The Four Cardinal Principles of Taxation
Taxation is a symbiotic relationship between the state and its citizens. In return for a monetary contribution, a taxpayer enjoys a host of general benefits and protection. This is the most basic principle of taxation. The burden of taxation shifts from the factor of production to the factor of distribution, ultimately settling on the ultimate consumer or purchaser. The burden of taxation may be shifted one or more times.
In taxation, the principle of horizontal equity applies. The same tax treatment is applicable for all individuals, and there should be no discrimination. The obligation to pay taxes is the same for all people, regardless of their income level. The same principle applies to intangible personal property, such as land and businesses. The place where a property is located must be the same as the place of ownership. However, intangible personal property does not admit a fixed location.
Taxes should be transparent and easy to understand. This will reduce the burden of compliance and avoid the so-called “tax gap” (the difference between what is owed and what is collected). The tax system should be easily administered, so that taxpayers do not experience too much trouble complying with tax payment requirements. The process should be transparent to the taxpayer. That way, the process is fair and democratic. For example, the government can adjust the tax rate to meet its revenue requirements.
A system of taxation should aim to minimize the tax burden on people, while collecting taxes at minimum cost. A tax should have the least burden on everyone and not favor any group. Exemptions from a tax should be limited and be specific in purpose. These exemptions are often meant to encourage certain types of behavior. This way, it is easier for taxpayers to comply with the taxation requirements. The process should be uncomplicated.
The four cardinal principles of taxation are: *taxes must be equitable and simple. The tax code should be simple to understand and the burden of compliance must be minimal. Moreover, a tax system should be transparent and easy to administer. The government should be open to the public. Hence, the taxes should be visible and the policies should be open to public debate. This means that it is important to have a transparent and easy tax system.
The system of taxation must be neutral. It should not interfere with economic decisions. For instance, a tax that favors one economic activity over another can lead to misallocation of resources. Furthermore, such a policy may lead to schemes to exploit preferential tax treatment. A government that base their decisions on the tax code is violating the principle of neutrality. This principle is a very important aspect of taxes and tax policy.