Theory and basis of taxation

  1. The power of taxation proceeds upon the theory that the existence of the government is a necessity, that it cannot continue without means to pay its expenses and that for this means it has a right to compel all its citizens and property within its limits to contribute.
  2. The basis is the reciprocal duties of protection and support between the State and its inhabitants. The State collects taxes from the subjects of taxation in order that it may be able to perform the functions of government. The citizens, on the other hand, pay taxes in order that they may be secured in the enjoyment of the benefits of organized society (benefits received theory).

Lifeblood theory:

  1. Taxes are the lifeblood of the Government and their prompt and certain availability are imperious (expecting obedience) need.
  2. Upon taxation depends the government’s ability to serve the people for whose benefit taxes are collected.

Manifestation of lifeblood theory:

  1. Imposition of tax even in the absence of Constitutional grant.
  2. Right to select objects of taxation.
  3. No injunction to enjoin (or stop) tax collection.

Purposes of taxation:

  1. The principal (primary) purpose is to raise revenue for governmental needs. This is also called revenue or fiscal purpose.
  2. The secondary purposes of taxation are:

Compensatory purposes

  1. To reduce excessive inequalities of wealth.
  2. To maintain high level of employment.
  3. To control inflation.

Sumptuary or regulatory purpose

  1. To implement the police power of the State to promote the general welfare.

Basic principles of a sound tax system (Canons of taxation): FAT

  1. Fiscal adequacy – this means that the sources of revenue should be sufficient to meet the demands of public expenditures.
  2. Administrative feasibility – this means that the laws should be capable of   convenient, just and effective administration.
  3. Theoretical justice – this means that the tax burden should be proportionate to the taxpayer’s ability to pay (ability to pay principle).

About Jonathan Ruiz CPA

Entrepreneur, CPA Mentor, Stock market Newbie Mentor, Influential Author and Master's Degree in International Business graduate in Hult International Business School, UK. A father of two lovely daughters.
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