Characteristics of a Good Tax System

What is Tax?

A tax is a mandatory financial charge or a financial obligation that is placed on an individual or corporation by the government to finance public expenditures and government spending as a whole. A tax system refers to the set of rules and regulations that govern the collection and distribution of taxes in a particular country. It is designed to generate revenue for the government to fund public infrastructure, social programs, defense, and other necessary expenses.

A good tax system can be defined as one that is efficient, fair, transparent, and capable of generating sufficient revenue to fund public services and government operations. In India, Goverment mainly levies two type of taxes, i.e., Direct Tax and Indirect Tax. Direct tax can be defined as a type of tax in which the incidence and impact of the tax are levied on the same person. Indirect Tax can be defined as a type of tax in which the incidence and impact of the tax are passed on to another individual or entity, i.e., the end consumer of the product. Tax systems vary across different countries and they can be designed in various ways. Taxes are often imposed on people, corporations, and other organizations based on their income, wealth, consumption, or certain actions. Taxes are collected by the government to ensure the proper functioning and maintenance of a society, allowing the government to address the needs and priorities of its citizens.

What are the Characteristics of a Good Tax System?

A Good Tax System should have the following characteristics :

1. Equity

A good taxation system should have a reasonable distribution of tax rates among the various groups within the community. The broadest shoulders should bear the greatest weight. The taxation system should properly combine direct and indirect taxes to accomplish this goal. The richest sections of society tend to bear a larger burden from direct taxes. On the contrary, the poorer parts of society bear more weight of indirect taxes. As a result, for the system to be just and equitable, there must be a suitable mixing of direct and indirect taxes.

2. Productivity

Productivity is the second essential quality of an effective tax system. There are two ways to interpret the word “productivity.” Firstly, the taxation system needs to be designed in a way that it generates enough revenue for the government to cover its expenses. Second, the country’s production capability should not be negatively impacted by the taxing system. In other words, the country’s production ability should be promoted as much as possible by way of the tax system.

3. Elasticity

The third quality a good tax system should have is a sufficient level of flexibility. In other words, when the national income rises, the tax system should raise its revenue for the government. In times of emergency or crisis, when the government’s spending increases, the tax system must generate greater revenue. When tax rates are slightly raised, it should be able to earn more money. For the government to cover its higher expenses during a conflict, the tax system should be able to produce more revenue. Elasticity naturally follows when the economy experiences a recession and a drop in economic activity, the tax rates ought to be flexible enough to be reduced to the lower side.  For the tax system to become elastic, two things are necessary. First, direct and indirect taxes need to be combined properly. Second, certain sources of revenue should only be kept aside for difficult times such as war, etc.

4. Convenience

When establishing the country’s taxation system, the government must also consider the convenience of the taxpaying public. Since taxpayers make sacrifices to pay taxes, the government must ensure that they do not experience any unreasonable hardship. To put it simply, the tax system should be based on the principles of certainty and economy. In addition, the tax code should be straightforward so that the average taxpayer can grasp it. The significance of this rule is that taxpaying citizens should never be subjected to harassment.

5. Absence of Tax Evasion

The country’s tax system should be set up in such a way that there is no room for tax evasion on the side of taxpayers. The right mixing of different types of tax on commodities and personal taxes is necessary to accomplish this goal. As a result, the possibility of tax evasion will be greatly reduced.

6. Favourable for Economic Growth

The tax system needs to be set up in a way that promotes the nation’s economy. It must provide a favorable investment atmosphere and offer incentives to the country’s entrepreneurial classes to step forward and launch new firms and industrial enterprises.

7. Conducive to Resource Mobilisation

Without proper mobilisation of financial and physical resources, no nation can experience economic growth. The tax system should be set up in a way that will support the achievement of this goal. It should be able to gather materials from any location. Direct taxes on wealth and income with a gradual increase in rate and high commodity taxes on luxury goods will help collect enough money to be invested in the economy’s future growth.

8. Counter-inflationary

The biggest threat to developing countries is inflation. In these nations, five-year plans for economic development have more often led to inflation than to economic growth. Along with reducing the average person’s actual income, inflation also adds to significant differences in wealth and income. In other words, it disrupts the economy’s overall operation, harming everyone but speculators, black marketers, hoarders, and other antisocial individuals. Therefore, the tax system should have built-in safeguards against inflation.

9. Maximum Social Advantage

A tax system that is based on the maximization of social benefit is the best. Every tax system should aim to maximize the welfare of as many people as possible. It is also essential to ensure that the country’s productive capability is not negatively impacted by the tax system.

10. Minimum Aggregate Sacrifice

Yet another quality of a good tax system is that it should place the least amount of financial stress on people. And the only way to accomplish this is by the imposition of progressive taxes, which place a burden on taxpayers based on their capacity to pay.

11. Minimal Tax Resistance

It is well-known that taxes have a negative impact on a taxpayer’s commitment, capacity, and ability to work and save. In this way, the tax acts as an obstacle for the tax-payer to increase productivity. The production is automatically reduced. Tax Friction is the term used by economists to describe the decrease in productivity that results from the taxpayer being subjected to a high tax burden. Today, economists claim that every government should make sure to reduce tax friction to a minimum while designing its tax system for the benefit of the economy.

12. Simplicity

For the tax system to be easily accessible by the general public without the help of legal professionals, it should be as simple as possible.

13. Economy

The tax system should be able to be operated as cheaply as possible. The taxes that are expensive to collect should be eliminated for the best interest of the nation.

It is clear that a good tax system should be able to meet all the principles of taxation. In real life, creating a taxation system that fully complies with all taxation principles is rather challenging. Therefore, when developing its taxation system, the government should aim to meet as many rules as it can. Thus, a good tax system is the backbone of a well-functioning society. It should be designed to promote fairness, efficiency, and economic growth.