The four main desirable characteristics of taxation systems
Ideal taxation system
With a transparent tax system, we know who is being taxed, how much they are paying, and what is being done with the money. Progressive tax: A progressive tax requires higher-income individuals to pay a higher share of their income in taxes. Almost any tax on necessities, such as food purchased at a grocery store, is regressive because lower income people must spend a larger share of their income on these necessities and thus in taxes. Related Articles:. It is not just a means of raising revenue for the limited functions of the State. It is just as important to seek vertical equity so government does not become a burden to low-income residents. Likewise, under progressive taxation at times of depression or recession, tax revenue will fall faster than the income so that purchasing power of the people does not fall as fast as their pre-tax income. This is because if a Government tries to get large revenue from a single tax or few taxes, it will have to raise the rates of taxation too high which will not only adversely affect the incentives to work, save and invest but also encourage evasion of taxes.
With the diverse tax system, the principles of fiscal adequacy and equity will also be better satisfied. To make the tax system sufficiently productive it should be broad-based and both direct and indirect taxes find place in it.
Vertical equity means that taxpayers who are better off should pay at least the same proportion of income in taxes as those who are less well off. In developing countries, the share of tax revenue as a proportion of national income is low as compared to the developed countries.
Proportional tax: A tax is proportional if all taxpayers pay the same share of income in taxes. Taxation as in Instrument of Economic Growth 5. This requires that the rates of progressive direct taxes on income, wealth, expenditure, capital gains etc.
Taxation for Ensuring Economic Stability. For this purpose, tax system must have built-in-flexibility.
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