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Understanding Taxation Principles

Taxation is the compulsory contribution imposed by the government on individuals and corporations to finance social and regulatory activities. It is mandatory by law for the government to collect taxes. A tax creates a tax liability and burden for those required to pay it. There are two main principles for determining how taxes should be allocated - the benefit principle, which says taxes should be paid based on the benefits received from government services, and the ability to pay principle, which says taxes should be distributed equitably according to one's means to pay. In practice, governments use elements of both principles to determine tax policies.

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Kleint Berdos
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238 views3 pages

Understanding Taxation Principles

Taxation is the compulsory contribution imposed by the government on individuals and corporations to finance social and regulatory activities. It is mandatory by law for the government to collect taxes. A tax creates a tax liability and burden for those required to pay it. There are two main principles for determining how taxes should be allocated - the benefit principle, which says taxes should be paid based on the benefits received from government services, and the ability to pay principle, which says taxes should be distributed equitably according to one's means to pay. In practice, governments use elements of both principles to determine tax policies.

Uploaded by

Kleint Berdos
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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WHAT IS TAXATION

As a subject, taxation is a study of how the government imposes on and


collects taxes from, the income and wealth of individuals and
corporations to finance its social and regulatory activities. The study of
taxation usually covers the entire tax system which is made up of Tax
policy, law and administration.

The government, therefore, derives its revenue from taxes. A tax is


compulsory and mandatory contribution to the government from its
subjects. It is mandatory in the sense that there is a legal document
giving the government the mandate to collect such contribution:
However, if carefully analysed this definition may include such
payments as fines and penalties paid to the government. The most
dependable and reliable definition of what is a tax was given by Hugh
Dalton who defined a tax as “a compulsory contribution imposed by a
public authority, irrespective of the exact amount of services rendered to
the taxpayer in return, and not imposed as a penalty for any legal
offence”.

Imposition of a tax, therefore, creates a tax liability upon those liable to


pay the imposed tax. A tax liability is always expressed in monetary
terms, and it is worth noting here that any monetary liability creates a
burden. In other words imposition of a tax creates a tax burden on
taxpayers.
 
The benefit principle is the idea that government spending should be met by the people who
receive them. In other words, everyone who receives government spending, should contribute
towards it.
In practice the benefit principle is hard to apply because many of those in need of government
benefits – the old, sick and unemployed are the least likely to be able to pay. A general principle
more commonly used is the ability to

pay.

 benefit principle -This approach dictates that taxes are apportioned to


individuals a
 ccording to the benefit they derive from government activities and
spending. Taxes therefore should be treated as a payment for the
goods and services provided by the government.

 The ability to pay principle: This is concerned with the equitable


distribution of taxes according to the stated taxable capacity or
ability to pay of an individual or group. The emphasis in this
approach is put on redistribution of income, that, those with higher
incomes should sacrifice more so that there can be proper and
equitable redistribution of income.

Both principles are calling for equality, no one then will quarrel with a
saying that ‘those who are essentially equal should be taxed equally’
(Horizontal Equity), and if equals are to be taxed equally then the
reverse is also true, that unequal to be taxed unequally (Vertical Equity)

To attain the much needed equally taxes are made to be proportional,


progressive or regressive depending upon whether they take from high
income earners the same fraction of income as tax than they take from
low income people.

However the general philosophy of Benefit or ability to pay alone does


not answer the question of best tax formula and hence the need for
political process. In practice all the principle are put into use.

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