Purpose, Structure, and Principles of Taxation

Introduction

Taxation is one of the principal ways in which a government obtains resources and influences economic and social behaviour. Every modern state requires funds to provide public services, maintain institutions, protect citizens, build infrastructure, and respond to emergencies. Taxes also affect decisions about work, saving, investment, consumption, business organisation, and the distribution of income.

Taxation is therefore more than a method of collecting money. It is a system of compulsory contributions established under law. A sound tax system must raise adequate revenue while treating taxpayers fairly, remaining understandable and administratively workable, and limiting unnecessary interference with productive economic activity.

This chapter introduces the purposes, structure, and fundamental principles of taxation. It provides a foundation for later study of tax planning, tax computation, compliance, and policy analysis. Tax rules differ between jurisdictions and change over time; consequently, the examples in this chapter are conceptual unless a jurisdiction is expressly identified.

Learning Objectives

By the end of this chapter, you should be able to:

• explain why governments impose taxes;
• distinguish revenue objectives from policy objectives;
• distinguish direct from indirect taxation;
• describe major categories of taxes and tax bases;
• explain equity, ability to pay, certainty, simplicity, neutrality, and efficiency;
• identify tensions and trade-offs among tax principles; and
• apply these ideas to a practical tax-policy situation.

1. What Is Taxation?

A tax is a compulsory payment imposed by a public authority under legal authority. It is generally not a payment made in exchange for a specific, individually measured service. This distinguishes a tax from a fee, such as a charge for issuing a passport, and from a commercial price paid for a privately supplied product.

Taxes normally have four characteristics:

1. Compulsion: payment is required when the legal conditions for liability are met.
2. Legal authority: the tax must be created and administered through law or legally authorised rules.
3. Public purpose: revenue supports public functions or is used to pursue authorised policy objectives.
4. No direct quid pro quo: the taxpayer does not ordinarily receive a benefit equal in value to the amount paid.

A tax system consists not only of tax rates. It includes the tax base, exemptions, deductions, credits, filing rules, payment mechanisms, enforcement procedures, appeals, penalties, and institutions responsible for administration.

Important terminology

• Taxpayer: a person or organisation legally liable for a tax.
• Tax base: the income, transaction, property, activity, or other measure to which a tax rate is applied.
• Tax rate: the amount of tax expressed as a percentage, fixed amount, or schedule.
• Tax liability: the amount legally due.
• Tax incidence: the person or group that ultimately bears the economic burden of a tax.
• Statutory incidence: the person or organisation legally required to remit the tax.
• Tax expenditure: revenue forgone because of exemptions, deductions, credits, reliefs, or preferential rates.
• Compliance: meeting legal obligations to register, calculate, report, pay, and retain records.

2. Why Governments Tax

2.1 Financing public expenditure

The most fundamental purpose of taxation is to finance public expenditure. Governments use tax revenue to support education, healthcare, courts, policing, defence, environmental protection, public administration, transport, and social protection. Some public services benefit individuals directly, while others, such as national security or clean air, are shared broadly.

Taxes also support the institutional framework in which markets operate. Contract enforcement, property registration, financial regulation, public statistics, and the rule of law all require public resources. Without reliable revenue, a government may be unable to deliver essential services or maintain public infrastructure.

Tax revenue is not the only source of public finance. Governments may also borrow, charge fees, earn income from public assets, or receive grants. Borrowing, however, generally creates future repayment obligations. Sustainable taxation provides a recurring source of finance and reduces excessive dependence on debt.

2.2 Correcting market failures

Markets may produce outcomes that are inefficient from society’s perspective. A market failure occurs when private decisions do not reflect all relevant social costs or benefits. Taxation can help address such failures.

An externality occurs when an activity affects third parties who are not fully reflected in the transaction. Pollution is a negative externality: a producer or consumer may impose health or environmental costs on others. A tax on emissions or on a polluting product can increase the private cost of the activity and encourage reduction in pollution.

Conversely, activities with positive external benefits, such as vaccination or education, may be encouraged through tax reliefs or public subsidies. Tax policy must be designed carefully, because poorly measured taxes can impose costs without producing the intended behavioural change.

2.3 Redistribution and social protection

Market income may be distributed in ways that a society considers unacceptable or inconsistent with its values. Governments can use progressive taxes, transfers, tax credits, and publicly funded services to reduce inequality and protect people from poverty or economic shocks.

