BASIC PRINCIPLES FOR A SYSTEM OF TAXATION

Adam Smith laid down certain canons of taxation which are still generally acceptable as basic principles for a system of taxation. They are the principles of equity, certainty, conveniene and economy.

There must be equality of sacrifice. This implies that the burden of taxation should be distributed according to people's ability to pay. Smith thought that proportional taxes would satisfy this criterion, but nowadays it is generally accepted that progressive taxes are the most equitable type of tax.

The capital gains tax was introduced on grounds of equity. It was felt that a capital gain obtained by speculation in share or commodity markets should be subject to taxation in the same way as income earned on the factory floor.

Certainty

The taxpayer should know how much tax he has to pay, when it must be paid, and how it must be paid. He should be able to assess his tax liability from information provided and should not be subject to tax demands made in an arbitrary fashion. In theory, the British system of taxation satisfies these requirements - all the necessary information is available to taxpayers, but the tax laws have become so complex and extensive that it is sometimes difficult for the average man to be certain of all his rights and responsibilities.

Convenience

Taxes must be collected in a convenient form and at a convenient time. The Pay As You Earn (PAYE) system of tax collection is probably the most convenient method in general use. Under the previous system income tax was paid in arrears' - the tax on the income earned in one period was payable in the following period.

Taxes are paid in money and generally speaking this is the most convenient form of making tax payments. Some difficulties arise, however, when taxes are levied on wealth, the majority of which will not be held in the form of money.

Economy

The costs of collection and administration should be small in relation to the total revenue. This requirement often conflicts with that of equity. The "fairest" system of taxation would involve casting the net so widely and so carefully that collection costs would be disproportionately high.

(from "Introductory Economics" by Stanlake G.E.)