(a) What is incidence of taxes? [4 marks] (b) Explain any four principles of taxation [16 marks]

Answer Details

(a) Incidence of tax. The incidence of a tax is the final resting place of the tax burden, that is, the person or group who ultimately bears and pays the tax and cannot pass it on to anyone else. It should be distinguished from the impact of a tax, which is on the person who first pays it to the government; the impact and incidence fall on the same person only when the tax cannot be shifted.

(b) Four principles (canons) of taxation.

• Equity (ability to pay). A tax should be fair, taking into account the taxpayer's ability to pay, so that those with higher incomes pay more.
• Certainty. The amount, time and manner of payment should be clear and known in advance to the taxpayer, not arbitrary.
• Convenience. A tax should be collected at a time and in a manner most convenient for the taxpayer, for example, deducting income tax when salaries are paid.
• Economy. The cost of collecting the tax should be small relative to the revenue it yields, so that most of what is collected reaches the treasury.

(Other acceptable principles include flexibility, simplicity, neutrality and productivity.)

Examination takeaway: keep impact (first payer) separate from incidence (final bearer), and for each canon give the principle plus a one-line reason for it.