The primary objective of the tax system was to generate TAX revenue.
Tax revenue is vital for a developing country to meet its needs and provide essential public services.
Therefore, how a country's tax system is to be set up should first and foremost take into account its own needs, both in terms of helping the economy grow and helping the people of the country, but also in terms of being able to respond to what is happening in the world.
When evaluating the effectiveness of a tax system, it is necessary to look at the system as a whole.
The government needs to attract more tax revenue while at the same time satisfying its resident taxpayers.
As a result, it is important to know that a good tax system does not have to be a perfect tax system that collects taxes according to the rules of the tax system, brings in enough money, and does not hurt taxpayers in any way.
A good tax system is one that, on average, collects fair taxes and adheres to most tax rules. The following are some qualities that should be included in an effective tax system:
equity or fairness;
suitability for achieving macro-level objectives.
One of the most fundamental elements of a good tax system for a developing country is that it should provide the government with sufficient money to carry out its expanding welfare and development operations.
Suppose the current method of collecting taxes cannot provide an adequate amount of money. In that case, the government will be obliged to rely on deficit financing.
Effects of deficit financing:
It causes a decrease in the purchasing power of people;
It causes inflation:
It causes the depreciation of the currency.
Equity or Fairness
According to Adam Smith, fairness, or equality, is one of the qualities that make for an effective tax system.
It indicates that everyone should pay their proportionately fair part of the taxes.
Equity and Fairness are synonymous with this concept.
For a tax system to be considered good, it needs to include most of the taxes that help bring in money and wealth for the country and ensure everyone gets the same treatment.
One of the most significant aspects of efficiency is the minimisation of administrative and compliance expenses.
Therefore, collecting taxes should not be designed so that the cost of collecting taxes constitutes a relatively significant fraction of the total taxes collected.
The collection process needs to be as cost-effective as is practicable.
In addition, the expenditures the taxpayer is responsible for to satisfy his obligation should be kept to a minimum.