Principles of a Sound Tax System

According to Mrs. Hicks, a sound tax system should have the following characteristics:

  1. It should facilitate financing of public services.
  2. Tax, should be levied according to the ability of the people, the index of ability being income and family circumstances and
  3. Similarly placed persons should pay similar taxes to avoid any discrimination.

From the discussion above, we may lay down the following four broad characteristics as the principles of a sound tax system.

  1. Equality in Tax Burdens: This principle suggests that when the taxes are levied they ensure equality in tax burdens. In other words, through taxes the government can ensure that the tax burden is spread in such a way that persons who are placed in similar positions are made to bear the same burden of taxes. This implies that people who are better-off should bear more tax burden than those who are worse-off. Though this principle is universal, yet in the implementation of this principle problem like indicators of equality, effectiveness in practice, the method of achieving this equality, etc., will all be faced.
  2. Productivity: With the ever increasing responsibility of modern welfare state, the need for financial resources is always felt. As the modern governments spend huge amounts of money on public projects to maintain high level of public welfare, they have to raise enormous funds through taxation. Unless taxes are productive, the governments will find it difficult to implement public projects. Especially in a developing country, taxes are to be highly productive so that country can achieve growth with stability. Apart from being productive, taxes should also be flexible and ensure regular inflow of funds for the government. This implies that taxes, should not only fetch regular flow of revenue, but this flow should increase on decrease depending upon the circumstances. Of course, the productivity of taxes is a relative term and it depends on several factors such as tax base, rate of tax, the exemptions and concessions granted, the efficiency of collection, the tax payers psychology, etc. Hence, the fiscal authorities should design the tax system in such a way at each tax levied is productive and flexible.
  3. Recognition of the Rights and Problems of the Tax Payers: Government should not be aiming merely at high revenue through taxes. While designing the tax system, it should take into account the various problems and difficulties of the common public so that the taxes imposed will be successfully implemented. The government should also recognize the rights of the tax paying public. The tax system should be such that the public are able to easily pay the tax with minimum inconvenience and their complaints and grievances are sympathetically heard and redressed. No tax system can bring the expected revenue unless the tax paying public understands the purpose of the tax and cooperate with the tax administrators. Hence, the government should make the tax laws simple and comprehensible and the collection procedure simple. Tax payment should be a pleasure and must not irritate the public. The tax administrators should be tactful, courteous, remain impartial and be alert all the time to avoid any evasion and avoidance. A system to enquire into the grievance of the tax paying public should also be formulated so that the public will have a way of settling their problems and difficulties in paying taxes. Only when the administrators are understanding and sympathetic, the morale of the tax payers will be high and the tax system will function smoothly.
  4. Adaptability of the Tax Structure: The tax system evolved should be such that it matches well with the prevailing situation, in a developing country, the burden of tax should not be very heavy as this will directly affect the morale of the tax payers. At the same time the government should also raise adequate revenue to meet its mounting public welfare expenditure. The best tax structure is one which can be modified suitably with changes in economy.