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Principles Of Sound Tax Policy

August 24, 2023
Bill Kimball

For example, property taxes grow predictably—but tend to grow more slowly than the cost of the services that governments provide. Elasticity is a measure of whether the growth in tax revenues keeps up with the economy—an important consideration because the cost of providing public services usually grows at least as fast as the economy. An elastic tax system is one that grows faster than the economy during good times, and falls faster than the economy during bad times. Over the course of the business cycle, elastic taxes like the personal income tax help to ensure adequate revenue streams. The principle of neutrality (sometimes called “efficiency”) tells us that a tax system should stay out of the way of economic decisions. Tax policies that systematically favor one kind of economic activity or another can lead to the misallocation of resources, or worse, to schemes whose sole aim is to exploit such preferential tax treatment. State and local governments should not use tax policy to create “winners and losers” by promoting one sector of the economy ahead of another or by favoring one type of income over another.

  • For example, in 2020 individuals in the United States with taxable income less than $9,875 faced a 10% income tax rate, while those with taxable income of more than $518,000 faced a rate of 37%, the nation’s top individual rate.
  • Individuals spent2.6 billion hourscomplying with IRS tax filing requirements in 2016.
  • This concept is based on the assumption that individuals at similar levels should have the same tax obligation.
  • In many ways, the requirement that the tax system should be efficient stems from the notion that markets are self-correcting and perfect.
  • An effective tax system should be broad-based, utilize a low overall tax rate with few loopholes, and avoid multiple layers of taxation through tax pyramiding.
  • Effective competitiveness is best achieved through economically neutral tax policies.

The basic reason is the lawmakers consider their duty to uplift the poor and weaker sections of the society compared to the privileged ones. Hence more often than not, you would see farmers, homemakers getting relaxed reforms compared to the middle class and service class.

This book is essential reading for students taking a first course in taxation, at the undergraduate or graduate level, as part of programs in accounting, law, public administration, or business at large. Taxation is a discipline that does not receive sufficient academic attention. It is typically viewed as a subset of law, accounting, public policy, economics, or finance.

Even the most pro-growth policies can have muted effects when implemented on a temporary basis. That’s because businesses make investment decisions by looking far into the future—much further than five years. The possibility that taxes on investment may increase in the near future will make businesses less likely to pursue big, long-term projects that often require years of sustained investment. Conversely, one of the advantages of a broad-based consumption tax is its stability. All tax revenue is subject to economic cycles and changing taxpayer behavior, but broad-based consumption taxes experience considerably less volatility than taxes that target a narrow tax base, such as cigarette use.


Frequent changes to tax laws can result in reduced compliance or in behaviour that attempts to compensate for probable future changes in the tax code—such as stockpiling liquor in advance of an increased tariff on alcoholic beverages. Various principles, political pressures, and goals can direct a government’s tax policy.

What are the principles and canons of taxation?

In this sense, his canons of taxation are ‘classical’ in sense, four canons of taxation are: (i) Canon of equality or equity (ii) Canon of certainty (iii) Canon of economy (iv) Canon of convenience.

Also, conflicts in choosing methods and forms of taxation occur, pitting priorities such as reducing iniquity of income against maximizing incentive for economic growth. Taxes can also help to structure all sort of economic transactions, in a way that the state can exert influence in all participants even over the currency used. Ability-to-pay taxation argues that those who earn higher incomes should pay a greater percentage of those incomes in taxes compared with those who earn less. For example, in 2020 individuals in the United States with taxable income less than $9,875 faced a 10% income tax rate, while those with taxable income of more than $518,000 faced a rate of 37%, the nation’s top individual rate. Earnings between those amounts face tax rates as set by income brackets.

The Benefit Principle

The former editor of Consumer Reports, she is an expert in credit and debt, retirement planning, home ownership, employment issues, and insurance. She is a graduate of Bryn Mawr College (A.B., history) and has an MFA in creative nonfiction from Bennington College. Full insight into the often detailed and always complex principles governing state tax law, compliance, and planning. While framing tax structure, the regulating body should ensure that these are managed with the utmost accounting framework and liabilities. These should be crystal clear without any ambiguity, should be stable for the economy and society in general, cost-effective, and convenient.

Janet Berry-Johnson is a CPA with 10 years of experience in public accounting and writes about income taxes and small business accounting. If the taxation rules are not clear or have too many twists and turns, it would be difficult for the common public to understand them. And even if they do understand them, they might not be able to take its full advantage and may end up calculating the wrong tax on their own. There can be a difference in tax liability and tax payable as common people might not be able to take advantage of various tax-saving opportunities. They might have to reach out to tax experts to seek guidance, which would have an economic cost of its own. To help evaluate changes in tax rules, the AICPA developed a framework of 10 guiding principles of good tax policy. Tax code complexity can create real costs for taxpayers in the form of compliance burdens.


Two factors that contribute to the adequacy of a tax are its stability and elasticity. Predictable growth makes it easier for lawmakers to put together budgets that match anticipated revenues to spending.

In this respect, most academic efforts in the field of taxation are shadowed by a mother discipline. There is currently an unprecedented need to approach tax pedagogy in a way that is independent of another discipline.

Taxation Principles

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Concept Of Horizontal EquityHorizontal equity is a tax treatment that a particular class of individuals who earn the same income should also pay the same income tax. There should be no discrimination between any two persons regarding their savings, expenditure, and deductions claimed but should be leviable with the same income tax.

Direct And Indirect Taxation

Tax rules should clearly specify when and how a tax is to be paid and how the amount will be determined. Certainty may be viewed as the level of confidence a person has that a tax is being calculated correctly. Permanent tax policies promote stability and, in turn, lead to more pronounced economic effects than temporary policies.

