Using The Various System of Tax Orientation, Initiate A Theoretical Position On Which Tax System Is Best For Your Organisation
Using The Various System of Tax Orientation, Initiate A Theoretical Position On Which Tax System Is Best For Your Organisation
Using The Various System of Tax Orientation, Initiate A Theoretical Position On Which Tax System Is Best For Your Organisation
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
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
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
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
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
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
It can be seen from the table above that lower-income earners pay a higher percentage of
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
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
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
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
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
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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
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
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
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
Thus, we must reiterate that equality of opportunity is not enough. Unless we create an
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
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
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
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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
well as financial and legal expertise during the selection of a tax system.
REFERENCES
Unufe Joseph. (2022), Tax and Revenue Administration: Themes And Trends.
Sally M. Jones (2006), Principles of Taxation for Business and Investment Planning.
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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