Understanding Tax Systems

A tax which does not distort the market is said to be neutral. A special tax on certain goods, e.g., motor cars, is not neutral as such a tax encourages the consumer to spend his money on other goods rather than on a motor car. There are many cases in many countries where neutrality is lacking. The effect is harmful since it encourages taxpayers to spend on expert professional advice for the purpose of tax avoidance. A system may consciously choose, however, to distort the market to achieve a desired result. For example, a tax can be imposed on a particular good to encourage manufacturers to allocate more of their limited capacity for export or a tax relief to stimulate businesses to to build, like capital allowances on property improvements.

Certainty.

Adam Smith considered this principle to be important, though it has often been underestimated in modern tax systems in which open and impartial administration can usually be taken for granted. Certainty implies that the scope and extent of the tax is clear and that the tax can and will be enforced. Certainty means that the Treasury will be able to forecast how much revenue will be obtained from a particular tax and possibly the effects of the tax on the economy as a whole. The public will have no confidence in countries where the application of taxes is uncertain and arbitrary. Also, the principle of certainty will not be satisfied in times of high inflation because of the uncertainty and fear of higher tax demands resulting from inflated values, click here to see the special rate pools. Such reactions will demonstrate the need for certainty as an important principle in a respected tax system. 

Efficiency.

A good tax system should be structured in such a manner that it can be administered efficiently and economically. Any tax which is expensive or difficult to administer will divert resources to non-productive uses and will diminish confidence in the government in its ability to govern properly. Waste of productive resources can result from the imposition of excessive tax rates. In such a situation productive efforts are shunted from high into low-yielding activities, from productive enterprises into tax shelters and from open transactions into hidden participation in the underground economy. The administrative costs incurred by HMRC in collecting a tax should be as low as possible, having regard to the tax collected. These costs do not take into account the costs of taxpayers. Also, costs incurred by a taxpayer in a tax dispute are not deductible against taxable income, even if he wins. Although, costs can bde deducted against tax bills, read more about capital allowances explained.