Principles of taxation

Business studies study module

These are the characteristics that a good tax system should have. They are also referred to as the cannons of taxation.

A good tax system should be;

  1. Equitable/principle of equity-Every subject of the state should pay tax in proportion to their income. A tax system should therefore have horizontal and vertical equity.

Horizontal equity means that those at the same level of income and circumstances should pay the same amount of tax.

Vertical equity means that those earning higher incomes should pay proportionately higher amounts of tax than those earning less.

  1. Certain/principle of certainty-The tax that an individual should pay should be clear in terms of the amount, time and manner in which it should be paid. The government should also be fairly certain of the amount of tax expected so that planning can be easier.
  2. Convenient/principle of convenience-Tax levied ought to be convenient to both the contributor and collector, it should be levied at a time when the payer has money and mode of payment should be convenient to both the payer and the payee.
  3. Economical/principle of economy-The cost of collecting and administering the tax should be lower than the tax so collected.
  4. Flexible/principle of flexibility-It should be readily adaptable to changing economic times i.e. when the economic conditions of the people improve it should give raised revenue e.g. VAT
  5. Ability to pay/non-oppressive-A tax system should be designed in a way that the amount charged is not too high to the extent that the contributors are unable to pay or is discouraged from working hard.
  6. Diversified/principle of diversity-There should be different types of taxes so that the tax burden is on different groups in the society. This also ensures that the government has money at all times.
  7. Simplicity-A good tax system should be simple enough to be understood by each tax payer. This will motivate them to pay tax.
  8. Elastic/principle of elasticity-The tax system should be able to generate more revenue for the government by targeting items of mass consumption.

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