Desirable Features of Tax System

in his seminal work on public finance, Musgrave (1959), drawing on the eighteenth century philosopher/ economist Adam Smith (1910), identified a set of requirements for a 'good' tax system. Although not universally accepted, they represent a set of principles by which a tax system might be judged. the following represent some general features of tax systems which are usually considered desirable, given that a goverment needs to raise revenue.

Efficiency

Taxation raises efficiency considerations. we know that Pareto efficiency requires that prices should reflect marginal cost, but most from of taxation (income Tax, expenditure tax) will actually drive a wedge between prices and marginal costs. So, unless governments tax endowments, commonly referred to as lump-sum taxes, taxation will result in a lost of efficiency. Our concern for efficiency reflects the principle that, given a revenue target, a tax should be designed to cause least harm.

Equity

Both horizontal and vertical equity represent value judgements. Horizontal equity requires that there should be equal treatment of those who are in relevant respects the same. Thus tax treatment should disregard gender, ethnicity of religious conviction. in general, tax system do satisfy horizontal equity in these respects. However, individuals with otherwise identical characteristics face differential tax treatment according to marital status or age. A Married Couple's Tax Allowance, for example, creates differential tax treatment for single and married people. This is becoming less common across the OECD, although in some countries it remains an important part of government policy aimed at encouraging and supporting marriage and the family. larger tax allowances may also be given to older workers, usually as part of a policy to protect against pensioner poverty.

Simplicity and Low Administrative cost

A desirable feature of a tax system is that it is simple and easy to administer; however, this is not always easy to achieve. The costs associated with collecting taxes will rise where there are more people or types of good facing special tax treatments, if there are more differential rates and more tax-rising bodies (e.g. local, federal, central). it is this sort of concern that has resulted in support  of simple taxes such as the 'flat tax'-a tax with a single marginal rate (see Hall and Rabushka, 1983).

it is unlikely that a tax system will reflect all of these properties. A trade-off will occur between efficiency and vertical equity and also horizontal equity and simplicity.