Taxation Principles

It should provide certainty of financial planning for individuals and businesses. Equity and Fairness – The government should not use the tax system to pick winners and losers in society, or unfairly shift the tax burden onto one class of citizens. The tax system should not be used to punish success or to “soak the rich,” engage in discriminatory or multiple taxation, nor should it be used to bestow special favors on any particular group of taxpayers. Taxes and tax policy should be visible and not hidden from taxpayers. Changes in tax policy should be highly publicized and open to public debate. The fundamental principles presented here provide guidance for a neutral and effective tax system; one that raises needed revenue for core functions of government, while minimizing the burden on citizens.

Alec Principles Of Taxation

Very high income earners may spend a lower proportion of their income on goods and services, and so pay proportionally a fewer taxes as a percentage of their income. Means that taxes must provide enough revenue to meet the basic needs of society. Simplicity – The tax code should be easy for the average citizen to understand, and it should minimize the cost of complying with the tax laws.

Without a proper taxation structure, economies may crumble as there will be no capital to improve infrastructure, which can have catastrophic effects on the economy. A tax system should enable the government to determine how much tax revenue it likely will collect and when—that is, the system should have some level of predictability and reliability. A tax system should not impede productivity but should be aligned with the taxing jurisdiction’s economic goals.

These factors become more of a threshold rather than just a guiding principle in developing markets compared to developed ones. This is because of illiteracy, lack of proper channels to resolve ambiguities, and also prevalent administrative challenges. However, a balance must be struck between the desired level of compliance and the tax system’s costs of enforcement and level of intrusiveness. Taxpayers should be able to understand the rules and comply with them correctly and in a cost-efficient manner. A simple tax system better enables taxpayers to understand the tax consequences of their actual and planned transactions, reduces errors and increases respect for that system. Governments should avoid enacting temporary tax laws, including tax holidays, amnesties, and retroactive changes, and strive to establish stable revenue sources.

However, an important argument here is that the individual tax bearing capacity should be deduced not based on what he earns but based on what he spends or consumes. Whatever may be the thinking process, but the ability to pay weighs heavily on equal distribution guidelines, and that’s why we see a slab based structure for income tax calculation. Taxation is principal method by which a government gains revenue into its budget. That revenue goes into a vast number of items, from paying debt, deafening the potential for implementing certain policies to paying for public services and welfare benefits and the military, etc. There are many methods by which tax revenue can be gained, and different definitions and structures to taxation which are outlined below.

Suellen Wolfe is engaged in the private practice of law in Pennsylvania where she is also licensed as a certified Public Accountant. Ms. Wolfe has taught as a visiting professor at law schools throughout the United States. EBooks, CDs, downloadable content, and software purchases are non-cancellable, nonrefundable and nonreturnable. The eBook versions of this title may feature links to Lexis+™ for further legal research options. The tax law’s effect on a taxpayer’s decision whether or how to carry out a particular transaction should be kept to a minimum. A tax system’s primary purpose is to raise revenue, not change behavior.

  • And even if they do understand them, they might not be able to take its full advantage and may end up calculating the wrong tax on their own.
  • She has published numerous articles in the Journal of Taxation, The Tax Adviser, and the Journal of the American Taxation Association.
  • EBooks, CDs, downloadable content, and software purchases are non-cancellable, nonrefundable and nonreturnable.
  • Preferential tax credits and exemptions like those offered for purchasingelectric vehicles, buildingsports arenas, or evenfilming movies in certain jurisdictions, do just that—they promote certain industries and activities over others.
  • Some of these changes are minor while others may involve major substantive changes .
  • The supporters of this option empathize on the guiding principle -The ability to pay.

At the end of the day, adequacy is what separates successful tax systems from unsuccessful tax systems. Of course, at any given time, the primary concern for state lawmakers is short-term adequacy – making sure there’s enough revenue to fund public services in the upcoming fiscal year.

■ Proportional or flat tax systems take the same share of income from all families. Well, no second thought that taxation is one of the primary sources for the government to raise revenues, ensuring its expenditure is met. However, one should not underestimate its importance in bringing equality and upliftment of the weaker sections of the society.

A traditional retail sales tax, on the other hand, is only added to the final price of a good or service and is usually clearly delineated at the bottom of a receipt or invoice. Orders within the United States are shipped via Fedex or UPS Ground. For shipments to locations outside of the U.S., only standard shipping is available. All shipping options assumes the product is available and that it will take 24 to 48 hours to process your order prior to shipping. McGraw-Hill sites may contain links to websites owned and operated by third parties. These links are provided as supplementary materials, and for learners’ information and convenience only.

Though the taxation system at large is focused on increasing the revenue of the government, it can also be used to revive the economy. Public expenditure tends to increase as the economy grows or more quantifiably as the GDP numbers grow. Taxation is the only mechanism that makes sure the revenues of the lawmakers increase proportionately. This growth is indispensable as to maintain the economic growth, the government must spend on infrastructure which acts as a foundation on which economic growth survives.

What are the 12 types of taxes?

Learn about 12 specific taxes, four within each main category—earn: individual income taxes, corporate income taxes, payroll taxes, and capital gains taxes; buy: sales taxes, gross receipts taxes, value-added taxes, and excise taxes; and own: property taxes, tangible personal property taxes, estate and inheritance …

Payment of taxes should cause taxpayers as little inconvenience as possible, subject to the limitations of higher-ranking tax principles. Governments often allow the payment of large tax liabilities in installments and set generous time limits for completing returns. Under the benefit principle, taxes are seen as serving a function similar to that of prices in private transactions; that is, they help determine what activities the government will undertake and who will pay for them. If this principle could be implemented, the allocation of resources through the public sector would respond directly to consumer wishes.

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