(a) What is a tax? (b) Describe any four principles of a good tax system.

Answer Details

(a) A tax. A tax is a compulsory payment levied by the government on individuals, firms and goods, for which the taxpayer receives no direct or specific benefit in return. It is a major source of government revenue used to finance public services.

(b) Four principles (canons) of a good tax system. These are the qualities first stated by Adam Smith.

• Canon of equity (fairness): tax should be based on ability to pay, so that those who earn more pay more.
• Canon of certainty: the amount, time and manner of payment should be clear and known in advance to the taxpayer, not arbitrary.
• Canon of convenience: the tax should be collected at a time and in a manner convenient to the taxpayer (for example, deducting income tax when wages are paid).
• Canon of economy: the cost of collecting the tax should be small relative to the revenue raised.
• Other canons: productivity, flexibility and simplicity are also desirable.

Examination reminder: describe each canon (do not merely name it), and remember the four Adam Smith canons: equity, certainty, convenience and economy.