PRINCIPLES OF TAXATION

Dr Shivani Mohan
Assistant Professor of Economics
Chanakya National Law university, Patna
Development of Taxation
◦ Major source of Public Revenue
◦ The modern states are no more police states but welfare states.
◦ Adolph Wagner, a German economist presented his famous ‘Law of Increase of State
Activities.’
◦ He states that ‘comprehensive comparison of different countries and different times
show that among progressive people with which alone we are concerned, an increase
regularly takes place in the activity of both central and local governments.’
◦ This increase is both intensive and extensive.
◦ Professor R.A Musgrave, the twentieth century economist, advocated public
expenditure since a government’s activities have increased many fold, such as
◦ 1) activities to secure a reallocation of resources
◦ 2) redistribution activities,
◦ 3) stabilizing activities
◦ 4) commercial activities.
Public revenue and Taxes
◦ Public revenue is used in two senses
◦ 1. Narrow sense- Taxes, prices of goods and services supplied by public sector, revenue
from administrative activities, fee, fine etc
◦ 2. Wider Sense- income of revenue for a given period of time( borrowing, individuals
and banks and public enterprises)

Difference between Public revenue and Public receipts

Public Receipts = Public revenue + Public borrowing + issue of new currency

(Public revenue includes that income which is not subject to repayment by the
government. )
Taxes and its Characteristics
◦ A) Taxes on income
◦ B) Taxes on wealth and property and
◦ C) Taxes on commodities.
◦ Characteristics
◦ 1. compulsory payments to the government from the citizen.
◦ 2. a personal obligation.
◦ 3. Absence of direct benefit or quid pro quo between the State and people.
◦ 4. payments for meeting the expenses in the common interest of all citizens.
◦ 5. Certain taxes are imposed on specific objectives for example,( tax on petrol/
addictives to reduce consumption and tax on luxuries
◦ 6. There is no tax without representation.
Canons of Taxation
◦ A good tax system is based on certain canons and principles. Adam Smith’s Canons of
Taxation
◦ Canon of Equality
◦ Canon of Certainty
◦ Canon of Convenience
◦ Canon of Economy

Charles F. Bastable has followed other principles

◦ Canon of Productivity
◦ Canon of Elasticity
◦ Canon of Diversity
◦ Canon of Simplicity
◦ Canon of Co-ordination
Principles of Taxation

◦ 1. Principle of Equity

◦ a) horizontal equity

◦ b) vertical equity
The Benefit of Quid Pro Quo Principle

◦ people receiving equal benefits should pay equal amounts of taxes and those who receive greater
benefits should pay higher taxes.
◦ Merits
◦ .Justification for taxes
◦ Equity principle satisfied
◦ No Discouragement to work and invest
◦ Basis for allocation of taxes
◦ Demerits
◦ Injustice for poor
◦ Benefits are community based
◦ Certain benefits are immeasurable
Ability to Pay Principle or Sacrifice Theory
◦ explains the fair fairness or justice in the distribution of tax burden.

“Equality in taxation means equality in sacrifice.”

J.S Mill,

“The burden of taxation should be so distributed that the direct real burden on all tax payers is equal.”
Dalton

“The basic point of the ability to pay principle is that the burden of taxation should be shared amongst
the members of the society so as to conform to the principle of justice and equity…….and this equity
criterion will be satisfied if the tax burden is determined according to the relative ability of the tax
payers.”
Professor Seligman
Implications of the theory

◦ tax compulsory contribution

◦ Public expenditure and public revenue distinct entities, expenditure provided for
common goods, revenue raised from the individuals according to their ability.
◦ Taxes should be equitable
◦ Minimum total sacrifice
◦ Welfare aspect
Indices of ability to pay
1. Subjective Approach (burden should be equally distributed)
◦ Equal Absolute sacrifice ( loss of utility should be equal )
◦ Equal Proportionate sacrifice (loss of utility should be proportional to the total income of
the tax payer)
◦ Equal Marginal Sacrifice (least aggregate sacrifice)

2. Objective Approach
It includes
1. Income
2. Property
3. Consumption
Thank You!