The 3 Principles Of A Good Tax System
In every place where the authority deducts taxes from the income of residents
, there is always a system. Some are more established and professional than others. Each of these systems operates based on certain principles that are determined by factors such as party ideology, religious factors and historical factors. However, there are certain principles which broadly define what a good system should be all about. Here are three of them:
Economy of Collection
A good tax system must be designed in such a way that the cost of collecting the taxes is low for both the collecting agency and the taxpayer. At the same time, the cost of enforcing the rules must also be low for the overseeing authorities. For example you should not spend $10,000 in following up someone to pay $1,000, unless you expect to use him or her as an example to the rest.
Sometimes tax agencies can be overzealous in trying to make sure that each and every taxpayer pays their taxes. With such an attitude, an agency might end up fulfilling the Pareto principle where 80% of the agency's resources are directed towards following up only 20% of the taxpayers.
The Principle of Equity
The principle of equity is another characteristic of a good tax system. Though the exact definition of an equitable tax system is rather blurred, the basic idea here is that everyone must pay according to his or her own ability.
This may mean that people should pay at a fixed rate but different amount depending on their income (proportional tax,) or pay taxes at different tax rates depending on their income (progressive tax.)
Another thing that usually comes up when people talk about equity and fairness in tax systems is the fact that different income sources should not be treated differently. Income that comes from working as a congressman should be taxed at the same rate as that which comes from working as a teacher.
The Principle of Simplicity
Another important principle of taxation is simplicity. The process of calculating and submitting tax returns should be simple enough without the need for specialized training. However, we know that this rarely happens. Filling returns is one of the most difficult jobs that the average citizen engages in during the year.
Simplicity is important in a tax system because it helps reduce the cost of filling returns by preventing the hiring of tax specialists. Again, it also helps one to pay the right amount of taxes by avoiding overestimating or underestimating the taxable income. Complexities in the tax process also form many loopholes that can be used by those people who would love to evade or avoid taxes.
These three principles of taxation are not exhaustive. However, they form good basis for coming up with and establishing tax systems. Although some people equate a good tax system to socialism where the rich are "punished" for being rich, these principles will actually help the society to increase both communal and individual wealth.
by: David de Souza
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