BASIC PRINCIPLES OF A SOUND TAX

SYSTEM
1. Fiscal Adequacy- The sources (proceeds) of tax revenue should coincide with and
approximate needs of government expenditures. The sources of revenue should be sufficient and
elastic to meet the demands of public expenditures;

2. Theoretical Justice- The tax system should be fair to the average taxpayer and based upon his
ability to pay.

3. Administrative Feasibility- The tax system should be capable of being properly and efficiently
administered by the government and enforced with the least inconvenience to the taxpayer.

Basic Principle of a sound tax system

Fiscal Adequacy

Sources of revenue, that is, receipts therefrom, taken as a whole, should be sufficient to meet the demands of public
expenditure.

Revenues should be elastic or capable of expanding or contracting annually in response to variations in public
expenditures.

Alternatives:

(a) to incur the risk of a series of deficits or surpluses due to inelastic revenues

(b) to adjust the amount of public expenditures to fit the flow of funds

Equality or theoretical justice

Tax burden should be in proportion to the taxpayer's ability to pay (ability-to-pay principle).

Also connotes that the contribution of each person towards the expense of the gov't should be apportioned such that
he would feel neither more nor less inconvenienced from his share of the payment that every other person
experiences from his.

Administrative Feasibility

Tax laws should be capable of convenient, just, and effective administration.

Each tax in the system should be clear and plain to the taxpayer
Tax laws should close up loopholes for tax evasion and deter the unscrupulous official from committing frauds in
the assessment and collection of taxes.