Taxation principles

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

  • Broad application. The system of taxation should be spread across a broadest possible population, so that no one person or entity is unduly taxed.
  • 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 is invisible to the taxpayer.
  • 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 as low as possible, so that net receipts are high.
  • Understandability. The calculation and payment of a tax should be easy for a taxpayer to understand. Otherwise, the amount of taxes remitted may be incorrect.