Redistribution is not achieved by tax rates alone. The overall effect depends on the complete fiscal system. For example, a tax may be progressive when collected but partly offset by consumption taxes that take a larger proportion of low-income households’ resources. The distributional analysis must therefore consider both taxes and public benefits.

2.4 Stabilising the economy

Taxation can support macroeconomic stability. During periods of strong economic growth, higher tax payments may moderate excessive demand. During downturns, lower incomes and profits may automatically reduce tax liabilities, leaving households and firms with more disposable income. This is known as an automatic stabiliser.

Governments may also alter tax rules deliberately as part of fiscal policy. Such measures require careful timing. A tax reduction may stimulate demand, but it can also increase public borrowing or inflationary pressure if the economy is already operating near capacity.

2.5 Influencing behaviour

Taxes may discourage activities viewed as harmful or encourage activities viewed as beneficial. Examples include taxes on tobacco, alcohol, carbon emissions, or congested roads, and reliefs for research, retirement saving, or energy-efficient investment.

Behavioural objectives create an important distinction. A successful corrective tax may reduce the activity being taxed, thereby reducing the tax revenue collected. The policy should therefore be evaluated by its social outcome, not only by the revenue raised.

3. Revenue Objectives and Policy Objectives

A revenue objective focuses on raising funds for public expenditure. A policy objective uses the tax system to influence behaviour, redistribute resources, correct market failures, or pursue broader social goals.

These objectives can reinforce each other but may also conflict. A broad-based consumption tax may raise substantial revenue efficiently, while a narrowly targeted tax may be effective in discouraging a harmful activity but yield little revenue if behaviour changes significantly.

The distinction is useful in professional tax analysis. When reviewing a tax measure, ask:

• What activity or base is being taxed?
• Is the primary purpose revenue, behaviour change, redistribution, or a combination?
• Who is legally responsible for payment?
• Who is likely to bear the economic burden?
• What administrative and economic costs will arise?
• How will success be measured?

A tax policy should not be judged solely by its stated purpose. Its actual effects may differ because taxpayers change their behaviour, reorganise transactions, shift income, reduce consumption, or move activities across borders.

4. The Structure of a Tax

A tax can be analysed through several connected elements.

4.1 Tax base

The base is the quantity or value to which the tax applies. Common bases include:

• personal or business income;
• profits;
• consumption or sales;
• wages and payroll;
• land and buildings;
• wealth or transfers of wealth;
• imports and exports; and
• particular products or activities.

A broad base generally permits a lower rate for a given revenue target, although the distributional and administrative effects depend on the design.

4.2 Tax rate

A specific rate is a fixed amount per unit, such as a fixed amount per litre. An ad valorem rate is a percentage of value, such as a percentage of a sales price.

A rate may be:

• proportional: the same percentage applies across the relevant base;
• progressive: the average tax rate increases as the base increases; or
• regressive: the average tax rate decreases as the base increases.

The terms progressive and regressive describe the relationship between tax liability and a measure such as income. They do not necessarily describe the legal rate schedule alone. A tax with one uniform rate can be regressive relative to income if lower-income households spend a larger share of their income on the taxed consumption.

For a simple tax, liability may be represented as:

Here, T is tax liability, r is the tax rate expressed as a decimal, and B is the taxable base. This expression applies only where the tax is a single-rate tax with no deductions, exemptions, thresholds, or credits. In a real tax system, liability may instead be calculated through multiple bands and adjustments.

4.3 Thresholds, deductions, exemptions, and credits

A threshold is an amount below or above which a different tax treatment applies. A deduction reduces the taxable base. An exemption removes specified income, property, or transactions from the base. A tax credit reduces tax liability directly, usually after the tax has been calculated.

These instruments have different distributional effects. A deduction is generally more valuable to a taxpayer facing a higher marginal rate, whereas a refundable credit can provide support even when a taxpayer has little or no initial tax liability. Their effects depend on detailed legal design.

5. Direct and Indirect Taxes

The direct–indirect distinction concerns how a tax is imposed and, traditionally, whether the legal taxpayer is expected to bear the burden.

5.1 Direct taxes

Direct taxes are generally imposed on the income, profits, or property of identified taxpayers. Examples include personal income tax, corporate income tax, property tax, and inheritance or estate taxes.

