TAX & REVENUE ADMINISTRATION

USING THE VARIOUS SYSTEM OF TAX ORIENTATION, INITIATE A

THEORETICAL POSITION ON THE IDEAL TAX SYSTEM THAT BEST SERVE

YOUR ORGANISATION.

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INTRODUCTION

It is no news that tax, though collected in different forms, has been a source of income

and wealth to governments of the world. Kingdoms, empires and societies existing in as far

back as the 5th century have practiced some form of taxation or the other, be it in the form of

prescribed labour provided by citizens or tributes to the king as is documented to have been

carried out in the pre-colonial Yoruba kingdom. Modern taxation however differs utterly from

such traditional practices and archaism. Today, taxation, while still being a source of income

to the government, has also become a means through which the government improves the lives

and standard of living of its people. What this implies is that tax is not only in the best interest

or for the benefit of the government, but also for the benefit of the governed. This is manifest

in both democratic and autocratic polities.

The aim of this document is to initiate a theoretical position on the ideal tax system that

best serves my organisation, doing so by using an orientation of tax systems. For this reason,

we shall need to consider what really tax is, highlight existing tax systems, and provide a

comprehensive understanding of what makes an ideal tax and let the understanding guide our

decision.

DEFINING TAX

Tax is a ‘financial charge’ or deduction from something you get or own, or an additional

cost added to something you buy. Tax is an involuntary fee paid by individuals or businesses

to government. It is a compulsory charge or other levy imposed on an individual or a legal

entity by a state or a national equivalent of a state. Put this way, one might begin to mistake tax

for a fine or see tax as some form of punishment. However, tax differs from a fine or penalty

imposed by a government. This is because tax is not imposed or used as a tool to deter or punish

unacceptable behaviour. Rather, it is used to support the cost of governing. However, tax is

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levied legally on a basis of laws established by the government and for this reason, failure to

pay them attract sanctions.

Normally, governments collect taxes so that there is a pot of money to spend for the

benefit of society as a whole. This might be for law enforcement, including the police and

courts; infrastructure, like roads and pathways, and administration. Taxes can be imposed by a

sub-national entity such as provinces and municipalities. These entities may use the tax revenue

for various purposes, most important of which is to provide benefits for the people within the

geographical region or territory. However, the value of government benefits received by any

particular person is not correlated or in proportion to the tax that person must pay and that is

why it is said that taxes are unrequited payments.

The main functions of taxation include raising revenue aimed at financing public

expenditures, redistributing income and wealth and correcting externalities. Just like other

sources of government income, Taxation has its limit but it remains the most important source

of government revenue. Examples of tax include; income tax, sales tax, profit tax and so on.

To this end, we can define tax as a compulsory payment levied by public authorities to

support the cost of government and for which nothing is directly received by the taxpayer.

Taxpayer here refers to the entity (individual or organisation) that is required by law to pay a

tax to governmental authority. Other elements or concepts commonly associated with taxation

that we might find repeatedly in this document include tax base, tax rate and tax revenue. Tax

base refers to the item on which a tax is levied; tax rate refers to the percentage at which a

taxpayer is taxed; and tax revenue refers to the income collected by governments through

taxation.

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TAX SYSTEMS

Tax system can be expressed in simple terms as a legal system for assessing and

collecting taxes based on income and/or wealth. We can also consider it to be a set of tax forces

in a country at a given time. But perhaps it was clearly broken down by A.V. Tolkushkin who

defined the tax system as a set of taxes and fees that are charged in a state, and the forms and

methods of its organisation (Tolkushkin, 2000).

According to tax rate systems, taxes can either be progressive, proportional or

regressive.

1.) Progressive Tax: These are taxes which take an increasing proportion of an income as the

income rises. Here, entities are taxed based on their level of income and wealth. For

example, if it is stipulated that income of 20,000 Naira should have a tax rate of 10% and

income of 30,000 Naira are taxed 20% and further goes on to apply a tax rate of 30% on an

income of 40,000 Naira, it would be seen that as the income rises, so does the the proportion

of it to be remitted. This illustration proposes that higher income earners do not just pay

more tax, but a higher percentage of taxes than low income earners.

2.) Proportional Tax: In proportional tax, there is a fixed tax rate such that, no matter the level

of income, be it high or low, everyone pays the same tax rate. For example, using the same

tax base as above, but instead of increasing the tax rates, every income earner pays the same

10%. That is, income A has a 10% tax rate on 20,000; income B also has 10% tax rate on

30,000; and still, income C has a tax rate of 10% on 20,000. This illustration shows that

this is a system of taxation where the same percentage of taxes is paid by all income groups.

