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

Explanation

(a) A tax is a compulsory levy imposed by the government on individuals and firms.

(b)(i) Equity / Ability to Pay:It is fair to assume that those who have the greatest wealth or the highest in-come should pay higher. This implies that revenue should be raised without causing undue hardship to the tax payer.

(ii) The Revenue yield:From the standpoint of the government, the total revenue that tax yields is of considerable importance. Governments are comfortable with . taxes that provide a fairly predictable and steady in-come.

(iii)Economy: Consideration must be given to the cost of collecting a tax, since high cost incurred in administering a tax may make it uneconomical for both the tax payer and the government.

(iv) Neutrality:An important consideration in evaluating tax is how the tax affects production, savings and people's willingness to work. A good tax system should not interfere unnecessarily with the supply and demand for goods and services.

(v)Convenience: The method and time of payment should be convenient to the tax payers.

(vi) Benefits - Received principle:It is argued that those who benefit most from government supplied goods or services should pay the taxes necessary for their financing. For example petrol taxes are typically ear-marked for financing road construction and repairs. Toil gates. etc.

(vii)Certainty: Governments and the tax payers should know about the amount, time, method of tax payments with certainty.

(viii) Flexibility: The tax system should be flexible enough for adjustments when the need arises.

(ix) Simplicity:Taxation should not be difficult to administer and understand. It should not cause problems of differences in interpretation.