• Equity (continued)

• Horizontal and vertical equity

• Taxation according to ability to pay calls for people
with equal capacity to pay the same, and for people
with greater ability to pay more.
• The former is referred to as horizontal equity and
the latter as vertical equity.
• Vertical equity concerns people in unequal economic
circumstances.
• Horizontal equity states that people who are
“similarly situated” should be taxed alike.
• It leaves open the essential question of what is
meant by “similarly situated”.
• If income is used as index of ability to pay, then HE
says people with the same income should, all else
equal, pay the same tax.

• Again, we are left with essential questions: what do

we mean by “income” and by “all else equal”.
• 2. Certainty
• The tax which each individual is bound to pay ought
to be certain and not arbitrary.
• The time of payment, the manner of payment, the
quantity to be paid should all be clear to the
taxpayer and to every other person.
• Certainty pertains to objectivity.
• 3. Convenience

• The mode and timing of tax payments should

be convenient to taxpayers.

• This canon recommends that unnecessary

trouble to the taxpayer should be avoided,
otherwise various ill-effects may result.
• 4. Economy
• “every tax should be so designed as both to take out
and to keep out of the pockets of the people as little
as possible over and above what it brings into the
public treasury of the state” (Smith 1776, (1952 ed),
p 362).
• taxes should not cause an unnecessary burden upon
the society in the form of costs over and above the
tax liability.
• In addition to the actual payment of taxes, taxes
induce other costs:
– Compliance and administrative costs (tax
operating costs)
– Efficiency costs

• Tax compliance costs – costs incurred by taxpayers

and third parts in the process of complying with the
requirements of a tax legislation;
• Tax administrative costs can be broadly viewed as
resources sacrificed by the public sector in
connection with a tax system.

• Public sector costs of taxation conceptually

constitute those costs which would not have been
incurred if the tax had never been introduced
(Sandford et al. (1989)).
• Convenience and certainty canons deal with the tax
compliance costs while the economy canon is
concerned with both the administrative and
compliance costs;

• The economy canon deals with efficiency costs as

well
• 5. Economic Efficiency
• Economic efficiency can be thought of as the
effectiveness with which an economy utilizes its
resources to satisfy people’s preferences.

• When resources are directed to their highest

valued uses the economy is said to be efficient.

• By changing the relative attractiveness of highly

taxed and lightly taxed activities taxes can distort
resource allocation decisions (divert resources);
• If there are distortions in resource allocation, that
would reduce people’s well being in a variety of ways
that can include a loss of output or consumption
opportunities;
• These reductions in well-being are efficiency costs,
also called deadweight losses, excess burdens
(excess because they are costs in addition to the tax
liability) or welfare losses.
• The total cost of taxes from a taxpayer’s point of
view:
=tax liability + efficiency costs + compliance costs

• Tax induced costs to the economy =

• = efficiency costs + compliance and administrative
costs;
• 5. Productivity –
• also called canon of fiscal adequacy.
• the tax system should be able to yield
enough revenue for the government;  
• 6. Buoyancy
• the tax revenue should have an inherent
tendency to increase along with an
increase in national income, even if the
rates and coverage of taxes are not
revised.
•  
• 7. Flexibility –
• it should be possible for the authorities without
undue delay to revise the tax structure both
with respect to its coverage and rates, to suit
the changing requirements of the economy and
of the Treasury.

• 8. Simplicity
• the tax system should not be too complicated.
• Complex tax system is difficult to understand
and administer and breeds problems of
interpretation and legal disputes.
•
PART II Tax systems and taxes
• A tax system – a set of all the taxes that a
nation imposes;
• Tax systems can be classified in different ways
– Multiple and single tax system
– Direct vs indirect
– Ad Valorem and unit
• Single and Multiple tax systems
• Single tax system is where there is only one
tax in place;
• It is claimed that taxpayers are more certain
of their liabilities in a single tax and this can
help in reducing costs of collection.
• Against this claim note the following
problems:
– identification and choice of an appropriate single
tax,
– the adequacy and growth of revenue,
• One simple form of a single tax is the poll tax, or
the head tax;
• Poll tax is imposed on a person simply because
he/she is there in the society and not because
he/she has an income, or wealth, or is following
any particular trade or profession etc.
• Poll tax is against the principle of equity assessed
in terms of either the benefit principle or the
ability to pay principle.
• It does not enable governments to raise sufficient
amount of revenue;
• Multiple tax system

• A multiple tax system is with several tax

structures being used in the system.
• Any worthwhile tax system in a modern economy
will be a multiple tax system.  
• (1) a modern economy is not one-objective
economy. It tries to forge ahead simultaneously
along the paths of growth, equitable distribution
of income and wealth, economic stabilization and
so on.
• Since no single tax can be expected to help the
economy on all fronts, a choice for a multiple tax
system becomes inevitable.
• (2) Income of a modern economy originates
from many sources.
• It would be highly unjust to tax income
originating from any one source and leave out
others.
• Equity would demand that the government
should tax all the important sources of income
in an equitable manner.
• Single (multiple) tax systems are different
from single (multiple) stage taxes;
• Direct vs Indirect taxation
• One way of distinguishing between direct and
indirect taxes has been in terms of the
incidence of taxation.
• Tax incidence and impact
• concerned with the issue of who bears the
burden of taxes;
•
• tax impact – initial burden – is borne by those
who make the payment of taxes to the
government;
• tax impact concerns where the tax first hits;
• tax incidence – ultimate burden – is borne by
those whose real incomes are reduced as a
result of taxes;
• tax incidence concerns its ultimate resting
point;
• Tax impact - legal incidence (statutory
incidence);
• Tax incidence - economic incidence ;
• The initial and final burdens of a tax may be
quite different.
• When the incidence and impact are not at the
same point, the tax is said to have been
shifted.
•  shifting burden through changes in prices,
wages and returns on investments.
• Businesses as such do not bear the incidence
of any tax. Taxes imposed (i.e, with impact) on
business always result in burdens (incidence)
on people;
• The burden of corporation income tax is
shifted to other groups of people through
lower income (to employees and investors) or
higher prices (to consumers);