When we speak of tax, we usually think of money paid to the government by reason of our obligation as citizens. All Citizens are expected to pay their taxes to their government, sometimes irrespective of whether or not they live and work in their country, and some people, especially companies, are expected to pay taxes to the government of the country where they do business, whether or not they are citizens of that country.
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Definition
Taxation is a compulsory levy imposed on a subject upon his property by the government to provide security, social amenities and create conditions for the economic well-being of the society. The main purpose of taxation is to raise funds to meet government expenditure and to redistribute wealth and management of the economy.
Taxes comprise public funds generated from private persons for providing public goods. There are different types of taxes and the laws governing tax in any society will usually state how, when and by whom the requisite payments should be made, but not necessarily what they will be used for.
Principles Of Tax
The following principles must form the bedrock of an effective tax system:
Equity/Proportionality
While the government has the authority to demand a certain percentage of the income of the citizens to finance itself, the percentage demanded should not be such that would amount to unconscionable extortion, but one proportionate to the income of the taxpayer, and at the same time ensure uniformity of liability.
Although the two principles of equity and proportionality are subsumed in one heading, it will be difficult to satisfy both ends. This is so because, one may think of equity as demanding equality in the imposition of tax and is satisfied by the proportional tax system, whereas proportionality requires that the overall income of a taxpayer should be the determining factor of how much of his income would be requested for by the state, and this is satisfied by the progressive tax system.
Consequently, equal payment of tax does not mean an equal distribution of burdens on citizens because of the difference in income amongst different levels of citizens in the society.
Certainty
This principle demands that at no point in time should the method of taxation be such that the taxpayer is left in doubt as to the imposition of a tax system. It should be as clear as possible for citizens and other taxpayers to understand their obligations and how such obligations are to be discharged.
Convenience
This principle demands that the government ensure that the mechanism put in place for the payment of tax is such that makes it convenient for taxpayers to make the required payments.
When taxpayers have to go through cumbersome processes before payment can be made, the outcome will be tax avoidance, even by those who otherwise would have been willing to pay.
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In the Nigerian context, methods of collection like Pay-As-You-Earn and withholding tax are designed to facilitate convenient payment of taxes.
Simplicity/Administrative Efficiency
The purpose of the imposition of taxes is to ensure that revenue is readily available to run government apparatus. This purpose will be defeated if the bulk of the money collected goes to fund the cost of administering the tax collection itself.
Hence, the government should endeavour to use the most efficient and least expensive administration machinery so that the money collected from taxpayers will not be significantly greater than what actually gets to the government treasury after administrative costs have been deducted.
The cost of collection of tax should be reasonable when compared to the amount actually collected. In other words, the government should not impose taxes if the cost of collection would be excessive; otherwise, the tax is not economical. The lower the cost of collection, the more efficient the tax system.
Neutrality
A tax is neutral if it avoids distortions of the market, which means that it does not influence the supply and demands of goods and services in any direct way. A selective tax, such as sales tax, is not neutral since it encourages the consumer to rather spend money on an item that is not taxable than on taxable items.
Flexibility
A tax system that is responsive to changing realities is to be preferred to a rigid tax system. An adjustable tax system would allow any tax that is obsolete to be withdrawn and accordingly replaced with a meaningful and collectable tax.
Productivity/Fiscal Adequacy
The yield from a tax should be adequate, to cover the government’s expenditure. Therefore, the government must plan the tax structure in such a way that the revenue accruing therefrom is adequate for carrying out public administration and other government activities.
Since the main purpose of taxation is to collect money for the provision of public goods, it is important that the funds collected are adequate to meet this purpose.
Conclusion
It must be noted that a good tax system should be coherent, simple and straightforward. The tax should be clear to the taxpayers and accepted by the public. This eliminates or at least considerably reduces the opportunities for corruption, oppression, and manipulation of the system and the taxpayers by the tax officials.
Taxes are very important because of their significance for funding government administration and infrastructure development. Therefore, governments come up with taxes on individuals, companies, and groups, based on their earnings or monies received.
Tax is not a punishment and it is not a fee for services rendered. It is simply a levy on earnings meant to serve the purposes of the government collecting it.
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