Economics
Principles of Taxation
The principles of taxation refer to the fundamental guidelines that govern the imposition and collection of taxes by governments. These principles include equity, efficiency, simplicity, and transparency. Equity ensures that the tax burden is distributed fairly, while efficiency aims to minimize the economic distortions caused by taxes. Simplicity and transparency help to make the tax system more understandable and accessible to taxpayers.
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11 Key excerpts on "Principles of Taxation"
eBook - ePubPublic Sector Revenue
Principles, Policies and Management
- Alberto Asquer(Author)
- 2017(Publication Date)
- Routledge(Publisher)
Another important contribution in the scholarly literature on the Principles of Taxation is that of Knut Wicksell, who argued that a unanimity-voting rule for determining taxation would guarantee that all individuals receive benefits from public goods that are higher than the tax cost (Johnson, 2006; Wicksell, 1958). The theoretical work of Wicksell, as well as of others like Lindahl (1958), builds on the principle of ‘benefit taxation’, according to which taxpayers should contribute to public finance according to the benefits that they receive from public expenditures. The principle of benefit taxation has some theoretical and practical limitations, however, which arise from the possibility that taxpayers free ride on tax obligations and the difficulty to reveal taxpayers’ preferences for alternative public goods.Principles of Taxation have also been formulated, in the contemporary age, within accounting professional circles. The American Institute of Certified Public Accountants (AICPA), for example, outlined ten guiding Principles of Taxation as follows (Nellen, 2002):1 Equity and fairness: similarly situated taxpayers should be taxed similarly, both in the sense of vertical and of horizontal equity.2 Certainty: tax rules should specify when and how a tax is to be paid and how the amount is determined.3 Convenience of payment: a tax should be due at a time and in a manner that is convenient to the taxpayer. If payment of taxes is convenient then it is more likely that taxpayers will comply with their tax obligations.4 Economy of collection: the cost of collection of taxes should be kept to a minimum for both the government and the taxpayers.5 Simplicity: the tax code should be simple so that taxpayers can understand the rules and regulations and comply with them correctly and cost-efficiently.6
- OECD(Author)
- 2014(Publication Date)
- OECD(Publisher)
ADDRESSING THE TAX CHALLENGES OF THE DIGITAL ECONOMY © OECD 2014 2. FUNDAMENTAL Principles of Taxation – 29 Chapter 2 Fundamental Principles of Taxation This chapter discusses the overarching principles of tax policy that have traditionally guided the development of tax systems. It then provides an overview of the principles underlying corporate income tax, focusing primarily on the taxation of cross-border income both under domestic laws and in the context of tax treaties. Finally, it provides an overview of the design features of value-added tax (VAT) systems. ADDRESSING THE TAX CHALLENGES OF THE DIGITAL ECONOMY © OECD 2014 30 – 2. FUNDAMENTAL Principles of Taxation 2.1 Overarching principles of tax policy In a context where many governments have to cope with less revenue, increasing expenditures and resulting fiscal constraints, raising revenue remains the most important function of taxes, which serve as the primary means for financing public goods such as maintenance of law and order and public infrastructure. Assuming a certain level of revenue that needs to be raised, which depends on the broader economic and fiscal policies of the country concerned, there are a number of broad tax policy considerations that have traditionally guided the development of taxation systems. These include neutrality, efficiency, certainty and simplicity, effectiveness and fairness, as well as flexibility. In the context of work leading up to the Report on the Taxation of Electronic Commerce (see Annex A for further detail), these overarching principles were the basis for the 1998 Ottawa Ministerial Conference, and are since then referred to as the Ottawa Taxation Framework Conditions. At the time, these principles were deemed appropriate for an evaluation of the taxation issues related to e-commerce.
