In order to have an effective tax system, government must have criteria or standards. One such criterion is that a tax yields enough revenue.

A second criterion is clarity. Tax laws should be written so that both the taxpayer and tax-collector can understand them. This is not an easy task but people seem to be more willing to pay taxes¹, when they understand them. A third criterion is ease of administration. A tax should be easy to collect. It should not require a large enforcement staff, and it should be designed so that citizens find it hard to avoid. This criterion also includes convenience and efficiency. That is the tax should be administered at the lowest possible cost. A final criterion is fairness. Taxes should be imposed justly. However, this is hard to do because people do not always agree about what is or is not fair when it comes to taxes².

In general taxes are based chiefly on two principles: the Benefit Principle3 and the Ability-to-Pay Principle4.

The Benefit Principle of taxation is based on two ideas. First, those who benefit from government services should be the ones to pay for them. Second, people should pay taxes in proportion to the amount of services or benefits they receive.

The Ability-to-Pay Principle of taxation says that people should be taxed according to their ability to pay, no matter what benefits or services they receive. This principle is based on three things. First it is not possible to measure benefits, derived from government spending. Second, people with higher incomes suffer less discomfort than people with lower incomes even if they pay higher taxes. Finally, the only means most people have of paying taxes is the income they earn. Since the benefits of government services to individuals are hard to measure, the other basis for distributing taxes is income.

11. Business organizations

There are many types of business organizations in the business world. Choosing the form of business organization is a key factor to success of any business organization.

Anyone who wishes to start a business must take into consideration the objectives in setting up a business organization, the amount of capital needed to launch it and the level of control, the business and tax liability of different forms of ownership and expected profits or losses of the business.

There are essentially three basic ways to set up a privately owned enterprise: a sole proprietorship, a partnership, and a corporation. Each form of business organization has its advantages and disadvantages.

A sole proprietorship is an unincorporated business that is owned and operated by one person called a sole proprietor or sole trader. It's the most commonly used form for new small businesses.

Advantages of a Sole Proprietorship

• A sole proprietorship is the least costly and easiest form of business organization to launch and operate.

• A sole proprietorship is a business in which the owner is fully and personally responsible for all the obligations of the enterprise.

• A sole proprietor is entitled to all the company’s profits and takes complete managerial control.

• A sole proprietor is free to make any business decision – what kind of business activities to choose, who to hire or fire, when to take a vacation, when to liquidate his or her business and so on.

• There is preferential tax treatment. It means that any profit earned from the business is considered a sole proprietor’s income. The owner pays only personal income taxes on the business’s profits, which are reported as personal income on the proprietor’s individual income tax return.