3.) Regressive Tax: This is the direct opposite of the progressive tax. In regressive tax,

individuals are also taxed based on their level of income and wealth, but there is an inverse

relationship between the tax base and the tax rate. That is, the higher the income, the lower

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 the proportion of tax to be paid and the lower the income, the higher the tax rate. Let’s use

the same figures to illustrate.

INCOME A 20,000 40%

INCOME B 30,000 20%

INCOME C 40,000 10%

It can be seen from the table above that lower-income earners pay a higher percentage of

taxes than high-income earners.

WHAT IS AN IDEAL TAX?

Tax systems and practices vary widely around the world. However, these tax systems

are guided by principles to ensure that the imposition and administration of tax, when analysed,

can be considered good. Indeed, tax can be classified as good or bad based on certain criteria

referred to as the principles of tax. The principles of taxation have served as the maxims or

rules that guide the conduct of tax administration. They project standards that, if followed to

the letter, will allow for the affective administration of tax.

In The Wealth of Nations (1776), Adam Smith proposed four canons of taxation that

have been widely adopted as the major principles of taxation and these are discussed as follows:

1.) Convenience: This principle suggests that tax ought to be levied at the time or in the

manner in which it is most likely to be convenient for the contributor to pay it. For example,

the Pay As You Earn (PAYE) income tax on salaries and wages deducted monthly, or

weekly as the case may be, as income is received saves people the trouble of having to go

about figuring how to remit taxes accrued to government.

2.) Equity: This principle speaks of equality and fairness with respect to the tax contribution

of different individuals. In more elaborate terms, this principle proposes that the subjects

of every state ought to contribute to the support of the government as nearly as possible in

proportion to their respective abilities, i.e, in proportion to the revenue they enjoy under

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 the protection of the state. This principle is against overcharging taxes or imposing heavy

tax burdens on those with lower ability to pay.

3.) Certainty: This principle suggests that the time of payment, manner of payment and

quantity to be paid ought to be clear and plain to the taxpayers so they know where they

stand. This information ought to be adequately and clearly stated by tax regulations.

4.) Efficiency:This principle posits that the cost of administration of tax should be minimised

as far as possible, i.e, the cost of assessing and collecting a tax should be small in relation

to the revenue collected. For example, if the expenses incurred in the course of collecting

a tax exceed even 50% of the yield, then such tax do not conform to the principle of

efficiency.

Asides these principles adopted from Adam Smith, other principles have emerged that could

be considered variations of the canons proposed by Adam Smith. Some noteworthy principles

include: Simplicity, Flexibility, Neutrality, Stability amongst others.

CHOOSING THE IDEAL TAX SYSTEM

Now that we have understood the categories of tax system, and the basis of an ideal tax

system, we can forge ahead to propose a tax system that would be ideal for my organisation.

We shall allow this process to be guided by one of the canons proposed by Adam Smith which

is the principle of Equity. The reason for this is because it is practically impossible for one tax

system to conform to all principles, as the pursuit of one might reduce or impede another

principle. Also, the concept of equity or equality embodies further elements such as justice and

fairness in tax administration. Taxes must not only be fair, but they must also be seen to be fair

if the tax paying public is to find them acceptable. There is also a greater tendency for tax

evasion when the tax system is perceived to be inequitable.

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 Equity can however be horizontal or vertical. The distinction between horizontal and

vertical equity is as old as Aristotle's Nicomachean Ethics. Horizontal equity requires the equal

treatment of equals; vertical equity requires the unequal treatment of unequals (in proportion,

according to Aristotle, to their inequality). However, we shall analyse these two in the context

of taxation.

Horizontal equity requires that similarly situated individuals face similar tax burdens,

i.e, the taxation system should not discriminate between taxpayers in a similar position. It thus

suggests that it is fair for people of equal ability to pay the same amount in taxes. Taxpayers

are ‘similarly situated’ when their situations are considered to be equivalent. The proportional

tax system falls under this category as it involves a flat rate paid by all income earners.

Vertical equity on the other hand requires that people in unequal situations be treated

with the necessary degree of inequality. Vertical equity would require the rich to pay more than

the poor, which advocates a progressive system of taxation. In this system, the tax rate one is

subject to increases with the amount of earned income. The principle behind vertical equity is

that those who have the ability to pay more taxes should contribute more than those who do

not.