- OECD(Author)
- 2015(Publication Date)
- OECD(Publisher)
ADDRESSING THE TAX CHALLENGES OF THE DIGITAL ECONOMY – © OECD 2015 2. FUNDAMENTAL Principles of Taxation – 19 Chapter 2 Fundamental Principles of Taxation This chapter discusses the overarching principles of tax policy that have traditionally guided the development of tax systems. It then provides an overview of the principles underlying corporate income tax, focusing primarily on the taxation of cross-border income both under domestic laws and in the context of tax treaties. Finally, it provides an overview of the design features of value-added tax (VAT) systems. ADDRESSING THE TAX CHALLENGES OF THE DIGITAL ECONOMY – © OECD 2015 20 – 2. FUNDAMENTAL Principles of Taxation 2.1. Overarching principles of tax policy 10. In a context where many governments have to cope with less revenue, increasing expenditures and resulting fiscal constraints, raising revenue remains the most important function of taxes, which serve as the primary means for financing public goods such as maintenance of law and order and public infrastructure. Assuming a certain level of revenue that needs to be raised, which depends on the broader economic and fiscal policies of the country concerned, there are a number of broad tax policy considerations that have traditionally guided the development of taxation systems. These include neutrality, efficiency, certainty and simplicity, effectiveness and fairness, as well as flexibility. In the context of work leading up to the report on the Taxation of Electronic Commerce (see Annex A for further detail), these overarching principles were the basis for the 1998 Ottawa Ministerial Conference, and are since then referred to as the Ottawa Taxation Framework Conditions (OECD, 2001). At the time, these principles were deemed appropriate for an evaluation of the taxation issues related to e-commerce.
- Andy Lymer, Lynne Oats(Authors)
- 2021(Publication Date)
- Fiscal Publications(Publisher)
Principles of tax system design Introduction 3.1 In Chapter 1 we considered the objectives of a tax system and determined that taxation is a tool used by government to manage the economy, regulate and develop society and provide public goods. We also noted that the nature of any particular tax system, which consists of a number of different types of tax, is constantly changing with the changing views of society as a whole. In this chapter we will first discuss a number of ideas and concepts which are relevant to understanding how to design a tax system. We will then identify and explore the desirable characteristics of a tax system that underpin its design. These principles apply to any tax system – not just the UK’s. Once we have done this we will evaluate various bases of taxation to illustrate the application of this theory in practice. At the end of this chapter you will be able to: outline the key issues of tax system design; state and discuss the five desirable characteristics of a tax system; state the range of tax bases from which a tax system may be built; and discuss the merits and limitations of each of these tax bases. Key issues in taxation design 3.2 In this section we will explore the key issues of tax system design that all tax systems must keep in balance to function properly: What to tax? Who to tax? What kind of rate structure? How should the tax burden be distributed? and What effect do taxes have on taxpayer behaviour? 3 3 Principles of tax system design 38 What to tax? 3.3 We saw in the historical review of taxation in Chapter 1 that taxes have been imposed on all kinds of activities, goods and services throughout history.
eBook - ePub- Csaba Lentner(Author)
- 2020(Publication Date)
- Harmattan Hongrie(Publisher)
, and they have served as a general principle for governments ever since, and this subsection emphasizes the validity and traceability of these theorems. The first, perhaps most important, classical principle is that taxpayers must contribute to the maintenance of public finances in proportion to their capacity and income. Adam Smith himself called this principle the principle of equal burden sharing. Capacity in this case means the ability to carry a tax burden, a financial ability, which can be defined as a gauge for burden sharing. The core of this principle is therefore the distribution of public burden, which was established in Western Europe at the end of the 18th century.Smith’s second principle (predictability) states that the tax should always be specific, and that tax regulation and the conditions for bearing the burden by taxpayers should be simply and precisely phrased. The determination of the tax should not be arbitrary; efforts should be made to minimize uncertainty in the taxpayer’s financial position.The third classical principle is that of “convenience”, which says that tax liability should be established and tax should be collected in a way that causes taxpayers as little “inconvenience” as possible, so that their fulfilment does not cause any liquidity or capital withdrawal problems. The most appropriate conditions have to be created for taxpayers in order to fulfil their obligations. Based on this principle, Adam Smith supported the taxation on consumption because he believed that taxpayers’ consumption habits well characterized their state of wealth.The fourth principle was captured by Adam Smith in low-cost tax administration. When establishing taxes, efforts should be made to minimize the burden on taxpayers and this should include the minimization of administration. The tax and the taxation itself (fulfilment of the tax liability910) should not have a deterrent effect regarding performance. It should encourage taxpayers to increase their economic performance and thus their tax base. It is also related to this that tax sanctions should not oppress taxpayers and should not unnecessarily restrict their activities, because the entire national economy needs their work and the benefits of their performance. This also implies that tax investigations should not unduly harass taxpayers and that any penalties should be proportionate to the seriousness of the negligence or wilful misconduct and should even give opportunity of returning to the circle of normal taxpayers. The definition of modern taxation principles is already a more controversial issue, with tax exemption and minimum income guaranteed by the state and its tax exemption at the forefront.
