The most important attributes of a good tax system are, Revenue adequacy, Equity, Economic Efficiency, Administrative Efficiency, and Flexibility. A single tax need not satisfy all these attributes. It is the combined effect of the taxes, and expenditure policies of an entire tax system that must be evaluated against these attributes.
Revenue adequacy refers to the ability of a tax system to raise sufficient revenue to finance budgeted government expenditure. This calls for designing a tax system the has an optimal combination of different taxes in order to bring widen the tax base as much as possible. If a tax system fails to mobilize adequate revenue, the Government will resort to deficit financing. Deficit financing is harmful to society as it brings about inflation. Policies that aim to implement optimal combinations of broad-based income and consumption taxes seek to achieve revenue adequacy.
The burden of taxation and the distribution of revenues from taxation must be equitable. A tax system must ensure that citizens fairly contribute towards the running of government, to the extent of their:
- ability to pay; and
- benefits from goods and services that a government provides
Taxes affect the prices of goods services and labour. They affect the behavior of the players in an economy, i.e. producers, consumers and workers. Without taxes, prices will allow set the economy to operate at an equilibrium point, where the supply and demand of goods services and labour is most efficient given the available technology and other factors. When taxes are imposed, the players in the economy may change production, consumption and working patterns. This sets the economy off equilibrium and the welfare of society is reduced. The extent of the loss in welfare depends on the design of a tax system. A good tax system minimizes the loss in welfare (or the deadweight loss) that it caused by the various taxes on the economy.
The main objective of taxation is to raise revenue to finance government operations. They must however be collected at minimum cost to the administration and to the taxpayers. If administrative costs are too high, it may not be viable to enforce them and if compliance costs are too high, taxpayers may not comply voluntarily. This may cause further administrative costs and difficulties. Administrative efficiency calls for simplicity and certainty of taxes.