The principles of a good tax system were first explained in a book published by Adam Smith in 1776. These principles have stood the test of time and are still useful for an effective and efficient tax system. In this article, you will learn these six principles and how it applies to a tax system.
A good tax system must be equitable. It is based on the equality of the taxpayer. By equality, it means the ability of the individual taxpayer to pay taxes. All humans are not equal. Some are very wealthy, others are poor. The tax system should be designed in such a way that the wealthy class pays more while the poor class pays less.
A good example of this is the PAYE (Pay As You Earn) tax. It has a different percentage charged for various ranges of income (salary) of the taxpayer.
This is another important canon of a good tax system. A tax system must be certain in the manner of calculation and mode of payment. Every taxpayer should have assessed how taxes are calculated.
To achieve this, the government can use the media to enlighten taxpayers on how tax is computed and explanations of various aspects of the tax law.
Also, the date of payment of each tax type should be fixed on a particular date. In Nigeria, the date for paying value-added tax, PAYE, withholding tax, company income tax among others are fixed on a particular date of the month.
Paying taxes should not be tedious to the taxpayer. To achieve this, the state government has set up tax offices in all local government areas of the state. Also, the federal government had established tax offices in each state. This will enable the taxpayer to make payment of taxes on due dates.
Technology has made payment of taxes more convenient. With financial technology, taxes can be paid via debit cards through the tax authority website.
The tax administration should be organized in a way that will be trusted by the individual and corporate taxpayers.
Also, an effective administration means that nobody can claim to be from the tax authority, when he is not, with the aim of defrauding the taxpayer.
This stems from administrative efficiency. A productive tax system implies that the cost of operating a tax system should not outweigh the benefits of such a tax system. If running a tax system in a country worth 10 billion Naira and the benefits of tax revenue generated by the government is 6 billion Naira, then, it can be said that the tax system is not productive.
Simplicity and flexibility
A good tax system should be easy to understand by a knowledgeable taxpayer. Also, the calculation of such a tax should be simple to calculate. A complex computation of tax, especially with petroleum profit tax, must be adjusted and made simply to calculate.
Also, a tax system must be flexible. The government should easily make adjustments to the tax law without changing the entire tax law. The finance Act of 2019 is a good example of a flexible tax system. The federal government of Nigeria was able to make certain changes with the tax law through the finance bill without changing the entire tax law.
To wrap it up, a good tax system must comply with Adam Smith principles or canons of taxation. Thereby making it easy for both the taxpayers and the tax authorities.