Tax can be termed as a levy or fee that is charged by a government on products and income of the people in that state. Tax is either direct or indirect tax. Direct tax is the levy on an individual’s or corporate’s income. Indirect tax on the other hand is charged on the prices of goods and services offered in the country. The government normally has a body that is bestowed with the responsibility of collecting taxes on its behalf (Web-book, n.d, p.1). The tax collected is principally used to finance the expenditure of the government, for instance, paying of government officials and provision of essential services to the residents of the country.
Designing a tax system for a country is normally a very difficult decision for the law makers and tax agencies. The government is therefore compelled to lay down factors that will guide it in selecting the tax system to use (Web-book, n.d, p.1). This will be steered by factors such as transparency and simplicity of the system. If the tax system is detailed and complicated, it leaves room for legal evasion of tax which is a loss of revenue to the country. An example is the sales tax that was earlier on charged on transactions. This system had loopholes because tax was charged if the goods were sold but not charged if the goods were transferred to a branch of the company. If the government uses the value added tax system then all possible loopholes will be sealed leaving the government with more revenue.
The tax system should also be easy to understand. This will help citizens to know and precisely understand what they are being taxed on. This will make remittance of tax easier and simpler as people will know what and how much they are supposed to pay in form of taxes. It should also be stable, in that it does not change or fluctuate yearly or periodically. If the tax system is stable it will not cause inconveniences in financing of public expenditure. A change in the tax system causes a decline or an improvement in the amount of revenue collected, thereby resulting in a surplus or deficit is revenue (Seto, 2009, p.1). The system should also be unavoidable, implying that all people comply in paying of the taxes. In the past, there have been instances of people avoiding or underpaying their taxes. The system should be free of inter-governmental leakages, implying that the state and the local tax system should share information. This will create transparency and accountability between the two.
A good tax system should be efficient to ensure that all taxes are collected accordingly (Seto, 2009, p.1). The system should also not interfere with the private economic decisions. Adequacy should be observed for the government or state to be able to meet its targets on public expenditure. Last but not least, the tax system should also be fair on the mode of payment. This means that there should be considerations for the high income earners and low earners. A good tax system is the one that ensures that people with higher incomes pay more than their counterparts with less income (Seto, 2009, p.1). This is due to the fact that if low income earners are overtaxed they are left with little income hence having difficulties in living a decent life.
As much as the state requires tax revenue to finance its public expenditure, it should ensure that the system has the right measures put in place. This being public money, it should be well spent and accounted for.
Reference List
Seto, T. (2009). Four Core Principles of Tax System Design: Introduced and Applied to the Taxation of Multinationals.
Web-book. (n.d). Financing Government. Web.