A clear exposition of what makes an efficient and just tax system in the 21st century is essential.
Taxation is a dynamic economic and social tool and must inevitably change in nature as national economies and business sectors develop. Green taxes, for example, were unheard of 20 years ago. But there are also some enduring maxims. Below are ACCA’s 12 tenets of tax.
A presumption to tax neutrality
Governments must seek to remove the distortions in their own national tax systems and work together to try to iron out the differences in tax bases which give rise to tax arbitrage.
Openness and transparency
Tax payers should understand what they are paying, why they are paying it, and what the benefits of paying will be.
Tax legislation and operations should be as simple and straightforward to understand and to comply with as possible. Complexity in the tax system is in itself a distortion of the economy
Many tax systems require the tax payer to self-assess their liability to tax. The wording of the legislation should make it possible for tax payers to accurately establish their liability.
Accountability and regular review
Tax systems should be periodically overhauled and consolidated. This review brings the tax system up to date and makes it easier to follow.
Tax policy is a percentage of GDP
Levels of taxation should be clearly stated as a percentage of Gross Domestic Product. A rapid rise in the taxation burden to a level which cannot be supported by the economy can do immense harm
Governments require efficient tax systems to secure the revenue due and to prevent tax leakage. But the system should also be efficient for taxpayers in complying with its requirements.
Tax shifting and hypothecation have a role to play
Elected governments have the right to use taxation in certain circumstances in pursuance of agreed social policies. One of the most important examples is to change behaviour which can damage the environment.
Tax is a matter of national sovereignty
Globalisation means that each country should ensure its tax rates are competitive and its regime user-friendly. It is the quality of the underlying tax system – rather than a simple focus on comparative tax rates – which matters to companies.
Tax is subject to the rule of law
Taxpayers are under a moral obligation to pay the level of tax set by the law. There is a clear division between tax avoidance which is legal, and tax evasion which is not.
Respect for Human rights
The huge inequality in resources and power between governments and individual taxpayers places a responsibility on states not to impose their will in the field of taxation in an arbitrary or vexatious way.
Avoidance of double taxation
An essential principle of tax law must be that income should be subject to tax only once. This applies both to direct tax and consumption taxes.
"The pressure on governments to protect their tax bases by clamping down on both avoidance and evasion has become more pressing. The pressure is fuelled by a simple need for funds as much as political ideology."
Equity, Certainty, Convenience, Efficiency
In The Wealth of Nations (1776) Adam Smith (generally considered in the English speaking-world to be the father of modern political economy) articulated four famous canons of taxation:
The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.
The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person.
Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it.
Every tax ought to be contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state.