NOTE 3A

Question 1

Requirements for stability of tax

Answer 1

the legislation be well written to eliminate unintended tax exemptions or deductions (loopholes)
the statutory rates of tax for each of the taxes are not so high as to create powerful incentives to promote tax avoidance schemes or to stimulate tax evasion activity
the tax revenue is adequate and grows in a consistent fashion
the tax system is simple and the combined cost of administration and compliance is low

Question 2

Simplicity of tax

Answer 2

A Tax system should be simple so that it is easy to comply with by taxpayers.
Simplicity must apply to the administration of the law as well as its legal structure.
A complex tax system imposes high level of compliance costs on tax payers and a high cost of administration on the government.

Question 3

Economic effieciency

Answer 3

A tax is efficient if the dead weight loss or efficiency cost is small.
High differential tax rates create larger economic efficiency costs.
The economic efficiency of a tax is an important consideration when designing a tax system.
Estimates of efficiency cost range from 5 to 150 percent of additional tax revenues.

Question 4

Tax Neutrality

Answer 4

• Growth comes about primarily through the expansion of savings and expansion of investment into high return activities.
• The tax system should not create major distortions in consumption and production behavior.
• A tax should not change the investment decisions by favoring one set of investments over the others.
• The tax system should not create a disincentive to work.
• Well-designed tax systems should encourage competitive growth in all sectors of the economy.

Question 4

Low administration and compliance costs

Answer 4

A good tax system has low administration and compliance costs. These costs are part of the economic cost of having a tax system.

Question 5

Revenue Adequacy

Answer 5

-The taxes introduced should be sufficient to finance and fund the government expenditure requirements over time.
-Inadequate revenues will force the government to resort to borrowing, selling state assets or printing money (inflation).
-The entire tax system should evolve as the economy changes