Taxation remains the surest and most sustainable source of revenue to Government of Nations. Even countries (Saudi Arabia and UAE) that are heavily dependent on income from mineral resources have recently introduced Value Added Tax on the sales of goods and services.
Some countries have been able to set up an effective and efficient tax system that fetches enough tax revenue to cater for government expenditures – cost of governance, building world-class infrastructure, welfare for citizens and giving aids to other nations. Most countries are yet to fathom the fundamentals for setting up an effective and efficient tax system.
Tax Mix and Design are the two key fundamentals that drives the tax system of country. Tax Mix or Structure refers to the aggregate of the tax types and their contributions to the total tax revenue, while tax design refers to the crafting of each tax type by defining what is to be taxed and who should collect the tax.
The optimal tax mix of a nation should strike the appropriate balance between, direct and indirect taxes, consumption tax and income tax (company income tax and personal income tax) income tax and poll taxes or levies and promoting fewer broad-base taxes. The optimal tax design of a nation should promote one tax per tax base, the appropriate tax rates, administrative efficiency, ease of compliance, and equitable to all tax payers.
Low tax revenue or tax to GDP ratio in a nation is a reflection of a faulty tax policy mix and design.