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What are the principles of taxation?

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Quick Answer

According to John Stuart Mill, the four principles of taxation are that the system be efficient, understandable and equitable and those who benefit from publicly-provided services should sponsor and pay for those services through taxes. A good tax system follows the four principles of taxation.

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Full Answer

The first principle, efficiency, means that the tax system raises enough revenue to sponsor projects without burdening the economy and the system shall not become a disincentive for performance. According to Wikibooks, the second principle of "understandable" means that the system should not be incomprehensible to someone who does not understand the principles of taxation. The tax system should not have hidden or complicated language that the average citizen cannot understand, and all costs should be upfront and transparent.

Thirdly, the tax system must be equitable, notes Wikibooks. This means that taxation should be determined by a person's ability to pay, and that wealthier people should pay more in taxes because they are able to do so. This specific principle is also known as a flat tax rate. For example, a tax of 10 percent would have far less of an impact on a person who makes a million dollars a year than on someone who makes $10,000. The fourth principle, the benefit principle, simply means that those who benefit from a publicly provided service should pay the taxes that fund the service.

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