The famous literature on principles of taxation was embodied in Adams Smith “Canons of taxation”. Since then, economies have adopted (and adapted where necessary) these basic principles for what is regarded as the most important tool of fiscal policy.
Taxation is a compulsory levy imposed on the income, value of goods and services of individuals, partners and companies by the government. It is can be said to be an approach of imposing tax on the citizen. This imposition of tax, is expected to yield income which should be utilized in the provision of both basic and substantial infrastructural amenities, both social and security, as well as creates conditions for the economic well-being of ...view middle of the document...
This is a tax imposed directly on the taxpayer or property of the taxpayer. It is those individual taxpayers that bear the burden and the incidence of the tax, and these burdens cannot be shifted to any other persons or individuals. These taxes are imposed on income, property, company profit and capital gains.
While an indirect tax is one whose burden are transferred to other individuals usually the consumer who have purchased a good or service. This form of tax is levied on goods and services, the taxpayer can transfer both the burden and the incidence to the ultimate consumer or user of the goods or services. These could come inform of Value Added Tax, Import Duty or Export Duty.
A good tax system ought to be structured based on certain laid down principles. However, disagreements may occur as to which characteristics best define a good tax system. M. Myrsky (2012) is of the opinion that since tax system are consistently evolving and there are so many principles to appraise, it will be insufficient to classify any tax system as ‘good’ or ‘bad’. However, there are a few principles, which have been identified by economist.
CLASSIFICATION BY METHODS
I. PROPRRTIONAL TAX SYSTEM
This form of tax assesses a taxpayer to tax a flat rate of his or her total assessable income. Therefore, the tax paid is proportional to the taxpayer’s income, which is the same rate charged on every taxpayer irrespective of the amount of taxable income.
II. PROGRESSIVE TAX SYSTEM
A system is progressive, when the rate of taxation increases as income increases. It is a tax that is based on the idea of vertical equity, which means redistribution of income from the well-to-do, to the less-to-do. This system relies on the principle of ability to pay, and it is therefore considered more equitable than either the proportional or the regressive tax system. A possible criticism is that it can produce distinctive effects by discouraging the spirit of enterprise or hard work.
III. REGRESSIVE TAX SYSTEM
A regressive tax system results when the incidence of the tax reduces with rise in income or tax base. A regressive tax is a tax, which falls more heavily on the people with low income than, on those with high income. Here, the rate of tax decreases as income increases.
FEATURES OF A GOOD TAX SYSTEM
Classical economist such as Adam smith, J.S Mills and J.B Say, developed canons or principles of taxations which a good tax system of any country of the world should be based on. These canons are as follows;
A. ADAM SMITH
I. Canon of Equity
II. Canon of Convenience
III. Canon of Certainty
IV. Canon of Economy
B. OTHER CLASSICALS
VI Canon of Simplicity
V Canon of Flexibility
V Canon of Impartiality
V Canon of Productivity
CANON OF EQUITY
Equity, means that the apportioning of the tax liability should be equitable. That is every taxpayer should pay a fair share of taxes. According to Deller (2004) “ Tax equity is judged on the basis of the benefit principal and ability to pay...