TAXATION CONCEPTS

AND PRINCIPLES

TAX: DEFINITION

A compulsory contribution from the

person to the government to defray the
expenses incurred in the common
interest of all without reference to
special benefits conferred upon
taxpayer
Free rider problem
Can be considered as a monetized
service to the government

TAXATION: PURPOSES

To finance the governments public

expenditures
Serves as a fiscal instrument to promote
the goals of developing countries

TAXES: CLASSIFICATION

As to Purpose fiscal or regulatory

As to Incidence direct or indirect
As to Rate proportional, progressive or
regressive
As to Authority national or local
As to Object income tax, property tax, excise
tax
As to Scope general or specific (e.g. Special
Education Fund)
As to Amount Paid specific or ad valorem

Principles of a Good Tax

System

Economic efficiency
Administrative simplicity
Flexibility
Fairness
Political responsibility

ECONOMIC EFFICIENCY
Taxes should enhance economic
and social efficiency
Market failures
Externalities (positive and
negative)
Announcement effects

E.g. on real property

DISTORTIONARY TAX

An individual can change his tax

liability by simply changing his
consumption of a particular good or
service

NONDISTORTIONARY TAX

If and only if, there is nothing an

individual can do to alter tax liability

CORRECTIVE TAX

Raises the revenue and improves the

efficiency of resource allocation

Point to ponder: Why should society

tax productive (good) economic
activities, like savings and hard work,
rather than bad economic activities, like
pollution?

he tax System should have low costs of administrative compliance.

ADMINISTRATIVE SIMPLICITY
The tax system should have low
costs of administrative
compliance.
It ought to be easy and relatively
inexpensive to administer
Direct cost: cost of running tax
collection agencies
Indirect cost: cost to taxpayers

he tax System should have low

The
costs
tax of
System
administrative
should have
compliance.
low costs of administrative compliance.

FLEXIBILITY

The tax system should allow easy (even

automatic) adaptation to changed
circumstances
Progressive tax (automatic
stabilization)
Ad valorem vs. specific tax
Political difficulties of adjusting tax
rates

he tax System should have low

The
costs
tax of
System
administrative
should have
compliance.
low costs of administrative compliance.

FAIRNESS
A good tax system should
distribute the tax burden across
taxpayers in a manner that is
consistent with accepted norms of
fairness and equity.
It ought to be fair in its relative
treatment of different individuals

he tax System should have low

The
costs
tax of
System
administrative
should have
compliance.
low costs of administrative compliance.

FAIRNESS

There are two different ways to view

fairness, but both are based on tax
incidence.

TAX INCIDENCE

refers to who actually pays the

tax
Many

taxes are paid by one person (gasoline

distributor, landlord, corporation), who has the
ability to look to others for reimbursement
(consumer of gasoline, renter, consumer).

Tax fairness is judged by a taxs incidence, rather

than who pays the tax.

FAIRNESS
Fairness in the burden of the tax
according to ones ability to pay.

A fair tax is one that is levied according to

ones ability to pay the tax.

TAX TYPES

FLAT TAX

A commonly-held principle is that ones tax

burdens should rise at the same rate as
ones ability to pay

PROGRESSIVE TAX :

it should rise at a faster rate

REGRESSIVE TAXES

Tax rate falls despite greater ability to pay

FAIRNESS
Fairness in the burden of tax according to
benefits received.

A second way fairness may be evaluated is

with reference to who benefits from
government activities.

POLITICAL RESPONSIBILITY

People should know how much they and

others pay

Thus, a good tax system is one where the

tax incidence is clear, or transparent.

Transparency is important in a tax

system

It should improve the democratic

process surrounding taxes

References:

Joseph E. Stiglitz, Economics of the

Public Sector, Third Edition (New York:
W. W. Norton & Co., 2000), Chapter 17
Introduction to Taxation.

Leonor M. Briones, Philippine Public

Fiscal Administration, vol. 1, Manila:
FAFI, 1996. Chapters 6-7.