What would happen if nobody paid tax?
we would have no roads, no hospitals, no schools, no social welfare.The rich would be richer and the poor would be broke and not broke like many people are at the moment but completely penniless.
What are the functions of tax?
- To raise money for Government Expenditure
- To redistribute wealth
- To achieve desirable social objectives
- To provide merit goods
- To provide public goods
Taxation can also be used as an automatic stabilizer.
So we all agree that we need to Tax.... But how best to tax?
Adam Smith set down four canons of taxation in The Wealth of Nations. These canons or laws are still hugely relevant to tax today. He said that all taxes should be
- Equitable (Taxes should be fair, and tax the people who can afford it)
- Economical (Raise more money than it costs to collect)
- Convenient (It should be easy for the taxpayer to pay the tax)
- Certainty (People should be aware of their tax liability in advance)
These canons lay the foundations of a good tax system and when applied with some new canons can best describe how most countries try to implement their tax systems.
A good tax system should not act as a disincentive to work, invest or save. If taxes on low income earners are high and people have access to relatively high social welfare payments, it may not be worth their while to bother working which can cause a major issue for the Government.
***Exam Tip***
I believe that you can answer any question on evaluating a tax by applying Adam Smiths four canons along with the disincentive canon.
Think
Is the tax fair? Can the people being asked to pay it, afford it?
Are the Government making a profit on collecting the tax?
Is it easy or handy to pay?
Does the tax payer know how much they are expected (liable) to pay?
and could the tax act make people not carry out the activity and therefore reduce productivity in the economy?