Direct taxes can be designed with information about the taxpayer’s circumstances. This may make them suitable for progressive treatment and redistribution. However, they may be administratively demanding, particularly where income is difficult to measure or taxpayers have opportunities to alter the timing, form, or location of income.

5.2 Indirect taxes

Indirect taxes are generally imposed on transactions, consumption, production, or specific goods and services. Examples include value-added tax, sales tax, excise duties, customs duties, and some transaction taxes.

Businesses may collect an indirect tax from customers and remit it to the tax authority. The business is then the statutory remitter, but the consumer may bear much of the economic burden through a higher price. The extent of shifting depends on demand and supply conditions, competition, market structure, and time.

A value-added tax is commonly collected at stages of production and distribution, with registered businesses often receiving credit for tax paid on eligible business inputs. Its detailed operation differs among jurisdictions.

5.3 Incidence is an economic question

Legal responsibility does not determine economic incidence. Suppose a government imposes a tax on sellers of a product. Sellers may raise prices, accept lower profit margins, reduce wages, or alter production. Buyers may reduce purchases. The final burden is distributed according to behavioural responses.

This is why tax planning and policy analysis must distinguish statutory liability from economic incidence. A tax described as a business tax may partly affect consumers, employees, suppliers, shareholders, or landowners.

6. Principles of a Good Tax System

Tax principles are standards used to assess whether a tax system is desirable. No system perfectly satisfies every principle. Policymakers must identify trade-offs and make them transparent.

6.1 Equity and fairness

Equity concerns whether taxpayers in comparable circumstances are treated similarly and whether taxpayers with different circumstances are treated appropriately differently.

Horizontal equity requires taxpayers with equal relevant ability to pay to bear equal tax burdens. For example, two taxpayers with equivalent taxable income should generally face equivalent liability, subject to legitimate differences recognised by law.

Vertical equity concerns how taxpayers with different abilities to pay should be treated. It may support progressive taxation, but the appropriate degree of progression is a normative and political question rather than a purely technical conclusion.

Equity can also be assessed by benefits received. The benefit principle suggests that people should contribute according to the benefits they receive from public services. The ability-to-pay principle suggests that contributions should reflect economic capacity. General taxation often combines elements of both approaches.

6.2 Ability to pay

Ability to pay may be assessed through income, consumption, wealth, or a combination of indicators. Income is widely used but may not fully represent resources. Two households with the same income may have different family responsibilities, health costs, accumulated wealth, or living costs.

A tax based on ability to pay should define the relevant measure consistently and recognise genuine differences without creating excessive complexity. Reliefs intended to promote fairness can also create opportunities for avoidance or produce unequal benefits.

6.3 Certainty

The principle of certainty requires taxpayers to know, with reasonable clarity:

• what is taxable;
• who is liable;
• how liability is calculated;
• when payment is due; and
• what records and procedures are required.

Certainty reduces disputes, compliance costs, and opportunities for arbitrary administration. It also improves investment decisions because taxpayers can assess the likely consequences of transactions. Complex anti-avoidance rules may be necessary, but they should be drafted and administered consistently.

6.4 Simplicity

A simple tax is easy to understand, calculate, administer, and enforce. Simplicity lowers compliance costs and reduces accidental errors. It can also improve voluntary compliance because taxpayers are more likely to perceive the system as legitimate.

Simplicity is not the same as a low tax rate. A low-rate tax with numerous exceptions may be more complex than a higher-rate tax with a broad base. Similarly, a simple rule may be unfair if it ignores important differences among taxpayers. Good design seeks proportionate complexity: detailed rules should be justified by significant revenue, fairness, or policy benefits.

6.5 Neutrality

A neutral tax does not unnecessarily favour one economic decision over another. For example, if two investments with similar risk and economic return receive very different tax treatment, the tax may distort capital allocation.

Complete neutrality is rarely possible or desirable. Corrective taxes intentionally influence behaviour, and distributional objectives may justify different treatment. The appropriate question is whether a departure from neutrality is deliberate, transparent, and justified by a recognised objective.

6.6 Efficiency

Efficiency has at least two dimensions. Allocative efficiency concerns whether resources are directed to their most valuable uses. Administrative efficiency concerns whether revenue can be collected at reasonable cost.

