The principles of how to design an effective tax system

Adam Smith was one of a figure of early minds who considered the rules of how to plan an effectual revenue enhancement system, and in his book, The Wealth of Nations, published in 1776 ; he outlined four desirable features of a revenue enhancement system ( Lymer and Oats, 2010/2011: p43-44 ) :

“ The topics of every province ought to lend to the support of the Government, in proportion to their several abilities ; that is in proportion to the gross which they severally enjoy under the protection of the province. ”

“ The revenue enhancement which each person is bound to pay ought to be certain, and non arbitrary. ”

“ Every revenue enhancement ought to be levied at the clip, or in the mode, most convenient for the subscriber to pay it. ‘

“ Every revenue enhancement ought to be so contrived as both to take out, and maintain out, of the pockets of the people, every bit small as possible over and above what it brings in to the public exchequer of the province. A revenue enhancement may either take out or maintain out of the pockets of the people a great trade more than it brings into the public exchequer, and in four ways: a ) by the figure of officers who levy it: B ) by blockading the industry of the people ; c ) by punishments incurred in trying to hedge the revenue enhancement ; vitamin D ) by subjecting the people to the frequent visits and scrutinies of the tax-gatherers. ”

Lymer and Oats ( 2010/2011 ) re-state these four features as: equity, certainty, convenience and efficiency.

This essay will explicate these four features in item and discourse whether the current income revenue enhancement system of self-assessment achieves them in decision. Self-assessment is a system under which the taxpayer is responsible for working out his or her ain revenue enhancement liability and describing it to the gross authorization each twelvemonth. ( Lymer and Oats, 2010/2011: p19 )


All person should be taxed reasonably, and revenue enhancements should be charged harmonizing to people ‘s nonexempt capacity. Peoples will resent the authorities if a revenue enhancement is non seen to be just. Fairness is of import because it helps to cut down revenue enhancement turning away.

There are two facets to the equity of a revenue enhancement system: horizontal equity and perpendicular equity. A revenue enhancement system is horizontal equity if taxpayers with equal nonexempt capacity on the same revenue enhancement load. A vertically just revenue enhancement system is those with greater capacity to pay revenue enhancement bear a higher revenue enhancement load. ( Lymer and Oats, 2010/2011: p45 )

There are two attacks to mensurate the equity: ability to pay and the benefit rule. Person ‘s income degree is one obvious factor in mensurating ability to pay ; another factor is individual ‘s stock. The benefit rule refers to those who benefit most from the services provided by a authorities should pay the most revenue enhancement. ( Lymer and Oats, 2010/2011: p46-49 )

For illustrations of equity, in income revenue enhancement, everyone is just to hold a personal allowance and so revenue enhancement at different rate related to the income. Different sum of income will be taxed on different revenue enhancement rate, such as rate between i??0 to i??37,400 will be taxed at 20 % ; i??37,400 to i??150,000 will be taxed at 40 % ; what extra i??150,000 will be taxed at 50 % . And different sort of income will revenue enhancement on different rate excessively, such as the higher rate of nest eggs income and dividends income are 40 % and 32.5 % . Otherwise, persons who have a telecasting are taxed on having Television to lend to the cost of the BBC by manner of the license fee.


Taxs should non be random, taxpayers should cognize their revenue enhancement liability and when and where to pay the revenue enhancement.

A state ‘s citizens need to be to the full informed about who will hold to pay the revenue enhancements in the revenue enhancement system and when they will hold to be paid ( named the incidence of revenue enhancement ) . Taxes where the incidence is clear are to be preferred over revenue enhancements where there is disagreement and uncertainness over the ultimate remunerator of the revenue enhancement and when the revenue enhancement must be paid. ( Lymer and Oats, 2010/2011: p52 )

Such as non-savings income revenue enhancement, income between i??37,400 to i??150,000 must be taxed at 40 % , single can non alter it to 20 % .

Under the self-assessment system, it sets that those need to finish a self-assessment revenue enhancement return ( such as persons have more complicated revenue enhancement personal businesss, even they have already pay revenue enhancement through PAYE. There are besides certain fortunes need to finish a revenue enhancement return – freelance, a company manager, a legal guardian and foreign income ) ; when and where the revenue enhancement remunerator must breast the self-assessment return ( make HMRC by midnight on 31 October as paper revenue enhancement return or by midnight on 31 January online ) . ( HMRC, 2011 )


Tax convenience relate to how persons engage with the revenue enhancement system and how people pay their revenue enhancements. Taxes should be easy for people to pay what they levy.

For case, Pay As You Earn scheme and involvement received are really convenience ways to hold revenue enhancement. Persons will hold revenue enhancement deducted before they receive their salary and salvaging involvement. Another illustration is VAT revenue enhancement, people will hold revenue enhancement deducted at the clip they buy something.

Self-assessment system provides a manner easy for people to register their one-year revenue enhancement returns. It is on-line filing. This manner makes a batch of advantages for both HMRC and taxpayers. Such as, the system will assist to look into if u put the figures in right topographic point and so calculates the sum of revenue enhancement due. The most of import advantages is it helps to acquire the filing procedure faster, so the taxpayers can acquire any refunds every bit shortly as possible.


The revenue enhancement system should non impact the allotment of resources and its disposal cost should be inexpensive. It should be avoided every bit much as possible that the revenue enhancements cost for the revenue enhancement authorization to administrate. Cost to authoritiess include disposal costs, the cost of looking for delinquent taxpayers through audits, and the costs of sing wrangles with taxpayers over the manner in which the revenue enhancement Torahs operate. ( Lymer and Oats, 2010/2011: p44 )

Adam Smith divided efficiency into two parts: economic efficiency and administrative efficiency. ( Lymer and Oats, 2010/2011: p54 )

An economic efficient revenue enhancement system is one that does non falsify the economic and commercial determinations made by persons. Lymer and Oats ( 2010/2011 ) said that Economic efficiency is sometimes referred to as financial neutrality, and the cardinal thought is that revenue enhancements should, every bit far as possible, non interfere with the workings of the market. The more a revenue enhancement cost to administrate, the lupus erythematosus of the money raised by the revenue enhancement is available to the authorities for their outgo programs. The disposal cost should be every bit little as possible to accomplish desirable economic efficiency. ( Lymer and Oats, 2010/2011: p54-57 )

VAT revenue enhancement is a good illustration of efficiency. VAT revenue enhancement receives straight when people buy something. When people buy something, they pay the revenue enhancement instantly,

Under the self-assessment system, there is no demand for the revenue enhancement authorization to bring forth appraisal for taxpayers any longer. HMRC so can apportion more of its resources to following up instances that might be inaccurate, supplying more advice and offer other services to assist taxpayers instead than holding to look into every revenue enhancement return that is filed to measure the revenue enhancement liability. It reduces the disposal cost to the authorities. However, it increases the cost to the taxpayer of following with the system, but this will non interfere with the workings of the market. ( Lymer and Oats, 2010/2011: p19 )


As explain above, the current income revenue enhancement system of self-assessment achieves three Adam Smith ‘s desirable features evidently ; they are ‘certainty ‘ , ‘convenience ‘ and ‘efficiency ‘ . For ‘equity ‘ , self-assessment does menaces each taxpayers fair, because anyone who delay to subject the self-assessment return, he or she will a punishment.

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