Fairness as a Principle of Taxation

Karl Marx is attributed to have said, “…from each according to one’s capability, to each according to one’s need,” maybe without actually bearing in mind the principles of finance or specifically taxation.  But the famed saying may describe what most economists nowadays believe about the principle of fairness of a good tax system – the burden of tax must be according to people’s ability to pay and based on whether people are involved in availing of public goods or otherwise.

Ability to pay is a sub-principle in itself, which holds that tax must be measured by a person’s income or wealth.  A look at being able to spend produces two implications – horizontal equity and vertical equity.  Horizontal equity states that people in the same economic standing must be impelled to pay the same amount of tax; problems in this kind of equity arise because of various factors affecting economic status, such as personal health, dependents, and environment.  Vertical equity requires fairness in distribution of tax burden across people with varying abilities to pay, or one with higher income must be taxed more than the other with lesser income; this equity poses the question regarding the rate of tax imposition.

Tax based on availing of public goods fall under the benefits sub-principle, or the principle stating that tax imposition must be limited to individuals or groups who availed of public products or services; this treats public goods as similar to privately produced ones, and regards tax as the price people must pay to avail these.  The benefits principle of taxation is only practically applied to situations which are negatively beneficial or those activities resulting to undesired effects.  Simply put, individuals or entities causing harm or degradation of the society in any aspect, must be the only ones to pay for taxes.

Because of the requirements a fair tax system demands, it is safe to conclude that simplicity is the arch-enemy of fairness.