There are always going to be broad classes in every society; those who have, those who

do not, and those who have more than others; those who earn, those who do not, and those who

earn more than others; the elites and the masses; and the list goes on. For this reason, the thesis

of an equal treatment of equals and an unequal treatment of unequals is largely dependent on

which equalities or inequalities are considered relevant. If we decide to measure well-being by

income groups, everybody earning the same income should be subject to the same tax rate in

such a way that, using the same illustration as before, all income earners within the group of

20,000 Naira should have the same tax rate; those within the group of 30,000 Naira should

have the same tax rate, but different from those in the 20,000 Naira group because they are not

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in the same income group and thus unequal. It would be wrong to assume that just because they

are all income earners they would have the same ability to pay. Using this yardstick, it is

impossible to see all income earners as equal just because they earn income and thus there is

no such thing as equivalent situation, unless everyone earns the same amount which is

impossible due to differences in skill set and organisational tasks as well as contributions to the

attainment of organisational goals.

No rational organisation would be inclined to pay the gateman the same amount of

salary as the Human Resource Manager even if the gateman has the necessary qualification to

be a Human Resources Manager. In his book, 23 Things They Don’t Tell You About Capitalism,

Ha-Joon Chang stated that, “When some people have to run a 100 metre race with sandbags on

their legs, the fact that no one is allowed to have a head start does not make the race fair.

Equality of opportunity is absolutely necessary but not sufficient in building a genuinely fair

and efficient society.”

For this reason, we shall be leaning towards the vertical equity and our ideal tax system

of choice shall be the Progressive Tax System. As we have earlier established, the principle of

equity is concerned with the distribution of tax burden and it is imperative that the burden of

taxation should be spread in such a way as to give rise to an equality of sacrifice among the

taxpaying community. Hence, we have no reason to even take the regressive tax system into

consideration. For example, 2,000 Naira is less of a sacrifice to a person earning 50,000 Naira

than it is to someone earning 20,000.

Thus, we must reiterate that equality of opportunity is not enough. Unless we create an

environment where everyone is guaranteed some minimum capabilities through some

guarantee of minimum income, education, and healthcare, we cannot say that we have fair

competition.

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 It is only through the Progressive Tax System this fair competition can be achieved. In

a market system, an individual’s income is determined by the factors of production he owns

and the price those factors will fetch in the market. This is what has led to the wide gap between

social classes. In this system, those who have no capital or land and are unable to work are

heavily disadvantaged and even more so oppressed. This can be remedied through the

Progressive Tax System. The Progressive Tax System in which those with higher income pay

more taxes allow for a redistribution of wealth across the society through the creation of social

policies aimed at reducing inequalities in access to services and support between social groups.

On the contrary, proportional and regressive tax systems can exacerbate income inequality by

disproportionately benefiting the wealthy and further oppressing the poor or those with lower

ability to pay.

Also, the ability-to-pay principle of taxation suggests that the amount of tax an

individual or organisation pays should be relative to the amount they earn, as a means of easing

the financial burden that taxes can create for low-income households. This aligns with the

concept of the progressive tax system.

This progressive approach aims to distribute the tax burden equitably, with wealthier

individuals contributing a larger share of their income. The rationale is that those who have

less should contribute less, and those with more income who have benefitted from economic

prosperity should be responsible for perpetuating the growth cycle. Higher salaries enable

affluent people to pay higher taxes and this is the fairest system because it lessens the tax

burden of the poor. Since the poor have the smallest disposable incomes and spend a higher

proportion of their money on basic survival needs, such as housing, this system will allow them

to keep more of their money and income inequality will be reduced.

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CONCLUSION

In conclusion, it is important to note that when talking about a tax system, one must

always consider the reality in which it applies. The principles of taxation are fundamental and

guiding ideas that ought to be comprehended and substantiated by sociological precision as

well as financial and legal expertise during the selection of a tax system.

REFERENCES

Unufe Joseph. (2022), Tax and Revenue Administration: Themes And Trends.

Tolkushkin, A. V. (2000), Taxes and Taxation: Encyclopaedic Dictionary.

Sally M. Jones (2006), Principles of Taxation for Business and Investment Planning.

Simon James & Christopher Nobes (2003/2004), The Economics of Taxation.

Kath N. (1997), Taxation: Theory and Practice.

https://www.investopedia.com/ask/answers/042815/progressive-tax-more-fair-flat-tax.asp

Ha-Joon Chang (2010), 23 Things They Don’t Tell You About Capitalism.

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