- Andy Lymer, Lynne Oats(Authors)
- 2023(Publication Date)
- Fiscal Publications(Publisher)
This is captured by the Canon of convenience. Efficiency 3.18 There are two separate aspects to efficiency derived from Adam Smith’s Canons of taxation: economic efficiency and administrative efficiency. Economic efficiency 3.19 A tax system is seen to be economically efficient if it does not distort the economic and commercial decisions which are made by individuals. Economic efficiency is sometimes referred to as fiscal neutrality, and the key idea is that taxes should, as far as possible, not interfere with the workings of the market including the decisions taxpayers make about their various activities. We will be considering economic efficiency in more detail in the Chapter 14 where we discuss the impact of the UK tax system on decision making. Here, however, we will consider the way in which the tax system affects people’s behaviour more generally, referred to 3 Principles of tax system design 48 as “distortions”, and therefore the extent to which a tax system is economically efficient by its design. As we noted earlier in this chapter, tax can affect peoples’ behaviour in many ways. Sometimes distortions resulting from particular taxes are deliberately intended by a government to affect individuals’ behaviour. Planned distortions include tax reliefs, tax breaks or tax concessions. These are a reduction in taxes theoretically due, sometimes also referred to as a tax expenditure as it represents tax revenue forgone by a government. An example is the tax reductions given to businesses for locating in a particular area the Government is seeking to regenerate or develop. Taxes can also be explicitly used in a non-fiscally neutral way to dissuade particular behaviour. Such taxes are termed corrective taxes or Pigouvian taxes. They are designed to correct for externalities (costs imposed on others) and internalities (costs imposed on individuals themselves) in the market.
eBook - PDFPublic Sector Economics
Made Simple
- D. I. Trotman-Dickenson(Author)
- 2014(Publication Date)
- Made Simple(Publisher)
10 What the pattern of taxation of any one country will be depends not only on what is desirable but on what is practical, and this will be influenced by the country's stage of economic development and the level of revenue it requires. Suggested Further Reading Brown, C. V., and Jackson, P. M., Public Sector Economics, Martin Robertson, Oxford, 1978. James, S., and Nobes, G., The Economics of Taxation, Phillip Allen, Oxford, 1978. Meade, J. E., The Meade Report, The Institute of Fiscal Studies, The Structure and Reform of Direct Taxation, George Allen & Unwin, London, 1978. Musgrave, R. Α., and Musgrave, P. B., Public Finance in Theory and Practice, McGraw Hill, New York, 1980. Prest, A. R. and Barr, Ν. Α., Public Finance in Theory and Practice, Weidenfeld & Nicolson, London, 1979. Sandford, C. T., The Economics of Public Finance, Pergamon Press, Oxford, 1981. Exercises 1 What is meant by the benefit theory of taxation? What are the problems of putting it into practice? 2 Discuss the validity of the main assumptions of the ability-to-pay theory of taxation. 3 Distinguish between horizontal and vertical equity and explain their relevance to tax policies. 4 Progressive taxation has both desirable and undesirable features. Comment on this statement. 5 What are the main disadvantages of indirect taxation from the point of view of the taxpayer? 6 Explain why in raising of state revenue, equity and expediency may require the levying of different forms of taxation. 7 Consider the argument that taxes on income are fairer than taxes on expendi-ture. 8 Suggest reasons why taxes on consumption are by their very nature regressive. 9 'Principles of Taxation are a product of their time and reflect current political, social and economic thought.' Comment on this statement. 10 Explain why a tax system that is workable in a developed country may not be suitable for a developing one. 7 Basis of Income Tax We have looked at taxation in general.
