general principles of taxation

Yet they have different distributive consequences. 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. General Principles Federal Tax Course – Lesson 1. The tax which each individual is bound to pay ought to be certain, and not arbitrary. mary3sha. The President has the authority to fix tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts.III. Let us consider, for example, the personal income tax. In fact the necessity for different taxes generally makes benefit taxation somewhat impractical for pure public goods. According to the benefit principle of taxation those who reap the benefits from government services should pay the taxes. Indirect taxes such as VAT, excise, sales, or turnover taxes can be adapted to the ability-to-pay criterion, but only to a limited extent—for example, by exempting necessities such as food or by differentiating tax rates according to “urgency of need.” Such policies are generally not very effective; moreover, they distort consumer purchasing patterns, and their complexity often makes them difficult to institute. 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: 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. Syllabus D1c) Understand the general principles of the operation of a sales tax. In The Wealth of Nations (Book V, chapter 2) he set down four general canons: I. 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. By equality is meant equality of sacrifice, that is people should pay taxes in proportion to their incomes. Likewise, a tax on cigarettes will serve a two-fold purpose: raising revenue and dis­couraging consumption of this harmful item. A poor man may spend more if he has more dependants and if he has to look after his old parents. Various principles, political pressures, and goals can direct a government’s tax policy. Secondly, the application of this principle requires the poor to pay taxes at higher rates than the rich as the government generally spends more for the poor than for the rich. In practice, the policy of a government can hardly be based solely on any of the above principles. Taxes should be based on an individual’s ability to pay. But other objectives are also important in the design of a tax system. Most people will enjoy the benefits of public expenditure but will be reluctant to pay taxes. Early taxes were used to … In practice this equality principle is often disregarded, both intentionally and unintentionally. Examples include road tax, toll tax and transit fees. A practical problem arises when we try to translate the idea (or notion) into practice. A few other principles of taxation have also been suggested from time to time such as the following: The Cost of Service Principle: According to this principle, the tax to be paid by an individual should be equal to the cost of services incurred by the government in rendering the service to him. 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. General Principles of Taxation. Key Concepts: Terms in this set (27) Taxation. and efficiency (Does the tax interfere unduly with the workings of the market economy?) By signing up for this email, you are agreeing to news, offers, and information from Encyclopaedia Britannica. 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. If taxes are imposed according to the benefit principle, people pay taxes in proportion to the benefits they receive from government spending. Fairness, in that taxation should be compatible with taxpayers’ conditions, including their ability to pay in line with personal and family needs. 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)? The most basic function of taxation is to fund government expenditures. 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.…. Police Power - to enact laws in relation to persons and property as may promote public health, safety, morals, and general … Two basic indices (measures) of the ability to pay, viz., income and wealth provide a justification for progressive personal taxes. 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 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. On these grounds, advocates of greater equality of income support progressive income taxes and oppose sales taxes. So, all these plans may be said to be operate on the ability to pay principle of taxation. Taxation principles are the guidelines that a governing entity should use when devising a system of taxation. In The Wealth of Nations (Book V, chapter 2) he set down four general canons: Although they need to be reinterpreted from time to time, these principles retain remarkable relevance. Taxation, imposition of compulsory levies on individuals or entities by governments. According to Prof. N. Kaldor, expenditure is the best possible measure of ability. 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 subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.…, II. Naturally, their ability to pay taxes will differ greatly. The principle of taxation can be chosen only in terms of the goals which are accepted as the appro­priate objectives of the economic system. The measures of ability differ from tax to tax. PLAY. 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 tax system must, therefore, seek to achieve neutrality, by minimising the disturbance to the market that comes from taxation. 