pay, when it is to be paid and the manner of payment. They should be made clear and plain to taxpayers. Such information should be adequately accurate and clearly stated by the tax regulations. Therefore, the amount and time of payment should not be the subject of arbitrary decisions by the tax officials.
(C) THE PRINCIPLE OF CONVENIENCE:
Taxes should be collected at a time convenient for the taxpayers. For example, the Pay as You Earn income tax on salaries and wages deducted weekly or monthly as the case may be as income is received, or an import duty should be paid as the imported goods arrive the country. These are good examples of the principle of convenience. Eckeston (1983) has said that a good tax should not impose taxes that are impossible to enforce even when people comply to tax laws voluntary, the government should verify the tax payments, if not the tax becomes an invitation to break the law. Adam (1910) said that every tax ought to be levied at the time or in the manner in which it is likely to be convenient for the contributor to pay it. Referencing this principle, one can say that the convenient time for payment of tax for farmers in West Africa is during the harvest time.
(D) THE PRINCIPLE OF ECONOMY:
This principle states that the cost of collecting tax should be cheap relative to the revenue yield. This also means that the economy should be the yardstick so that the cost of collecting tax should not be high. For example, if the expenses incurred in the course of collecting a tax exceed even 50% of the yield, then such taxes is going against the principle of economy.
(E) THE PRINCIPLE OF NEUTRALITY:
The principle of neutrality states that a good tax system should not interfere unnecessarily with the supply and demand for goods and services. One of the important consideration in evaluating tax is how the affects the production, savings and the willingness of people to work.
(F) THE PRINCIPLE OF FLEXIBILITY:
This principle states that a good tax system should be flexible enough for adjustments when the need arises.
(G) PRINCIPLE OF SIMPLICITY:
A good tax system should very simple and not difficult to administer and comprehend. It should be the same and not cause problems of differences in interpretation.
