Taxation Concepts

Adam Smith’s Canons of Taxation

Canons of taxation  are sets of  criteria  by which to judge taxes.  These canons are still widely accepted as providing a good basis by which to judge taxes.  Adam Smith  laid down  four canons of taxation.  They are:

  1. Canon of Ability:  According to this principle of taxation, the people in a country should contribute towards the government expenditure. Their contribution should be according to the ability to pay of each individual. A rich man should contribute more and the poor either should contribute less  or can be exempted. This principle of taxation will ensure that the cost of public expenditure is shared by the people in accordance with their individual ability.
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The Principle of Equity in Taxation

Taxation traces its origin to the ancient times as a major source of revenue needed for governance. Kingdoms, monarchies and even dynasties had an elaborate form of taxation imposed on their subjects to source funds that were used to run affairs of the government. These taxes were subjective and biased depending on those in power. Advancement in education led to important studies on the possible forms of taxation that reflected the aspirations and welfare of the people.

Owing to this therefore, Adam Smith, accredited as the “Father of modern political Economy” carried out an extensive study in Public Finance seeking to give an in-depth analysis of taxation.… Read the rest

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Dual Income Taxation

The Dual Income Tax (DIT) is a combination of both comprehensive income tax system and flat tax system. It is not a plain comprehensive system with a single progressive tax development or a flat tax with only a proportional tax, but a combination of both. It attempts to tax the personal capital income at a uniform (low) proportional tax while maintaining a (higher) progressive rate on the labour income.

This taxation system was first introduced in Denmark 1987, other northern countries as Finland, Norway or Sweden followed. Until today the Norwegian system is seen as the most experienced one and is seen as very respected for the consistency with which it was implemented.… Read the rest

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Flat Tax System

An alternative to the global tax system or comprehensive taxation system is the so called flat tax system. Herewith a flat proportional taxation for all net income types, capital, labor and other income is installed. This taxation system does not consider the taxpayers ability to pay taxes but sets a flat level for all income types. Some east European countries (Russia and Slovakia) have installed this taxation system. Russia replaced its progressive taxation system with a single flat tax rate of 13%.

Under a pure flat tax without deductions, companies could simply, every period, make a single payment to the government covering the flat tax liabilities of their employees and the taxes owed on their business income.… Read the rest

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Comprehensive Income Taxation

The comprehensive income tax system also known by other synonyms as global income tax, unitary income tax or synthetic income tax is the most used taxation system in western European countries. It has got its name due to the fact that all income types are seen as a one and therefore are added together and taxed as one whole income. It was seen as the ideal tax system in Europe because in its original form it could align fully with the “ability to pay principle” and to both tasks of simplicity and fairness. This method is composed as a system which adds together all the taxpayer’s income (from labor, capital, rent and business) in a single measure and taxes it with a single progressive tax.… Read the rest

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Five Reasons that Contribute to Non Compliance with Tax Laws

Non compliance of tax laws  can be said to be a failure, intentional or unintentional, of taxpayers to meet their tax obligations. This lack of compliance can be as a result of different factors as indicated below:

  1. A Rising or High Tax Burden: Individuals and organizations will tend to be non compliant to tax laws when the taxes are deemed to be high as compared with the cost of living. In such a case taxpayers will tend to avoid payment of taxes so as to have a sizeable amount of money to be used in the purchase of different commodities.
  2. Lack of Knowledge on Tax Laws: This point focuses on the unintentional failure of a taxpayer to comply to tax laws.
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