What are the principles of a good tax system?
If you were creating a new tax system from scratch, what would be the main principles on which your system might be based? One set of principles known as the canons of taxation was developed by classical economist Adam Smith in his famous work on the ‘Wealth of Nations’ published in the late 18th century. When you are asked to discuss the justification for different forms of taxation, it is often worth coming back to these principles when evaluating the relative merits and de-merits of alternative forms of taxation • Efficiency – an efficient tax system raises sufficient revenue to pay for government spending, without creating negative distortions such as reducing work-incentives for individuals and investment incentives for companies • Equity – the principle of equity is that taxes should be fair and based on people’s ‘ability to pay’. Income tax satisfies this condition because it is a progressive tax system, the marginal and average rate of tax rises with income – but some indirect
