The economist, Adam Smith
put forward four principles of taxation which are
widely accepted today in his book The Wealth of Nations
, published in 1776
: Each taxpayer
should pay tax in proportion to
his/her ability to pay.
: The taxpayer should know how much tax he/she
has to pay.
should be collected from taxpayers at a
convenient time e.g. the PAYE
(Pay As You Earn) system.
: The cost of assessing and collecting a tax
should be reasonably small compared with the amount of
the tax brings in.
In addition, there are two modern principles which are widely accepted. These
5. Work: Taxation should not discourage the creation of
or taxpayer's work efforts.
6. Investment: Taxation should not act as a disincentive
to saving or investment
Functions of Taxation
Originally taxation arose out of the need to finance
Nowadays taxation has many functions which have important effects on business
and the economy. The present functions of taxation are:
1. To finance the activities of the governemnt e.g. maintenance of the civil
2. To redistribute wealth e.g. providing social benefits.
3. To achieve desirable social objectives e.g. discouraging smoking
4. To achieve certain economic objectives e.g.increased tax which reduces consumer spending can help to reduce inflation