The economist,
Adam Smith put forward four principles of taxation which are
widely accepted today in his book
The Wealth of Nations, published in
1776.
These are:
1.
Equity: Each
taxpayer should pay tax in proportion to
his/her ability to pay.
2.
Certainty: The taxpayer should know how much tax he/she
has to pay.
3.
Convenience:
Tax should be collected from taxpayers at a
convenient time e.g. the
PAYE (Pay As You Earn) system.
4.
Economy: The cost of assessing and collecting a tax
should be reasonably small compared with the amount of
revenue the tax brings in.
In addition, there are two modern principles which are widely accepted. These
are:
5. Work: Taxation should not discourage the creation of
wealth or taxpayer's work efforts.
6. Investment: Taxation should not act as a
disincentive to saving or
investment.
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Functions of Taxation
Originally taxation arose out of the need to
finance government spending.
Nowadays taxation has many functions which have important effects on business
and the economy. The present functions of taxation are:
1. To finance the activities of the governemnt e.g. maintenance of the
civil
service.
2. To redistribute wealth e.g. providing social benefits.
3. To achieve desirable social objectives e.g. discouraging
smoking.
4. To achieve certain economic objectives e.g.increased tax which reduces consumer spending can help to reduce
inflation.