8 Full PDFs related to this paper. But here also some difficulties are encountered. Taxation Law 1 Reviewer.doc - Free download as Word Doc (.doc), PDF File (.pdf), Text File (.txt) or read online for free. As to who bears the burden • Direct tax – tax that is demanded from the person who also shoulders the burden of the tax. It is higher to a man with lower income and vice versa. Because a considerable part of the population does not pay certain direct taxes—such as income or inheritance taxes—some tax theorists believe that a satisfactory redistribution can only be achieved when such taxes are supplemented by direct income transfers or negative income taxes (or refundable credits). Receipts from road taxes typically are set aside for maintenance and construction of roads. Horizontal equity calls for two families in the same income to pay the same tax. It is the process or means by which the sovereign, through its lawmaking body, raises income to defray the necessary expenses of the government. The tax which each individual is bound to pay ought to be certain, and not arbitrary. – Not unduly burdensome upon or discouraging to business activity 14. Although they need to be reinterpreted from time to time, these principles retain remarkable relevance. 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. Similar and equally impracticable is the cost of service principle, according to which a person’s tax liability would be based on the cost of the public services which he enjoys. Intentional violations are usually motivated more by politics than by sound economic policy (e.g., the tax advantages granted to farmers, home owners, or members of the middle class in general; the exclusion of interest on government securities). 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 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. Some taxpayers might assert that they want little or none of the public good (like a road, or a public park or a bridge) in question. But this principle is difficult to apply in reality since, under this principle, lower income groups would be called upon to pay most. In The Wealth of Nations (1776), Adam Smith argued that taxation should follow the four principles of fairness, certainty, convenience and efficiency. A short summary of this paper. Content Guidelines 2. Economics, Principles of Taxation, Taxation. In both the cases, the market is disturbed but in a desirable way. Write. When a good or service supplied by the government has the exclusive and rival characteristics of a private good, benefits can be computed rather easily and users can be charged accordingly. 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. (e.g. Reciprocal Duties - (Benefits-Received or Compensation Theory) In return for the contribution of the taxpayer, he receives the general advantages and protection which the government affords the taxpayer and his property. ferdinand pauig. For a tax system to be considered good, the tax system must meet the rules governing it. The taxpayers are required to make certain payments, regardless of their individual wishes or desires in the matter. The time and manner of payment and the sums to be paid ought to be plain to the contributors and everybody else. TOS4. The first is horizontal equity. It is the act of laying a tax, i.e. 72-73) Equity. For example, if capital were more mobile than labour and the market is a highly competitive 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. However, using the benefit principle has several practical difficulties that render it impossible to apply it for many publicly supplied goods and services. 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. (1 Cooley on Taxation. Thus, those who drive on the roads pay the tax. 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. The principles of a sound tax system are the following: a. Taxes are obligations created by law. Thus, horizontal equity suggests that people who are equal should pay equal taxes: vertical equity suggest that, un-equals should be treated un­equally. a paper read before the dublin statistical society: 18th november, 1850. by w. neilson hancock, lld. C. Operates upon the whole citizenry. These objectives can be secured by providing tax incentives. This precept is known as vertical equity. Taxation is a mode of raising revenue for public purpose. If the objective of the government is to redistribute income, it should set taxes according to the ability-to-pay principle. 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 power of taxation is peculiarly and exclusively exercised by the legislature.II. These principles include the following: Broad application. Therefore, those who derive the maxi­mum benefits from government services such as roads, hospitals, public schools and colleges should pay the maximum tax. So, they should receive subsidies from the government. Input and Output Tax. Other things being equal, progressive taxes are seen as ‘good’ taxes in some ethical sense while regressive taxes are seen as -bad’. One with the same level of income as another may have more dependents and more liability and thus lower ability to pay. Taxation involves compulsion. 