Canons/Principles of Taxation By Adam Smith:
Adam smith,
the father of modem political economy, has laid down four
principles or cannons of taxation in his famous book
"Wealth of Nations". These principles are still considered to be
the starting point of sound public finance. Adam Smith's
celebrated cannons of taxation are:
(1) Cannon of
equality or ability, (2) Cannon of certainty, (3) Cannon of
convenience, and (4) Cannon of economy.
(1)
Canon of
equality or ability: Canon of equality, or ability is
considered j to be a very important canon of taxation. By
equality we do not mean that people should pay equal amount by
way of taxes to the government. By equality is meant equality of
sacrifice, that is people should pay taxes in proportion to
their incomes. This principle points to progressive
taxation. It states that the rate or percentage of taxation
should increase with the increase in income and decrease with
the decrease in income. In the words of Adam Smith:
"The subject of
every state ought to contribute towards the support of the
government as early as possible in proportion to their
respective abilities that is in proportion to the revenue which
they respectively enjoy under the protection of the State".
(2) Canon of certainty: The Canon of certainty
implies that there should be certainty with regard to the amount
which taxpayer is called upon to pay during the financial year.
If the taxpayer is definite and certain about the amount of the
tax and its time of payment, he can adjust his income to his
expenditure.
The state also
benefits from this principle, because it will be able to know
roughly in advance the total amount which it is going to obtain
and the time when it will be at its disposal. If there is an
element of arbitrariness in a tax, it will then encourage misuse
of power and corruption Adam smith in this connection
remarks:
"The tax which
each individual is bound to pay ought to be certain and not
arbitrary. The time of payment, the manner of payment, the
quantity to be paid all ought to be clear and plain to the
contributor and to every other person".
(3) Canon of convenience: By this canon, Adam
smith means that the tax should be levied at the time and
the manner which is most convenient for the contributor to pay
it. For instance, if the tax on agricultural land is collected
in installments after the crop is harvested, it will be very
convenient for the agriculturists to pay it. Similarly, property
tax, house tax, income tax, etc., etc., should be realized at a
time when the taxpayer is expected to receive income. The manner
of payment of tax should also be .convenient. If the tax is
payable by cheques, the contributor will be saved from much
inconvenience. In the Words of Adam Smith:
"Every tax ought to be levied at the time or in the manner
in which it is most likely to be convenient for the contributor
to pay it".
(4) Canon of Economy: The canon of economy implies
that the expenses of collection of taxes should not be
excessive. They should be kept as little as possible, consistent
with administration efficiency. If the government appoints
highly salaried, staff and absorbs major portion of the yield,
the tax will be considered uneconomical. Tax will also to
regarded as uneconomical if it checks the growth of capital or
causes it to emigrate to other countries, In the words of
Adam Smith:
"Every tax is to be so contrived as both to take out and
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".
Some other
Canons/Principles of Taxation Rather Than Adam Smith:
Some writers on
Public Finance have formulated four other important
canons/principles of taxation. They, in brief, are as
follows:
(1) Canon of productivity: The canon of productivity indicates
that a tax when levied should produce sufficient revenue to the
government. If a few taxes imposed yield a sufficient fund for
the state, then they should
be
preferred over a large number of small taxes which produce less
revenue and are expensive in collection.
(2)
Canon of
elasticity: Canon of elasticity states that the tax system
should be fairly elastic so that if at any time the government
is in need of more funds, it should increase its financial
resources without incurring any additional cost of collection.
Income tax, railway fares, postal rates, etc., are very good
examples of elastic tax. The government by raising these rates a
little, can easily meet its rising demand for revenue.
(3)
Canon of
simplicity: Canon of simplicity implies that the tax system
should be fairly simple, plain and intelligible to the tax
payer. If it is complicated and difficult to understand, then it
wilt lead to oppression and corruption.
(4)
Canon of
diversity: Canon of diversity says that the system of
taxation should include a large number of taxes whish are
economical. The government should collect revenue from its
citizens by levying direct and indirect taxes. Variety in
taxation in desirable from the point of view of equity, yield
and stability.
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