Principles of a sound tax system

The principles of a sound tax system are fiscal adequacy, administrative feasibility, and theoretical justice. Fiscal adequacy means the sources of revenue must be sufficient to meet government expenditures and other public needs. Administrative feasibility means tax laws and regulations must be capable of being effectively enforced with the least inconvenience to the taxpayer. And, theoretical justice means that a sound tax system must be based on the taxpayers’ ability to pay.

Fiscal adequacy. The sources of tax revenue should coincide with, and approximate the needs of, government expenditures. The revenue should be elastic or capable of expanding or contracting annually in response to variations in public expenditures.Ideally, taxes collected should be enough for the operations of the government. Government funds should not be lower than what is needed. However, it should also not be more than that because, if so, the public would be overburdened with tax.

The principle of fiscal adequacy as a characteristic of a sound tax system was originally stated by Adam Smith in his Canons of Taxation (1776), as:
IV. Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state.
It simply means that sources of revenues must be adequate to meet government expenditures and their variations. The dire need for revenue cannot be ignored. Our country is in a quagmire of financial woe. (G.R. NO. 168056)

Administrative feasibility. Tax laws should be capable of convenient, just and effective administration. Each tax should be capable of uniform enforcement by government officials, convenient as to the time, place, and manner of payment, and not unduly burdensome upon, or discouraging to business activity.

Administrative feasibility is one of the canons of a sound tax system. It simply means that the tax system should be capable of being effectively administered and enforced with the least inconvenience to the taxpayer. Non-observance of the canon, however, will not render a tax imposition invalid "except to the extent that specific constitutional or statutory limitations are impaired." Thus, even if the imposition of VAT on tollway operations may seem burdensome to implement, it is not necessarily invalid unless some aspect of it is shown to violate any law or the Constitution. (G.R. No. 193007

Theoretical justice or equality. The tax burden should be in proportion to the taxpayer’s ability to pay. This is the so-called ability to pay principle. Taxation should be uniform as well as equitable.

Equality or theoretical justice which means that the tax burden should be proportionate to the taxpayer’s ability to pay (this is the so-called ability to pay principle).

The non-observance of the above principles will not necessarily render the tax imposed invalid except to the extent those specific constitutional limitations are violated. (De Leon)