Q7. What are basic principles of a sound tax system? Give a detailed account of aforementioned basic principles.
Ans. The fundamental purpose of taxation is to raise the revenue necessary to fund public services. While there are many ways to achieve this goal, a widely agreed-upon set of principles should be used to evaluate tax systems. There are five commonly cited principles of sound tax policy: equity, adequacy, simplicity, exportability, and neutrality.

Equity: Two Kinds of Tax Fairness
When people discuss tax “fairness,” they’re talking about equity. Tax equity can be looked at in two important ways: vertical equity and horizontal equity.
Vertical equity addresses how a tax affects different families from the bottom of the income spectrum to the top—from poor to rich. Three terms are used in measuring vertical equity:
■ Regressive tax systems require that low- and middle-income families pay a higher share of their income in taxes than upper-income families. Sales taxes, excise taxes and property taxes tend to be regressive.
■ Proportional or flat tax systems take the same share of income from all families.
■ Progressive tax systems require upper-income families to pay a larger share of their incomes in taxes than those with lower incomes. Personal income taxes are usually progressive.
Horizontal equity is a measure of whether taxpayers with similar circumstances in terms of income, family structures, and age pay similar amounts of tax. For example, if one family pays much higher taxes than a similar family next door, that violates “horizontal” fairness. This sort of unjustified disparity undermines the public support for the tax and diminishes people’s willingness to file honest tax returns. It would be hard to defend a tax system that intentionally taxed left-handed people at higher rates than right-handed people. Likewise, a tax that hits a