9 Qualities of a Good Tax System

Qualities Or Characteristics Or Features of a Good Tax System

A good tax system is one that raises the government revenue substantially, maintains stability with sustained growth of the economy, and reduces the inequality of income and wealth in the society.

Adam Smith had enunciated four canons of taxation namely equality, certainty, convenience, and economy. But other economists have pointed out various other characteristics of a good tax system. However, the qualities of a good tax system are described as follows:

1. Canon of equality: 

A good tax system should follow the canon of equality. Equality does not mean an equal amount of tax to all the taxpayers rather it emphasizes equity and justice. The heaviest burden should be placed on the broader backs. It indicates the two principles: equality of sacrifice and ability to pay. Equality of sacrifice means that the burden of tax should be equitable. According to the law of diminishing marginal utility, a higher rate of tax should be imposed on the higher level of income, which equalizes the sacrifice of the rich and the poor. Ability to pay denotes that a richer person has a greater capacity to pay tax. So, a higher amount of tax should be collected from the rich.

2. Canon of certainty: 

A good tax system should be clear and certain regarding the amount, time, and method of tax payment. In a good tax system, a taxpayer should know exactly when and how much s/he has to pay in terms of tax. Similarly, the tax authorities should also be certain about the amount of tax that should be collected from the taxpayers.

3. Canon of convenience: 

In a good tax system, the tax should be levied at that time or in a manner that is most likely to be convenient to pay. The method of taxation and the time of payment should be suitable for the taxpayer. According to Adam Smith "Every tax ought to be so levied at the time or in the manner in which it is most likely to be convenient to pay it."

4. Canon of the economy: 

A good tax system should aim to collect the maximum amount of tax revenue at the minimum cost from the taxpayers. If the cost of the collection of tax revenue is large, a greater amount is collected from the taxpayers but a smaller amount goes to the government's treasury.

5. Canon of productivity: 

A good tax system should be productive. No tax system should make a negative impact on the production of goods and services in the economy. There should be the least burden on the production of basic goods.

6. Canon of elasticity: 

A tax system is good if it is elastic. It should help to increase the income of the government when it is needed. According to this principle, when the rate of tax is increased, it should yield more amount of revenue.

7. Canon of simplicity: 

The tax system should be simple and easy. The taxpayer should understand it easily. If the taxpayer were confused about the taxation, there would be a greater chance of corruption.

8. Canon of diversity: 

The tax system of a country should be diversified. It should cover a wide range of the economy. Reliance on a few taxes will be risky. So, taxes should be imposed on various commodities and persons.

9. Canon of uniformity: 

The method of tax should be uniform to all the people and in all the places. It does not mean that the rate or amount of tax should be the same for all but there should not be discrimination in the application of the tax system.