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. Debate over tax reform has often centred on whether deviations from “equal treatment of equals” are justified. So, in the ultimate analysis, income is not a good test of ability. A man earning Rs.500 through toil and trouble will not be a position to pay taxes as one earning the same amount without any effort (from paternal property) or gambling or through chance (lottery). The most suitable taxes from this standpoint are personal levies (income, net worth, consumption, and inheritance taxes). Let us suppose taxes are based on one’s reported assessment of the benefits one receives from the good. But none is full-proof. Taxes are proportional in character, since taxes are based on one’s ability to … The latter is determined by (a) income or wealth and (b) personal circumstances. Taxation - Taxation - Principles of taxation: The 18th-century economist and philosopher Adam Smith attempted to systematize the rules that should govern a rational system of taxation. Income is said to be a better measure of ability than wealth. Throughout much of the 20th century, prevailing opinion held that the distribution of the tax burden among individuals should reduce the income disparities that naturally result from the market economy; this view was the complete contrary of the 19th-century liberal view that the distribution of income ought to be left alone. But what if one family has eight children and the other has none? Since the government is under compulsion to collect taxes, it is not possible to guarantee complete neutrality. The principle also leads to an economically efficient solution to the questions of how much government should provide and who should pay for it. 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. 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. Fiscal adequacy means the sources of revenue must be sufficient to meet government expenditures and other public needs. The most important source of government revenue is tax. So, it is not possible to implement the principle in practice. Fiscal adequacy which means that the sources of revenue should be sufficient to meet the demands of public expenditures; b. How­ever, the modern system of progressive personal income tax seems to be based on the notion of vertical equity. So, the cost of services incurred for different individuals cannot be separately calculated. The benefit principle holds that people should be taxed in proportion to the benefits they receive from goods and services provided by the government. Thus, if the government spends Rs 50 for providing a particular service to A, he should pay a tax of Rs 50. dublin: published for the society by hodges and smith, 104, grafton street, 1851. general principles of taxation. Plan 1 is a progressive tax: the average tax rate is higher for richer families. Gravity. The second concept of fair taxation follows logically from the first. Taxation as distinguished from police power and power of eminent domain. 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. General Principles of Taxation. 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. One of the characteristics of internal revenue laws is that they are: a. Once other people agree to buy some of the public good, free riders are able to enjoy the good or service. Varying justifications and explanations for taxes have been offered throughout history. A good tax system follows the four principles of taxation. So, his expenditure may be higher than his colleague belonging to the same income bracket. Before publishing your Articles on this site, please read the following pages: 1. In general, it is said that the tax incidence falls upon capital, labour and/or consumption. However, progressivity in taxation is not necessary for vertical equity. Download Full PDF Package. But his expenditure does not reflect his true ability to pay. its power does b. Sometimes it becomes essential to maintain non-neutrality for meeting certain social objectives. From the conceptual and practical points of view there is hardly any conflict between the principles of horizontal and vertical equity. In this article we will discuss about the principles of taxation. Plan 2 is a proportional tax; every family pays 10% of its income. In fact, every tax provides an incentive to do something to avoid it. The system of taxation should be spread across a broadest possible population, so that no one person or entity is taxed excessively. The principle can be applied in the case of government services like railways, postal services, etc. One clear example is road tax. Clever people might even assert that they are harmed by the public good. Therefore, it is important for the tax system to be fair. General Principles of Taxation - Chapter 1 (Ampongan) STUDY. Notes Quiz CBE. Taxes are never founded on contract or agreement, and are not dependent for their validity upon the individual consent of the person taxed. At different times, certain principles of taxation have been suggested on the basis of Smith’s four basic canons. GENERAL PRINCIPLES OF TAXATION Inherent Powers of the State 1. More specifically, persons of equal income should pay iden­tical amounts in taxes. [Vera v. Fernandez, L-31364, March,30, 1979]. 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 PPT File, Public Good and Private Good: Difference | Economics. This paper. general. If a tax fails to meet these principles or rules, then it is considered a bad tax system. Richard Musgrave has argued that taxes are to be judged on two main criteria: equity (Is the tax fair?) TAXATION is the inherent power by which the sovereign, through its law-making body, raises revenue to defray the necessary expenses of … Created by. The principle recognises that the purpose of taxation is to pay for government services. pdf Download PDF. But it is very difficult to apply the concept in practice. Privacy Policy3. Test. Ring in the new year with a Britannica Membership, Proportional, progressive, and regressive taxes. Our mission is to provide an online platform to help students to discuss anything and everything about Economics. First, when the government spends some money for the people at large, it does so in a general way. Learn. 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. There are, in general, three measures of ability: income, expenditure and property. This principle points to progressive taxation. 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