Characteristics of an Effective Tax System

The basic objectives of taxation is to generate maximum potential revenue with desirable effects on the economy. For this, the tax system should be based on sound objectives and policies along with overall effective tax system. Due and Friedlander are of the view that a sound tax system should have the following characteristics:
  1. Equality in the distribution of the tax burden
  2. Productivity of the tax-system generating adequate revenue along with encouraging production in the economy
  3. Appreciation of the rights and problems of the taxpayers and
  4. Adaptability of the tax structure to meet the changing needs of the economy.
The effectiveness of a tax system requires the effectiveness of its components or sub-systems. They can be mentioned as follows:

1. Sound objectives and policies
Taxes should be levied with clear and specific objectives and policies with due considerations of the possible effects in the economy. For this, the tax structure should be designed with careful planning and research. The active participation of the taxation-experts, legal-experts, tax-administrators, taxpayers and other related stakeholders helps in this concern.

2. Simple and specific Taxation Laws
The taxation laws and regulations should be simple and specific about each and every terms, provisions, procedures, etc. They all should be thoroughly examined as to their application and effectiveness. There must be certainty about what the law requires and intends. Complexities and ambiguities in taxation laws should be avoided as they may lead to discriminatory powers to the tax authorities as well as provide more chances for tax evasion by the taxpayers. 

3. Effective Tax Administration
The tax administration mechanism should have effective organization structure, competent personnel, integrated information technology, simple and convenient tax procedures, well organized revenue intelligence mechanism, simplified revenue appeal mechanism and well coordination with the governmental organizations and other stakeholders.

4. Well provision for Reward and Punishment
A well provision of reward and punishment is essential for an effective tax system. Rewards should be provided to the taxpayers who maintain their account honestly and file returns in prescribed time. Similarly, the tax authorities doing their job honestly should be rewarded. On the other hand, both the taxpayers and tax authorities violating the taxation laws should be punished without discretion.

5. Tax Consciousness and Voluntary Compliance
The great asset of a tax system is the higher degree of voluntary compliance on the part of taxpayers. For this, there should be attempts to increase tax consciousness. Tax consciousness and compliance can be increased with the involvement of the taxpayers in policy formulation, tax education, convenient taxation procedures and effective reward provisions.

6. Stable Government and Political Commitment
There is always necessity to reform tax administration for its effectiveness. This is possible, in a true sense, only with a stable government and strong political commitment & consensus mainly on policy making and implementation concerning the broadening the tax-base in a progressive manner.

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