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3/6/25, 3:16 PM about:blank Canons of Taxation Canons of Taxation There are four criteria which helps to identify good tax system. First is Neutrality (Economic efficiency) itis achieved if tax does not distort economic choices made by individuals. All economic activities have costs and benefits associated with them eg. working: loss of leisure time, benefit - salary received. Distortions cause by taxation are known as “tax wedge” and can cause two effects. Substitution effect arises when individuals consume one item rather than another because of the effect of taxation eg VAT which applies to certain product. UK have wide range of zero rate based which helps people with low income to avoid paying extra for the necessity such as food. However, some more luxury products have the standard VAT rate on it therefore may not be as popular in demand due to the higher prices and people will choose other products eg. chocolate products have VAT, or books have no VAT but e-books do. The income effect is when the transfer of wealth from a taxpayer to the government caused by taxation eg. people choose not to work as they will have to pay too much to government. The income distortion then reduces the amount that the taxpayer can consume meaning people will not spend that much money on products etc as they will not have the resources to do so. In order to overcome that UK, increases their national minimum wage every year as well as the annual exemption and basic rate band in order to motivate people to work as they can earn more while the tax rate remains constant at 20%. Efficiency (Administrative) as taxes should be cheap to collect and administer. The tax authorities are responsible to collect the tax from taxpayers quickly and without excessive costs. Determine tax liability correctly to avoid errors which require time to correct. This can also link to second criteria Convenience. The sum time and manner of payment of a tax should not only be certain but the time and manner of its payment should also be convenient to the contributor. It removes the administrative burdens and reduces administrative costs for tax payer which relates to efficiency. The examples in UK tax systems , involves PAYE as it’s done automatically by the employer while paying wages which minimises the level of error and effort for taxpayer to provide appropriate information to HMRC. The self-assessment is seen as a way to simplify the way of computing tax liability. The ability of online payments are beneficial as it’s much faster and easier than writing cheques or sending money through post office. However, National Insurance can be seen as inconvenient tax as it’s just an extra tax which involves special calculations it would be much easier if there was just one rate which combines the two income tax and NI. Third, Certainty, the time of payment, the manner of payment and quantity to be paid should all to be clear to the contributor and to every other person. A successful function of an economy requires that the people, especially business class, must be certain about the sum of tax that they have to pay on their income from work or investment. The government should be able to forecast yearly tax take accurately so itis possible to plan how the tax will be spend. In addition, the lack of certainty in the tax system can encourages corruption in tax administration. The example what happens if the government is not certain isthe situation in Greece as their based their incomes on tourists but bar and restaurants were not VAT registered due to the competition level as they wanted to keep their prices low the government didn’t receive that much money and couldn’t provide accurate forecasts. Therefore, the correct VAT received estimations or ability to have one rate of VAT which applies to all products or anti-avoidance legislations eg. Stamp Duty Land Tax help to maintain the certainty. The last criteria is Equitable (Fair). Every person should pay to the government accordingly to his ability to pay, this is proportion of the income or revenue. There are to aspects of ability to pay , concept of horizontal equity which means that those who are equal and those in similar situation should be treated in similar manner, This implies that those who have same income should pay the 1/2 
