After reading this article you will learn about the characteristics and views about the sound tax system.
Characteristics of a Good Tax System:
Any system of taxation must be looked at as a whole. That is part of the economic system. Different taxes possess different effects upon the various economic activities.
Moreover, these taxes through their effects correct and balance one another. Usually a given quantity of revenue is raised by taxation.
Accordingly alternative tax systems will result in alternative distribution of burden of taxation. It is very difficult to achieve the manifold objectives of taxation.
Edmund Burke has rightly remarked “it is difficult to tax and to please as it is to love and to be wise”. Basically a sound tax system should satisfy all the professed canons of taxation. It should be able to generate sufficient revenue, fulfill the socio-economic objectives, would not hamper the productive system of the economy, to become an ideal one.
The characteristics of a good tax system are as follows:
(1) A good tax system should be fine-tuned to achieve the basic objective of maximum social advantage
(2) A good tax system should involve only minimum aggregate sacrifice
(3) The distribution of tax burden should be equitable. Everyone should be made to pay his fair share. However, care should be taken to ensure that equity objective will not hamper productive efficiency
(4) Tax structure should facilitate the use of fiscal policy for stabilization and growth objectives. There should be built-in flexibility in the tax structure of both developed and developing countries to ensure stability and to promote economic growth
(5) The tax system should have the merits of simplicity, flexibility and diversity. This is needed for the effective implementation of different tax measures
(6) Dalton suggests that “a good tax system should rely on a few substantial taxes for the bulk of the tax revenue”. This is needed to promote administrative efficiency in tax system
(7) A good tax structure should possess a balanced tax system. There should exist a number of taxes to cover the different class of people. The tax canvas should be wider enough to touch the entire population engaged in different economic activities.
Views on Sound Tax System:
1. Modern View on Sound Tax System:
Many modern workers have multiplied the requirements of a sound tax system. Usually it is agreed that a sound tax system should be based upon the principle of progression. Proportional and regressive taxation should be avoided as far as possible.
A well-known modern writer on public finance Mrs. Ursula Hicks emphasized three basic characteristics of a good tax system:
(1) Taxation should be used to finance public services.
(2) The general public should be taxed according to their ability to pay which in turn will depend upon their income and family circumstances.
(3) Taxes should be universal in the sense that persons in the same financial position should be treated in the same way without any discrimination of any kind.
Apart from this, a sound tax system should safeguard the interest of the taxpayers. The tax system should be so devised that the sources of irritation and resentment may be reduced to the minimum.
In order to maintain tax payer’s morale and to ensure efficient administration, the fair disposal of the complaints of tax payers is an important requirement with any tax system.
2. Musgrave’s View:
Professors R.A. Musgrave and PB. Musgrave put forward the following requirements for a good tax structure in their discussion on equity rules and the good tax system:
(1) The distribution of the tax burden should be equitable. Everyone should be made to pay his fair share. In a sense it means realization of horizontal and vertical equity in the distribution of tax burden
(2) Taxes should he chosen so as to minimize interference with economic decisions in efficient markets. The imposition of excess burden should be minimized
(3) At the same time, taxes may be used to correct inefficiencies in the private sector, provided they are a suitable instrument to do so
(4) Tax structure should facilitate the use of fiscal policy for stabilization and growth objectives
(5) The Tax system should permit the efficient and non-arbitrary administration. Moreover, it should be understandable to the taxpayer
(6) Administrative and compliance cost should be as low as is compatible with the other objectives
According to Musgrave, these and other requirements may be used as criteria to appraise the quality of a tax structure.
The Various objectives are not necessarily in agreement. For example, equity principle requires administrative complexity. But this may interfere with neutrality objective. Hence where these objectives conflict with each other trade-off between them are needed.
Therefore, it can be fairly concluded that a good tax system is one which strengthens the confidence in the fiscal basis of the state, designed to meet the requirements of equity, efficiency and convenience and simultaneously encourage community productive efforts and promote social welfare.