A tax creates an excess burden or deadweight loss when it changes behaviour and reduces mutually beneficial transactions beyond the revenue transferred to government. The size of this loss depends on how responsive taxpayers are to the tax, the rate, the availability of substitutes, and the time available for adjustment.

A tax may nevertheless improve overall efficiency if it corrects a negative externality. In that case, the behavioural change is not necessarily a social loss; it may reduce pollution or another external cost.

6.7 Flexibility and productivity

A productive tax raises sufficient revenue and can adapt to changing economic conditions. An income tax may grow with the economy, while a fixed charge may lose real value as prices rise. Flexibility can support fiscal management, but frequent changes undermine certainty and increase compliance costs.

6.8 Transparency and accountability

Taxpayers should be able to understand the purpose, cost, beneficiaries, and distributional effects of major tax measures. Tax expenditures should be identified rather than hidden within complex provisions. Transparent administration, accessible guidance, review rights, and protection of taxpayer information support trust in the system.

7. Trade-offs in Tax Design

The principles above can conflict. A broad consumption tax may be efficient and productive but place a relatively high burden on low-income households when measured against current income. A highly progressive income tax may promote vertical equity but increase complexity and affect incentives to work, save, or invest. Extensive deductions may recognise personal circumstances but narrow the base and create uncertainty.

A useful policy evaluation considers at least five questions:

1. Effectiveness: Does the measure achieve its stated objective?
2. Equity: Who gains and who bears the burden?
3. Efficiency: How does it affect economic decisions and resource allocation?
4. Administration: Can the authority and taxpayers operate it reliably?
5. Legitimacy: Is the measure transparent, lawful, and publicly defensible?

These questions should be applied to the whole tax-and-benefit system rather than to one tax provision in isolation.

8. Applied Case: Designing a Congestion Charge

This is an illustrative case, not a description of a particular jurisdiction.

Background

A metropolitan authority faces severe traffic congestion. Average journey times have increased, buses are delayed, and air pollution is concentrated near major roads. The authority is considering a charge on vehicles entering the central district during weekday peak hours.

Problem

The authority wants to reduce congestion and pollution, raise funds for public transport, and avoid placing an unfair burden on people who have limited travel alternatives.

Analysis

The charge has a clear policy objective: it is intended primarily to correct negative externalities rather than to maximise revenue. It is an indirect tax or tax-like charge on a transport activity. Its incidence may fall on drivers, employers, consumers, or vehicle owners depending on whether costs are passed through wages, prices, or parking arrangements.

The charge may be efficient if drivers respond by travelling at different times, using public transport, sharing vehicles, or avoiding unnecessary trips. However, the response depends on the availability, price, and reliability of substitutes. If public transport is inadequate, the charge may reduce mobility without achieving a proportionate reduction in congestion.

Equity requires attention to income, disability, work schedules, geographic location, and access to alternatives. Exemptions or targeted support may improve fairness, but too many exemptions could weaken the congestion objective and increase administrative complexity.

Certainty requires clearly defined charging zones, times, vehicle categories, payment deadlines, and appeal procedures. Technology may assist through electronic identification and digital payment, but the authority must protect personal data and provide accessible alternatives for people who cannot use digital systems.

Approach and solution

A defensible design could include:

• a clearly published charging zone and operating schedule;
• variable rates reflecting congestion intensity, if the technology and evidence justify them;
• transparent use of revenue for public transport and walking or cycling infrastructure;
• limited, evidence-based concessions for disability and essential services;
• privacy safeguards and retention limits for travel data;
• independent monitoring of traffic, pollution, revenue, and distributional effects; and
• periodic review with public reporting.

Outcome

If traffic volume and journey delays fall while public transport use increases, the measure is meeting its primary policy objective. If revenue falls because congestion is successfully reduced, that is not necessarily a failure. Conversely, high revenue with little change in congestion may indicate that the charge is functioning mainly as a revenue measure rather than an effective corrective instrument.

Learning points

The case demonstrates that tax assessment requires more than identifying the rate. Analysts must examine purpose, base, incidence, equity, efficiency, administration, technology, and evidence of outcomes. It also shows why a measure can be desirable under one principle and problematic under another.

9. Administration, Compliance, and Ethics

A tax system depends on institutions as well as legislation. Effective administration requires registration systems, taxpayer services, risk-based audits, reliable information, dispute resolution, staff competence, and proportionate penalties.