eBook - PDF- Richard W Tresch(Author)
- 2021(Publication Date)
- Bloomsbury Academic(Publisher)
They think it is the better tax on both equity and efficiency grounds. THE FIVE GOALS OF TAX POLICY Economists have identified five properties that any broad-based tax should ideally possess: (1) ease of collection; (2) ease of compliance; (3) flexibility; (4) promotion of economic efficiency; and (5) promotion of end-results equity. EASE OF COLLECTION AND COMPLIANCE The first two properties, ease of collection and compliance, are essentially administra-tive requirements, the former from the point of view of Departments of Revenue (DOR) and the latter from the point of view of the taxpayers. Ease of collection means that the DOR can collect large amounts of revenue with the tax with relatively little expense and effort. All the major taxes used by governments meet this requirement; they have to or they would not be used. For example, the U.S. IRS collected $2.0 trillion of personal, payroll and corporate income tax revenues in FY 2005 with an operating budget of $10.2 billion, only 0.5% of the tax revenues collected (U.S. Government Accountability Office, 2005, p. 1; U.S. Government Printing Office, 2007, Table 1). Ease of compliance means that taxpayers can compute their tax liabilities (comply with the tax laws) with reasonable amounts of time, expense, and record keeping. The compliance requirement explains why developing countries rely more on business taxes than on personal taxes. These countries have relatively low literacy rates, which means that a large percentage of the population is simply unable to collect and process the records and other information that would be required of them under a tax such as personal income tax. Nor could they fill out the tax forms. The compliance property also has a behavioral component. People (and businesses) not only have to be able to keep the records required to levy taxes on them, but they also have to be willing to make those records known to the DOR.
eBook - PDF- Martin Feldstein, A.J. Auerbach(Authors)
- 1985(Publication Date)
- North Holland(Publisher)
As will be noted below, land as the prime base of taxation was to receive further endorsement on efficiency (as distinct from equity) grounds. As shown in Chapter 8 of ths volume, the taxation of natural resources has remained a problem of great interest. Nor is this the only instance in which selective taxation of certain sources of income has been argued in the name of tax justice. The taxation of wartime profits under an excess profits tax, for instance, has been common practice. While the concepts of accretion and global base have been central to the equity rule, the underlying premise of general entitlement has been subject to certain qualifica- tions. Changing views on tax equity must indeed be understood in the context of philosophical views regarding the nature of property, individual entitlement thereto, and the relationship of the individual to the state. Thus, there is a vast gap between the neo-Lockean view of taxation as “forced labor” [Nozick (1974, p. 169)] and, say, Justice Holmes’ view of taxation as the cost of civilization. 4. Efficiency in taxation But equity is not all there is to the construction of a good tax system: efficiency also matters, and here economic analysis takes over. Adam Smith, in his fourth maxim, counsels that “every tax ought to be so contrived as to take out and to 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” [Smith (1776, vol. 11, p. 311)]. 26 R.A. Musgraoe Reference is to the cost of tax administration, obstruction to industry, the burden of penalties, and odious examinations. Taxes should be “as little burdensome to the people” as possible. John Stuart Mill quotes Smith with approval but finds that no elaboration is needed. At one point, Mill (1948, p. 803) almost recognizes that payment of similar amounts under different taxes may impose differential burdens, but then backs away from ths conclusion.
