Question

What are the four major considerations given to adopting a revenue source known as the principles of taxation? Describe what they are and their purpose.

What is the concept of tax equity? Describe the various factors that must be considered when determining tax equity.

What are progressive taxes and regressive taxes? Why are sales taxes considered regressive?

Provide three examples of goods subjected to selective sales taxes. Describe the public purpose goals of the selective sales tax for each of these items.

Answer 1

Major Considerations given to adopting a revenue source known as the principles of taxation and their purpose:

1. Certainty The tax rules should clearly specify how the amount of payment is determined, when payment of the tax should occur, and how payment is made.

2. Equity and fairness: Equity includes two principles: (1) ability to pay (horizontal and vertical equity), and (2) benefits received. “When making judgments about the overall equity of government policy, it is important to consider both how individuals are taxed and how the benefits of government spending are distributed.”

3. Convenience of payment: Compliance costs for taxpayers and administrative costs for the tax authorities should be minimized as far as possible.

4. Economic growth and efficiency: The systems for taxation should be flexible and dynamic to ensure that they keep pace with technological and commercial developments.

Concepts of Tax Equity:

Tax Equity means that Equity of taxation means each citizen pays an amount of tax equal to their income and ability to pay the tax. There are few factors that can be considered while determining tax equity:

1. Exchange Equity and Fairness – Over the long run taxpayers receive appropriate value for the taxes they pay.

2. Process Equity and Fairness – Taxpayers have a voice in the tax system, are given due process and are treated with respect by tax administrators.

3. Horizontal Equity and Fairness – Similarly situated taxpayers are taxed similarly.

4. Vertical Equity and Fairness – Taxes are based on the ability to pay.

5. Time-Related Equity and Fairness – Taxes are not unduly distorted when income or wealth levels fluctuate over time.

6. Inter-Group Equity and Fairness – No group of taxpayers is favored to the detriment of another without good cause.

7.. Compliance Equity and Fairness – All taxpayers pay what they owe on a timely basis.

Progressive taxes and regressive taxes

Progressive tax means a tax that takes a larger percentage of income from high-income groups than from low-income groups.

Regressive tax means a tax that takes a larger percentage of income from low-income groups than from high-income groups

Why are sales taxes considered regressive

Sales taxes are considered regressive because they take a larger percentage of income from low-income taxpayers than from high-income taxpayers.

Three examples of goods subjected to selective sales taxes

1. cigarettes (and other tobacco products)

2. Alcohol

3. motor fuels

Public purpose goals of the selective sales tax for each of these items.

These products are also subject to a federal tax. For cigarettes and alcohol, the taxes are sometimes called sin taxes because one purpose of the tax is to discourage consumption. Majorly these are levied as government want to discourage consumption on these items.