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37
Principles of Taxation: www.reference.com
According to John Stuart Mill( 19th century Economist), the four
principles of taxation are that the system be efficient, understandable and
equitable and those who benefit from publicly-provided services should
sponsor and pay for those services through taxes. A good tax system
follows the four principles of taxation.
The first principle, efficiency, means that the tax system raises enough
revenue to sponsor projects without burdening the economy and the
system shall not become a disincentive for performance. According to
Wikibooks, the second principle of "understandable" means that the
system should not be incomprehensible to someone who does not
understand the principles of taxation. The tax system should not have
hidden or complicated language that the average citizen cannot
understand, and all costs should be upfront and transparent.
Thirdly, the tax system must be equitable, notes Wikibooks. This means
that taxation should be determined by a person's ability to pay, and that
wealthier people should pay more in taxes because they are able to do
so. This specific principle is also known as a flat tax rate. For example, a
tax of 10 percent would have far less of an impact on a person who
makes a million dollars a year than on someone who makes $10,000.
The fourth principle, the benefit principle, simply means that those who
benefit from a publicly provided service should pay the taxes that fund
the service.
Wikibooks.org
Principles of Taxation
The following were first proposed by the great economist Adam Smith,
and are still applicable today, although many other economists have
added and improved on his theories:
Horizontal equity means that we apply the exact same policy to people
in the same situation. For example if two people earn both earn $25,000
per year they should both pay the same amount of tax. This means that if
we have horizontal equity, we try to make sure that we do not make
decisions based on non-income characteristics like ethnicity, gender,
weight, sexual orientation, or job status.
Horizontal equity is a must for most tax systems because citizens can
become very upset if they are required to pay higher taxes based on non-
financial characteristics such as marriage. Before the recent reform,
married couples filing together in the United States paid more in taxes
than an identical married couple would by filing separately. Consider
the following example of horizontal equity:
John and Jane file together, and make 50K each. Because together they
earn 100K, they fall into the 20% tax bracket, and pay 20K in
taxes. While Adam and Alice file separately, because they each 50K
each, they fall in the 10% tax bracket, and pay only 10K in taxes
total. Because these people are in identical situations but pay different
tax amounts, we see a violation of the horizontal equity principle.
What the recent tax reform did was raise the amount of income allowed
by married couples, so that people in John and Janes situation would
pay an identical amount to couples in Adam and Alices situation. This
results in horizontal equity.
Pg. 42
Tax Cascading
www.investopedia.com
DEFINITION of 'Cascade Tax'
A tax that is levied on a good at each stage of the production process up
to the point of being sold to the final consumer. A cascade tax is a type
of turnover tax with each successive transfer being taxed inclusive of
any previous cascade taxes being levied. Because each successive
turnovers includes the taxes of all previous turnovers, the end tax
amount will be greater than the cascade tax rate.
Pg.42
Input tax credit
http://www.thehindubusinessline.com
You cant punish a man twice for the same crime, says the law.
Shouldnt the same principle apply to taxation of goods and services?
Enter input tax credit. The basic premise is that taxing the same thing
twice is not fair.
So, to avoid double taxation on items used as inputs to make other items,
credit of taxes paid on the inputs can be taken by the maker of the next
item while paying tax on the output. If the tax paid on inputs is higher
than the tax on the output, the excess can be claimed as a refund.
All dealers are liable for output tax on taxable sales done in the process
of his business. With the help of input tax credit, he can offset the output
tax against the input tax already paid.
Tax offsets, sometimes referred to as rebates, directly reduce the amount
of tax payable on your taxable income. In general, offsets can reduce
your tax payable