This can be done by taxing only the rich as the marginal utility of money to them is lower than what it is to the poor. ferdinand pauig. Match. A tax system should be fair in its application to all taxpayers as a result all tax payers should be treated equally. These principles set merely as guidelines to the government in framing its tax policy which is prepared having regard to various considerations like the tax yield, equity, social and economic effects and the requirements of the country. Taxes should be based on an individual’s ability to pay. The government tries to satisfy most taxpayers by ensuring that taxes are fair and reasonable. The ethical base of this principle rests on the assumption that one rupee paid in taxes by a rich person represents less sacrifice than does the same rupee tax paid by a poor man and that fairness demands equal sacrifice by both rich and poor in support of government. Moreover, the marginal utility of money differs from man to man. If the objective of the government is to redistribute income, it should set taxes according to the ability-to-pay principle. General Principles of Taxation. 72-73) First, when the government spends some money for the people at large, it does so in a general way. But here also some difficulties are encountered. There have, however, been important dissenters from this view, including the 17th-century English philosophers John Locke and Thomas Hobbes and a number of present-day tax specialists. But it is very difficult to apply the concept in practice. The measures of ability differ from tax to tax. Horizontal equity is the notion that equally situated individuals should be taxed equally. In The Wealth of Nations (Book V, chapter 2) he set down four general canons: I. The time and manner of payment and the sums to be paid ought to be plain to the contributors and everybody else. the judicial tribunals have no concern on the wisdom of taxing act. If most people want to enjoy the good or service free of cost (or, they attempt to ‘free ride’), the public good may not be available at all. • Each tax should be: – Clear and plain to the taxpayer. Finally, if this principle be applied in the case of pension holders, the latter would have to pay taxes more than the amount of pension to cover the administrative expenses for giving such pension, but this would be absurd. Receipts from road taxes typically are set aside for maintenance and construction of roads. Therefore, it is important for the tax system to be fair. It is higher to a man with lower income and vice versa. Taxes are obligations created by law. GENERAL PRINCIPLES OF TAXATION I. Ring in the new year with a Britannica Membership, Proportional, progressive, and regressive taxes. The latter is determined by (a) income or wealth and (b) personal circumstances. More specifically, persons of equal income should pay identical amounts in taxes. Likewise, a tax on cigarettes will serve a two-fold purpose: raising revenue and discouraging consumption of this harmful item. The principle of horizontal equity assumes that persons in the same or similar positions (so far as tax purposes are concerned) will be subject to the same tax liability. The principles of taxation, that is, the appropriate criteria to be employed in the development and evaluation of the tax structure, have received attention from the days of Adam Smith. The principles of a sound tax system are fiscal adequacy, administrative feasibility, and theoretical justice. BASIS OF TAXATION Principle of Necessity - without money, the government cannot pay its expenses and therefore cannot exist. It states that the rate or percentage of taxation should increase with the increase in income and decrease with the decrease in … The fourth of Smith’s canons can be interpreted to underlie the emphasis many economists place on a tax system that does not interfere with market decision making, as well as the more obvious need to avoid complexity and corruption. One clear example is road tax. Varying justifications and explanations for taxes have been offered throughout history. Our mission is to provide an online platform to help students to discuss anything and everything about Economics. Plan 3 is quite regressive: since tax payments rise more slowly than income, the tax rate for richer families is lower than that for poorer families. Since the government is under compulsion to collect taxes, it is not possible to guarantee complete neutrality. Gravity. General principles of a sales tax 1 / 3. So, his expenditure may be higher than his colleague belonging to the same income bracket. It is the act of laying a tax, i.e. The first principle, efficiency, means that the tax system raises enough revenue to sponsor projects without burdening the economy and the system shall not become a disincentive for performance. Share Your Word File
Since many people object to paying taxes, taxation involves compulsion. But his expenditure does not reflect his true ability to pay. Because of this compulsion, the collection of taxes may have very significant effects upon the behaviour of individuals and the functioning of the economy, which must be taken into consideration in selection of taxes if the tax structure is not to interfere with the attainment of the economic goals of society. Inherent in sovereignty - maybe exercised although not expressly granted by the constitution. (1 Cooley on Taxation. Horizontal equity calls for two families in the same income to pay the same tax. For a tax system to be considered good, the tax system must meet the rules governing it. Thus, horizontal equity suggests that people who are equal should pay equal taxes: vertical equity suggest that, un-equals should be treated unequally. So, in the ultimate analysis, income is not a good test of ability. Some theorists believe that wealth provides a good measure of ability to pay because assets imply some degree of satisfaction (power) and tax capacity, even if (as in the case of an art collection) they generate no tangible income. For example, in income taxation, the measure of ability is income; in wealth taxation, it is the value of property (wealth). If equals are to be treated equally, it logically follows that un-equals should be treated unequally. A poor man may spend more if he has more dependants and if he has to look after his old parents. On grounds of equity it has been suggested that a tax system should be based on a principle of equal sacrifice or ability to pay. For example, if two persons have the same amount of wealth, they are not equally well-off. For example, the government may impose tax on polluting activities, so as to discourage firms to pollute the environment. By equality is meant equality of sacrifice, that is people should pay taxes in proportion to their incomes. The first is horizontal equity. General Principles of Taxation. The ability-to-pay principle requires that the total tax burden will be distributed among individuals according to their capacity to bear it, taking into account all of the relevant personal characteristics. But difficulties may arise in measuring the aggregate sacrifice of the community owing to the difficulties in knowing the correct marginal utility of money, which itself is a subjective phenomenon (only windfall gains should be taxed at a high rate since they involve least sacrifice). Taxation principles are the guidelines that a governing entity should use when devising a system of taxation. Richard Musgrave has argued that taxes are to be judged on two main criteria: equity (Is the tax fair?) So, it is not possible to implement the principle in practice. Historically there was common agreement that income is the best indicator of ability to pay. General Principles of Taxation - Chapter 1 (Ampongan) STUDY. At different times, certain principles of taxation have been suggested on the basis of Smith’s four basic canons. Specifically, the rich should pay more taxes than the poor, since wealth is considered an appropriate measure of one’s ability to pay taxes. (2) Optimum standards of living in terms of available resources and techniques and in the light of consumer and factor-owner preferences; (3) An optimum rate of economic growth; and. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person.…, III. As a general rule, people do not like tax payment. The principle also leads to an economically efficient solution to the questions of how much government should provide and who should pay for it. Therefore, those who derive the maximum benefits from government services such as roads, hospitals, public schools and colleges should pay the maximum tax. Or, what if one family has unusually high medical expense, while the other has none (even if two families have the same number of members)? This means that in some cases, it may be desirable to disturb the private market. However, progressivity in taxation is not necessary for vertical equity. However, if the benefit principle of taxation is followed, the government will be required to estimate how much various individuals and groups benefit, and set taxes accordingly. According to this principle, taxes should be so designed as to cause the smallest possible real burden or the smallest possible sacrifice to the community. The tax which each individual is bound to pay ought to be certain, and not arbitrary. No tax is ideal, but taxes are inevitable if the government is to obtain revenue to pay for its expenditure. This characteristic of public goods goes by the name ‘free riders’. D. There is generally no … A short summary of this paper. In The Wealth of Nations (1776), Adam Smith argued that taxation should follow the four principles of fairness, certainty, convenience and efficiency. Taxes are proportional in character, since taxes are based on one’s ability to … It comes to us a surprise that economists have been mostly concerned with the latter, while public discussions about tax proposals always focus on the former. The early dissenters believed that equity should be measured by what is spent (i.e., consumption) rather than by what is earned (i.e., income); modern advocates of consumption-based taxation emphasize the neutrality of consumption-based taxes toward saving (income taxes discriminate against saving), the simplicity of consumption-based taxes, and the superiority of consumption as a measure of an individual’s ability to pay over a lifetime. If taxes are imposed on the basis of the ability to pay principle, higher taxes will be paid by those with greater ability to pay, as measured by income and/or wealth. The system of taxation should be spread across a broadest possible population, so that no one person or entity is taxed excessively. Minimum costs of collections and compliance, consistent with effective enforcement: The rule requires that taxes be established in such a manner as to minimise the real costs of collections, in terms of resources required as in terms of the direct inconvenience caused to the taxpayers. The ability-to-pay principle also is commonly interpreted as requiring that direct personal taxes have a progressive rate structure, although there is no way of demonstrating that any particular degree of progressivity is the right one. It is the process or means by which the sovereign, through its lawmaking body, raises income to defray the necessary expenses of the government. One may have some productive wealth like a building which yields a steady income. This concept has been translated into the ability to pay principle, according to which those most able to pay should pay the maximum amount of taxes. TOS4. Adam Smith developed his four famous canons of taxation: The amount payable by taxpayers should be equal, by which he meant proportional to income; The taxpayer should know for certain how much he will have to pay; Taxes should not be imposed if