ideal_tax_system - Goals and Objectives of an Ideal Taxing...

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Goals and Objectives of an Ideal Taxing System (based on the 18 th century writings of Adam Smith The primary objective of any tax system is to raise revenues to finance government operations and programs. To a lesser extent, tax systems may attempt to achieve other objectives – help stimulate and/or control the economy, encourage certain activities and businesses, encourage socially desirable behaviors, discourage socially undesirable behaviors, and promote equity and fairness in the tax system. The ultimate design of any tax system is frequently complicated by the dynamics of political, economic, and social forces. People designing and analyzing tax systems often talk about the “fairness” of the tax system or how the tax burden should be distributed across taxpayers. More often they fall back on the four criteria identified by 18th-century economist Adam Smith – equality, certainty, convenience, and economy – to frame their discussion EQUALITY Equality means that taxpayers should bear a fair level of tax relative to their economic positions and their contribution to the support of the government should reflect their economic ability to pay. Equality can be defined in terms of two dimensions – horizontal equity and vertical equity. Horizontal equity means that two people with the same income have the same ability to pay, and thus should pay the same amount of income. Several conceptual issues should be kept in mind when applying the horizontal equity principle. One has to do with the measure of income – total income or taxable income – that is used to group taxpayers as equals.
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