A good tax system should have certain attributes. These are:
- Equity: Every taxpayer should pay tax in proportion to his income i.e. taxpayers should make equal sacrifice by paying the same percent of their incomes in tax. This is also known as “ability to pay” principle.
- Convenience: Taxes due should be paid at times most convenient to the taxpayer.
- Certainty: The taxpayer should know in advance the exact amount to pay and when to make the payment.
- Economy: The cost of assessing and raising taxes should be kept to a minimum.
- Flexibility: It should be possible at any time to revise the tax structure to meet the revenue requirements of government without delay and at no significant extra costs.
- Productivity: Taxes should bring large revenue which should be adequate for the government.
- Simplicity: A tax should not be difficult to administer and understand so as not to breed problems of differences in interpretation. Its calculations must be simple.
The first four principles were first mentioned by the acknowledged founder of modern economics, Adam Smith (1723 – 1790), in his famous book – The Wealth of Nations (1776). He referred to these principles as canons of taxation.