6. Principles of Taxation

The theory of taxation rests on the shoulders of economic theory of the market. When a tax is introduced, market prices of products and inputs change, shifting the allocation of inputs—labour and capital, for example—distorting their pre-tax ‘efficient’ allocations among various products. A second effect could be unequal distribution or incidence of tax burdens on those resources. A third effect comprises uncertain effects on the stabilisation of an economy, and on savings and investment that may, in turn, affect capital formation and economic growth. Tax design should, therefore, recognise principles that minimise such adverse ramifications. Fourth, revenue buoyancy or productivity of tax revenue is an important concern of tax administrations. Fifth, clarity of tax law determines the ease of taxpayer compliance. Sixth, simplicity of tax structure is important because complexity leads to challenges of interpretation. Seventh, structuring a tax administration such that tax law is applied transparently and impartially has emerged as a crucial principle. The fact that some principles may conflict with one another under selected circumstances has to be contended with. Finally, a question that is addressed is, once a reformed tax structure adhering to essential principles is introduced, how long is it likely to last.