eBook - ePubTaxation by Political Inertia
Financing the Growth of Government in Britain
- Richard Rose, Terence Karran(Authors)
- 2018(Publication Date)
- Taylor & Francis(Publisher)
CHAPTER THREEExercising the Taxing Power: A Public-Policy ModelLike the points of the compass, the principal determinants of tax revenue are few but diverse: laws, public administration and the economy. Because they are few, they are easy to state in the abstract. Because the ramifications of each is different, most discussion of taxation is specialized, concentrating upon one element only. Yet to look solely at tax legislation, or the administration of tax collection, or the relation between taxes and the economy, is to lose sight of their necessary interdependence. Tax revenue is not determined solely by any one element; it results from the interaction of tax laws, administration and economic activity.As a classic function of government, the procedures for taxation have evolved through the centuries; they have been routinized by public officials responsible for collecting the billions of pounds that government needs. The accretion of detail and the development of specialist concepts and procedures creates barriers to understanding the underlying principles of this basic activity of government.A public-policy model can bring together what is separated by the barriers imposed by specialization among the professionals of tax administration, and by the division of labour in the social sciences. Taxation combines elements of politics, administration, economics, law and accountancy – including the history of each of these subjects. A public-policy model can focus upon all that is necessarily involved in collecting taxes. Examining only tax laws ignores the influence of the economy in determining how much money such laws can actually raise. Focusing exclusively upon the state of the economy ignores the political considerations that affect how much money the government seeks in taxes, and how it goes about collecting revenue.To understand taxation, we must understand generic properties of revenue-raising. Tax revenue (TR) is a function of Laws (L), Administration (A), and Economic Activity (E).
- Ved Gandhi, Liam Ebrill, Parthasarathi Shome, Luis Manas Anton, Jitendra Modi, Fernando Sanchez-Ugarte, and George Mackenzie(Authors)
- 1987(Publication Date)
- INTERNATIONAL MONETARY FUND(Publisher)
The relevant question that this chapter must address is the following. If the multiple objectives of taxation are to be foresaken and if neutrality or efficiency is to be the paramount objective of taxation (i.e., if the primary aim is to cause minimal distortions to the choices of economic agents), what is an ideal tax system? A clue to the answer to this question is provided by the theory of the first-best and the second-best taxation, succinctly developed primarily in the recent literature on optimal taxation.General Theory of the First-Best Taxation
The theory of first best claims that, in the absence of market failures,12 all taxes, except lump-sum taxes and those levied on inelastic bases that an individual cannot alter by any of his actions, should be considered distortionary.13 All taxes, other than those mentioned above, increase rather than reduce distortions in one or more of the following: (1) the relative prices of commodities; (2) the relative rewards of factors of production; (3) the relative values of present versus future consumption; and (4) the relative rewards of work versus leisure.Government activities should, therefore, as a first-best solution, be primarily financed not through taxes (except via a poll tax or a tax on inelastic bases which alone are consistent with Pareto optimum), but through user prices.14This view of taxation depends on five main assumptions. (1) Choices made by individuals are better than other choice mechanisms, since all individuals are rational economic beings and have the relevant information needed for making rational decisions. (2) Product and factor markets are perfectly competitive, factors are perfectly mobile, and pretax market prices reflect true social opportunity costs. Implicit in this assumption is the belief that the cost of and benefits from consumption or production are wholly internalized—there are no externalities or spillovers. (3) Individual behavior is affected by prices (taxes being, of course, elements of prices); that is, there are neither social and institutional constraints nor any uncertainty influencing individual economic behavior. (4) Government expenditures have no desirable effect on relative prices; they certainly cannot compensate for the distortionary effects of taxation on relative prices and at the same time provide “merit goods” that may be desirable on social welfare grounds. (5) Redistribution is not a major objective of taxation; the initial distribution of income and wealth as well as the redistribution generated by market forces (and lump-sum transfers, if any) are correct and socially acceptable or else that redistribution should be achieved by policy instruments other than taxation.
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