their cost of collection is excessive. He advocated an expenditure tax which was tried in India for sometime but withdrawn subsequently. supreme court’s final judgement in all tax cases the power of judicial review in taxation is limited only to the interpretation and application of tax laws. The most basic function of taxation is to fund government expenditures. First, the public sector provides numerous public goods, and the cost of obtaining enough information to permit levying appropriately different taxes may be very high. This paper. Notes Quiz CBE. and efficiency (Does the tax interfere unduly with the workings of the market economy?) We may, therefore, start with the concept of equitable taxation: There are three distinct concepts of tax equity. According to Pigou, the burden of taxation is to be distributed among the people in such a way that the aggregate sacrifice of the community for paying taxes should be the least, i.e., the minimum. But none is full-proof. the process or means by which the taxing power is exercised. Plan 2 is a proportional tax; every family pays 10% of its income. If a tax fails to meet these principles or rules, then it is considered a bad tax system. In this context, equity means that the taxes people or organizations have to pay should be … principles of taxation mia-m • definition of taxation • underlying basis of taxation • purposes of taxation • nature of the power to tax • aspects of taxation • attributes of a sound tax system • definition of taxes • characteristics of taxes • taxation vs. other fundamental powers • taxes vs. other exactions • tax … Other things being equal, progressive taxes are seen as ‘good’ taxes in some ethical sense while regressive taxes are seen as -bad’. When a publicly provided service is non-rival and nonexclusive (a pure public good) the benefit principle is just a theoretical concept because the benefits cannot be measured. dublin: published for the society by hodges and smith, 104, grafton street, 1851. Examples include road tax, toll tax and transit fees. Most people will enjoy the benefits of public expenditure but will be reluctant to pay taxes. These principles of taxation are basically the rules that govern taxation. C. Operates upon the whole citizenry. This precept is known as vertical equity. 3. Every tax ought to be so contrived as both to take out and 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.…. ATENEO CENTRAL BAR OPERATIONS 2007 Taxation Law SUMMER REVIEWER PART I – GENERAL PRINCIPLES TAXATION – power inherent in every sovereign State to impose a charge or burden upon persons, properties, or rights to raise revenues for the use and support of the government to enable it to discharge its appropriate functions SCOPE OF TAXATION TAXATION IS: Unlimited, Far-reaching, … In essence, taxation is voluntary. Before publishing your Articles on this site, please read the following pages: 1. But other objectives are also important in the design of a tax system. There is hardly any controversy about this principle. Although they need to be reinterpreted from time to time, these principles retain remarkable relevance. Be on the lookout for your Britannica newsletter to get trusted stories delivered right to your inbox. Download Full PDF Package. Maybe exercised only by the government. In practice this equality principle is often disregarded, both intentionally and unintentionally. One of the characteristics of internal revenue laws is that they are: a. Welcome to EconomicsDiscussion.net! Early Attempts at Income Taxation: 101: The Present Income Tax Law: 102: Introduction – General Principles – Definitions: 103: Classification of Taxpayers: 104: Purpose of the Income Tax Return – Withholding and Estimated Tax: 105: a paper read before the dublin statistical society: 18th november, 1850. by w. neilson hancock, lld. general. A practical problem arises when we try to translate the idea (or notion) into practice. What follows is a discussion of some of the leading principles that can shape decisions about taxation. Broadly, the principle suggests that the fairest tax is one based on one’s financial ability to support governmental activities through tax payments. But this principle is difficult to apply in reality since, under this principle, lower income groups would be called upon to pay most. (4) A distribution of income in conformity with the standards of equity currently accepted by society. In practice, the policy of a government can hardly be based solely on any of the above principles. In general, it is said that the tax incidence falls upon capital, labour and/or consumption. In this article we will discuss about the principles of taxation. Share Your PPT File, Public Good and Private Good: Difference | Economics. The following are the most important principles of taxation: Prima facie, a tax system should be designed to be neutral, i.e., it should disturb the market forces as little as possible, unless there is a good reason to the contrary. Sometimes it becomes essential to maintain non-neutrality for meeting certain social objectives. PLAY. B. Legislative in character - only the legislature can impose taxes. According to Prof. N. Kaldor, expenditure is the best possible measure of ability. Spell. All work do not involve the same sacrifice. [Vera v. Fernandez, L-31364, March,30, 1979]. – Not unduly burdensome upon or discouraging to business activity 14. A tax is a compulsory payment made by individuals and companies to the government on the basis of certain well-established rules or criteria such as income earned, property owned, capital gains made or expenditure incurred (money spent) on domestic and imported articles. Taxes are levied in almost every country of the world, primarily to raise revenue for government expenditures, although they serve other purposes as well. Disclaimer Copyright, Share Your Knowledge
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