What are Taxation Principles?

Taxation principles are the guidelines that a governing entity should use when devising a system of taxation. These principles include the following items:

Broad Application

The system of taxation should be spread across a broadest possible population, so that no one person or entity is taxed excessively. Instead, the entire population shares in the taxation burden.

Broad Tax Usage

Taxes are only targeted at a specific use when there is a clear cause-and-effect between the tax and the use. In all other cases, taxes are collected for general usage. Otherwise, special interests will receive preferential funding.

Ease of Compliance

The administration of taxation should be as simple as possible, so that a taxpayer will have little difficulty in complying with the tax payment requirements. Ideally, the taxation process is invisible to the taxpayer.

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Expenditure Matching

The level of taxation should approximately match the amount of projected expenditures, so that the governing entity is prudent in covering its costs, but does not tax an excessive amount.

Fairness in Application

The type of tax imposed should present an equal burden on all taxpayers in the same economic condition. Further, the tax should not favor one group over another, so that one group receives a tax benefit at the expense of another group.

Limited Exemptions

Any exemptions from a tax should be for a limited period of time and for a specific purpose, after which the exemptions are eliminated. These exemptions are only intended to encourage certain types of behavior, usually involving economic development.

Low Collection Cost

The cost required to collect taxes should be low, so that the net receipts resulting from them are as high as possible. Otherwise, a tax is not cost-effective.