Taxpayers have responsibilities to provide accurate information, retain appropriate records, pay on time, and seek professional advice where necessary. Tax professionals have additional duties of competence, confidentiality, integrity, and lawful conduct. Tax planning is legitimate when it arranges affairs within the law and respects its purpose. Fraud, concealment, falsification, and deliberate evasion are unlawful.

The distinction between avoidance and evasion must be handled carefully because legal definitions differ among jurisdictions. In general, evasion involves illegal concealment or misrepresentation, while avoidance often refers to reducing tax through arrangements that may technically comply with specific rules but conflict with their intended purpose. Anti-avoidance legislation, disclosure requirements, beneficial ownership rules, and international information exchange have increased scrutiny of artificial arrangements.

Digital tax administration can improve accuracy and reduce costs through electronic filing, automated matching, data analytics, and pre-filled returns. It also creates risks involving cybersecurity, algorithmic bias, exclusion of digitally disadvantaged taxpayers, and inappropriate use of personal data. Human review, explainable decisions, secure systems, and accessible appeals remain essential.

10. Contemporary Developments

Several developments are reshaping taxation:

• cross-border digital commerce challenges traditional concepts of physical presence;
• multinational profit shifting has increased attention to international tax cooperation;
• environmental taxes and emissions pricing are being considered as tools for climate policy;
• ageing populations and changing work patterns affect social-security and payroll revenues;
• digital assets create questions about valuation, reporting, and classification; and
• governments increasingly use real-time data and electronic invoicing to improve compliance.

These developments do not eliminate the core principles of taxation. Rather, they make certainty, fairness, privacy, administrative capacity, and international coordination more important.

Best-Practice Framework for Basic Tax Analysis

When analysing a tax measure, proceed in the following order:

1. Identify the legal taxpayer and the economic activity being taxed.
2. Define the tax base, rate, threshold, deductions, credits, and payment point.
3. State the principal objective: revenue, redistribution, correction, stabilisation, or another policy purpose.
4. Distinguish statutory liability from likely economic incidence.
5. Assess horizontal and vertical equity, including effects on vulnerable groups.
6. Consider certainty, simplicity, compliance costs, and administrative feasibility.
7. Examine behavioural responses and possible efficiency effects.
8. Identify avoidance, evasion, privacy, and governance risks.
9. Review evidence and establish measures for monitoring outcomes.
10. Check the current law and official guidance before giving practical advice.

Chapter Summary

Taxation is a compulsory contribution established by law and used principally to finance public services. Governments also tax to correct market failures, redistribute resources, stabilise the economy, and influence behaviour. Revenue objectives should be distinguished from policy objectives because a measure that changes behaviour successfully may collect less revenue.

Taxes can be classified by base, rate structure, and collection method. Direct taxes commonly apply to income, profits, property, or wealth; indirect taxes commonly apply to consumption, transactions, or particular goods. Statutory incidence identifies who must remit a tax, whereas economic incidence identifies who ultimately bears its burden.

A sound tax system is evaluated through principles including equity, ability to pay, certainty, simplicity, neutrality, efficiency, productivity, flexibility, transparency, and accountability. These principles may conflict. Effective tax analysis therefore requires an explicit assessment of purpose, distribution, behavioural effects, administration, ethics, and evidence. Tax professionals must also distinguish lawful planning from unlawful evasion and remain alert to changing legislation and digital administration.

Key Terms

Tax: A compulsory payment imposed under legal authority for public purposes.

Tax base: The income, transaction, property, activity, or value on which tax is calculated.

Tax liability: The amount legally due from a taxpayer.

Taxpayer: A person or organisation legally liable for a tax.

Tax incidence: The person or group that ultimately bears the economic burden of a tax.

Statutory incidence: The person or organisation legally required to account for or remit a tax.

Direct tax: A tax generally imposed on an identified taxpayer’s income, profits, property, or wealth.

Indirect tax: A tax generally imposed on consumption, transactions, production, or specific goods and services.

Progressive tax: A tax for which the average tax rate rises as the relevant base increases.

Regressive tax: A tax for which the average tax rate falls as the relevant base increases.

Horizontal equity: Similar taxpayers in similar circumstances should be treated similarly.

Vertical equity: Tax treatment should appropriately reflect differences in ability to pay.

Ability-to-pay principle: The view that contributions should reflect economic capacity.

Benefit principle: The view that contributions should relate to benefits received from public services.

