These objectives can be secured by providing tax incentives. Sometimes it becomes essential to maintain non-neutrality for meeting certain social objectives. The tax system must, therefore, seek to achieve neutrality, by minimising the disturbance to the market that comes from taxation. Since the government is under compulsion to collect taxes, it is not possible to guarantee complete neutrality. In fact, every tax provides an incentive to do something to avoid it. 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.Īs a general rule, people do not like tax payment. The amount payable by taxpayers should be equal, by which he meant proportional to income
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.Īdam Smith developed his four famous canons of taxation: In fact, different writers have formulated the different theories, at different times, relating to the equitable distribution of the burden of taxation among the people. 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. Minimum costs of collections and compliance, consistent with effective enforcement: The distribution of burden of the tax must conform with the pattern of income distribution regarded as the optimum by the consensus of opinion in a modern society.ģ. The tax structure must be established in such a way as to avoid interference with the attainment of the optimum. The government tries to satisfy most taxpayers by ensuring that taxes are fair and reasonable. No tax is ideal, but taxes are inevitable if the government is to obtain revenue to pay for its expenditure. Furthermore, if the goals of society are to be realised, the burden of the taxes must be distributed among various persons in a manner consistent with these goals. 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. The taxpayers are required to make certain payments, regardless of their individual wishes or desires in the matter. Since many people object to paying taxes, taxation involves compulsion. 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. The most important source of government revenue is tax. In this article we will discuss about the principles of taxation.
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