Question

Assume that you were hired by a government to advise it on the design of its tax system. Discuss some factors that would be relevant to the advice that you would give. In your answer, discuss how different desirable factors might tradeoff with each other. What empirical factors would you want to learn about since they would be crucial in affecting the advice that you would give?

Answer 1

Tax is the primary source of revenue to the government. So utmost care should be given while formulating a tax structure. A good tax system does not mean all the taxes are good. It must be implemented in such a way that to ensure maximum revenue and also please the tax payer.

A tax system has virtue and vice. Thus the tax system must be based on minimum vice and maximum virtue. The tax systems will be efficient if it satisfy the basic cannons of taxation.

For a good tax system the following principle should be followed.

1. Canon of equity

The tax system should be in such a way that it ensures equity. Equity means equal treatment of all. The equity can be obtained by horizontal equity and vertical equity. Horizontal equity means equal treatment of all for those who have equal income. Vertical equity means unequal treatment of those who are unequal. More should be collected from those who have more capacity to pay and less from those who have less. Prgressive taxation gives both horizontal and vertical equity. Here those who are unequal treated unequally and those who are equal treated equally.

2. Cannon of certainty.

It suggests that the tax should be certain and there should be no ambiguity. The tax payer must be well aware that how much he has to pay, to whom and at what time. The place and formalities of taxation should be clear. It protect the tax payer from arbitrary imposition of tax by the tax authorities. Again the certainty enable the tax payer arrange his income and expenditure.

3. Cannon of convenience.

The tax should be imposed in such a way that it is more convenient to the tax payer. The tax payer should not suffer any hardships or inconvenience.

4. Cannon of economy.

These principles emphasise that the cost of collecting tax should be minimum. The tax structure should be in such a way that it ensure maximum revenue to the government.

5. Cannon of productivity.

The yield from tax is an important aspect. Before imposing a tax the government should consider the yield from tax. If the yield from tax is low the imposition only cause unwanted burden on the tax payer and waste of time to the government.

6. Cannon of elastic

The tax system should be elastic to increase or decrease as and when the demand for revenue changes.

7. Cannon of simplicity

The tax structure should be simple and easy to understand.

8. Cannon of diversity.

The tax system should be diversified with different varieties of tax. If a single tax is applies people can easly evade tax. If a number of taxes is applied on a single person he cannot evade tax.

9.   Cannon of expediency.

The tax system should be desirable. It must not raise cricism form the public. If the tax system does not preserve justice the tax payers retaliate without paying it. It must create a feeling in the mind of the tax payer that it is his duty to pay the tax.