Elements of Taxation: Desirable Characteristics and Related Measures

To a large extent, the effectiveness of a government depends on how well it can provide public goods that will meet the demands of its citizens. However, for a government to be able to provide the goods consistent with public demands, it must be able to collect the necessary revenue, in particular tax revenue, without overburdening the taxpayers. The decisions to raise taxes that can realistically support the range of goods a government provides must be based on a sound understanding of the principles that underlie those decisions. The budget process expects the decision makers to have a basic understanding of these principles before making any decision on how much goods the government must provide, the amount of revenue it must collect, the sources from which the revenues must come, and the economic and financial impact their decisions will have on the taxpayers vis-à-vis the public, and society at large. This chapter discusses several widely regarded principles that serve as the basis for tax decisions of a government. It also briefly looks at some of the methods commonly used in tax collection. The central issue in any discussion on taxation is not how much revenue a tax system generates, but who ultimately bears the tax burden, known as tax incidence. The chapter concludes with a brief overview of incidence of taxation, including some of the methods commonly used for measuring the incidence.