The
impact and incidence of taxation are two concepts in relation to taxation or
tax system. The impact of a tax
refers to the person or business on which a tax is levied; whereas the incidence of a tax refers to all
or part of the tax burden is passed on to someone else. In the case of a sales
tax, for example, the incidence will depend on the elasticity of demand and
supply.
A
good tax must possess the following qualities. These are canons of taxation. These are
generally acceptable as basic principles for a system of taxation. These
canons are 1) Equity, 2) Certainty, 3) Convenience and 4) Economy.
According
to Canon of Equity, there must
be equality of sacrifice, which means that the burden of taxation should be
distributed according to people’s ability to pay. It is generally accepted that
progressive taxes are the most equitable type of tax.
The
canon of certainty implies that
the taxpayer should know how much tax he/she has to pay, when it must be paid and
how it must be paid. He/she should be able to assess his tax liability from the
information provided by the government.
The
canon of convenience express
that, the taxes must be collected in a convenient form and at a convenient
time. (The pay as you earn system of tax collection is probably the most
convenient method in general use.
According
to canon of economy the costs of
collection and administration should be small in relation to the total revenue.
The structure of tax is of three different types
1)
Progressive taxation
2)
Proportional taxation and
3)
Regressive taxation.
A tax is progressive when it takes a
greater percentage of income from the higher income earner than it
does from the lower income groups. That is, as taxable income increases the
rate of tax increases.
A
tax is proportional when all
taxpayers pay the same percentage of their income. (UK corporation tax is an
example for this)
A
tax is regressive when it takes
a greater percentage of income from the lower income earner than it
does from the higher income groups.
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