Tax neutrality: The principle that taxation should not unnecessarily distort economic choices.

Tax certainty: Clarity about tax liability, calculation, timing, and procedures.

Tax expenditure: Revenue forgone through reliefs, exemptions, deductions, credits, or preferential rates.

Tax evasion: Illegal concealment or misrepresentation intended to avoid tax.

Tax avoidance: Tax reduction through arrangements whose legality and consistency with legislative purpose may be disputed.

Externality: A cost or benefit affecting third parties and not fully reflected in a market transaction.

Review Questions

Short Answer Questions

1. Define a tax and identify two characteristics that distinguish it from a fee.
2. What is the difference between a tax base and a tax rate?
3. Distinguish direct taxes from indirect taxes and give one example of each.
4. Explain horizontal equity and vertical equity.
5. Why does statutory incidence not necessarily equal economic incidence?

Long Answer Questions

1. Explain the principal revenue and policy objectives of taxation and discuss how they may conflict.
2. Compare the advantages and limitations of income taxes and consumption taxes using equity, efficiency, and administration as criteria.
3. Explain the principles of certainty, simplicity, neutrality, and efficiency in tax design.
4. Discuss the ability-to-pay and benefit principles and evaluate why neither principle alone completely determines a tax system.
5. Explain why tax administration, transparency, privacy, and taxpayer rights are essential to a legitimate tax system.

Analytical / Application Questions

1. A government proposes a tax on sugary drinks to reduce health costs and raise revenue. Analyse its objective, likely incidence, equity effects, behavioural responses, and administrative challenges.
2. Two taxpayers have the same gross income, but one supports three dependants and the other has no dependants. Using horizontal and vertical equity, discuss arguments for and against providing different tax treatment.
3. A city introduces a peak-time road charge but has overcrowded public transport. Evaluate whether the measure satisfies the principles of efficiency, equity, certainty, simplicity, and transparency. Suggest two improvements.

Multiple Choice Questions with Answers

Question 1

Which is the most fundamental purpose of taxation?

A. To finance public expenditure

B. To eliminate all private markets

C. To guarantee identical incomes

D. To replace monetary policy

Correct Answer: A. To finance public expenditure

Question 2

Which of the following is normally a direct tax?

A. Value-added tax

B. Customs duty

C. Personal income tax

D. Sales tax

Correct Answer: C. Personal income tax

Question 3

Economic incidence refers to:

A. The agency that collects a tax

B. The person who ultimately bears the tax burden

C. The date on which a return is filed

D. The statutory tax rate

Correct Answer: B. The person who ultimately bears the tax burden

Question 4

A tax is progressive when:

A. Its average rate rises as the tax base increases

B. Everyone pays the same absolute amount

C. Its average rate falls as the tax base increases

D. It applies only to consumption

Correct Answer: A. Its average rate rises as the tax base increases

Question 5

Which principle requires taxpayers to know how and when their tax is due?

A. Neutrality

B. Certainty

C. Benefit

D. Flexibility

Correct Answer: B. Certainty

Question 6

A tax on pollution designed to reflect environmental damage is primarily intended to:

A. Correct a negative externality

B. Guarantee a fixed profit for producers

C. Remove the need for public services

D. Create horizontal equity in all cases

Correct Answer: A. Correct a negative externality

Question 7

Under the simple formula T = r × B, what does B represent?

A. The tax rate

B. The taxpayer’s identity

C. The taxable base

D. The payment deadline

Correct Answer: C. The taxable base

Question 8

Which statement best describes neutrality?

A. Tax rules should deliberately favour every investment equally

B. Taxation should not unnecessarily distort economic choices

C. All taxpayers must pay an identical amount

D. Only indirect taxes can be neutral

Correct Answer: B. Taxation should not unnecessarily distort economic choices

Question 9

Which is an example of a tax expenditure?

A. A statutory filing deadline

B. Revenue forgone through a tax credit

C. A public-sector wage payment

D. A taxpayer’s bank balance

Correct Answer: B. Revenue forgone through a tax credit

Question 10

Why might a successful corrective tax collect less revenue over time?

A. The tax authority automatically cancels it

B. Taxpayers may reduce the taxed activity

C. The tax base becomes legally untaxed in every case

D. Progressive rates always reduce revenue

Correct Answer: B. Taxpayers may reduce the taxed activity