Essentials/Features/Characteristics of a Good Tax System

1. Should lead to fair and equal distribution of wealth in the community.

2. Should be composed in such a way that it yields sufficient revenue to the government
3. The cost on collection of taxes should not be excessive.
4. The burden of taxes should be distributed in proportion to the ability of the tax payer, i e it
should be progressive in character.
5. The system of taxation should be fairly simple, It should also be easy to administer.

What is the significance of the distinction between domestic debt and external debt?

• The first focuses on the currency in which the debt is issued (with external debt defined as foreign
currency debt and domestic debt as local currency debt).

•The second focuses on the residence of the creditor (external debt is debt owed to non-residents,
while domestic debt is owed to residents).

• The third focuses on the place of issuance and the legislation that regulates the debt contract (external
debt is debt issued in foreign countries and under the jurisdiction of a foreign court, while domestic debt
are all debt issued in the domestic market.

“Ricardian Equivalence is the view that deficits do not alter interest rates because citizens today see that
deficits today will be financed with higher taxes tomorrow and citizens save in order to have the funds
to pay those higher taxes”.

• He argued that rational, forward-looking households do understand that issuing bonds “today”
requires to raise taxes “tomorrow” such that the financing scheme is neutral w.r.t. consumption. Or also
known as “The Ricardian Neutrality Theorem”
• Ricardian Equivalence theorem suggests that when a government tries to stimulate demand by
increasing debt-financed government spending, demand remains unchanged. As rational consumers will
save the extra money in order to pay future tax they will incur. • The rise in private saving exactly offsets
the fall in public saving (Mankiw, 2012) and therefore aggregate demand remains unchanged. • The
question at issue in the Ricardian equivalence debate is whether a given path of public expenditure is
best financed by raising taxes or issuing debt. Ricardian equivalence teaches that fiscal policy changes
cannot be used by governments in order to stimulate economic growth as the households are rational
and realize that these policy changes are temporary and therefore alter their behavior. • The theory
opposes the classical and Keynesian view, where fiscal policy changes alter economic growth.

Some arguments

• Proponents of the Ricardian view assume that people are rational when making decisions such as
choosing how much of their income to consume and how much to save. When the government borrows
to pay for current spending, rational consumers look ahead to anticipate the future taxes required to
support this debt. • One argument for the traditional view is that people are myopic: they see a
decrease in taxes in such a way that their current consumption increases because of this new “wealth.”
They don’t see that when expansionary fiscal policy is financed through bonds, they will have to pay
more taxes in the future since bonds are just a tax-postponements.