Canons of Taxation

Taxes are the government’s most important source of revenue. Taxation signifies the act of levying taxes. A tax is an obligatory charge or fee levied by the government on individuals or companies. Persons who are taxed must pay the taxes regardless of any corresponding return from the government’s goods or services. Taxes can be imposed on the income and wealth of people or companies and the rates of taxation might vary.

Canons of Taxation

By taxation canons, we simply mean the features or attributes that a good tax system should have. In truth, taxation canons are connected to the administrative part of a tax. In 1776, Adam Smith developed concepts or canons of taxes for the first time. Even in the twenty-first century, modern governments use Smithian taxation canons when imposing and collecting taxes. Adam Smith profounded four Canons of Taxation; viz., Canon of Equity, Canon of Certainty, Canon of Convenience, and Canon of Economy. While other economists profounded some other canons of taxation other than the four profounded by Adam Smith; viz., Canon of Elasticity, Canon of Productivity, Canon of Variety, Canon of Simplicity, Canon of Expediency, and Canon of Flexibility.

1. Canon of Equity or Equality

According to the Canon of Equality, the burden of taxation must be distributed equally or evenly among taxpayers. This type of equality; however, deprives justice because not all taxpayers have the same ability to pay taxes. Rich individuals can afford to pay more taxes than impoverished ones. As a result, justice requires that a person with greater financial ability pay higher taxes.

If everyone is expected to pay taxes based on his or her abilities, then all taxpayers’ sacrifices become equal. This is the core of the equality canon (of sacrifice).To ensure equity in sacrifice, taxes will be imposed based on the principle of ability to pay. In this context, the canons of equality and ability are two sides of the same coin.

2. Canon of Certainty

The tax that an individual must pay should be certain and not arbitrary. According to Adam Smith, the time of payment, the method of payment, and the amount to be paid; i.e., tax liability, should all be apparent to the contributor and everyone. As a result, the canon of certainty encompasses a wide range of concepts. It must be certain for both the taxpayer and the taxing authority.

The taxpayers should be aware of when, where, and how much taxes are due. In other words, the certainty of liability must be anticipated ahead of time. Similarly, there must be certainty about the amount of income that the government wants to collect throughout the specified time period. Any bit of uncertainty in these areas could lead to disaster.

3. Canon of Convenience

Taxes should be imposed and collected in such a way that it is most convenient for both the taxpayer and the government. As a result, it should be as painless and trouble-free as possible. “Every tax,” Adam Smith emphasises, “should be levied at the time or in the manner most likely to be convenient for the contributor to pay it.” That is why agricultural income tax is collected after the harvest. Salaried people are taxed at the point of receipt of their salaries.

4. Canon of Economy

This canon suggests that the cost of collecting a tax should be kept to a minimum. Any tax that has a large administrative cost, extraordinary delays in assessment, and a high collection rate should be avoided at all costs.

According to Adam Smith, “Every tax should be designed to take as little money as possible out of people’s pockets while yet contributing to the public treasury of the state.” 

Other Canons:

5. Canon of Elasticity

The canon of elasticity is very important to modern economists. This canon indicates that a tax’s yield should be flexible or elastic. It should be levied in such a way that the tax rate can be adjusted in response to changing circumstances. When the government requires funds, it must be able to extract as much revenue as possible without causing any negative repercussions by raising tax rates. This canon is satisfied by income tax.

6. Canon of Productivity

According to Charles F. Bastable, a well-known classical economist on the subject of public finance, taxes must be productive or cost-effective. This indicates that the revenue generated by any tax must be substantial. Furthermore, this canon states that only taxes that do not impede the productive work of society should be imposed. Only when a tax functions as an incentive to produce, it is considered productive.

7. Canon of Variety

Taxation must be dynamic. This indicates that rather than having single or two taxes, a country’s tax structure should be dynamic or diversified. Diversification of a tax structure will necessitate the participation of the majority of the people. If a single tax system is implemented, only a certain sector will be required to pay to the national exchequer, leaving a big number of people out. Obviously, the impact of such a tax structure will be greatest on particular taxpayers. A dynamic or varied tax system will result in the distribution of tax burdens throughout a large population, resulting in a low degree of incidence of a tax in aggregate.

8. Canon of Simplicity

Every tax must be straightforward and understandable to the public so that the taxpayer can calculate it without the assistance of tax professionals. A complex and complicated tax is certain to have unfavourable side effects. If the tax system is determined to be difficult, it may encourage taxpayers to evade taxes. 

A complicated tax system is costly in the sense that even the most honest and informed taxpayers must seek the guidance of tax professionals. In the end, such a tax structure has the potential for breeding corruption in society.

9. Canon of Expediency

A tax should be expedient or beneficial so that the government may defend itself against public criticism by arguing for its need. Taxpayers will be outraged if there is no justification for the levy. Every new tax must have a reason to generate a feeling of acceptability in the minds of the taxpayers. An unfair tax will always confront acute refusal on the part of the taxpayers to pay and they will try to avoid them.

10. Canon of Flexibility

The canon of flexibility states that the entire tax system should be flexible enough to allow taxes to be readily increased or decreased in response to government requirements. This flexibility guarantees that anytime the government wants more money, it can generate it quickly and easily. Similarly, decreasing taxes should not be an issue when the economy is not thriving.

Conclusion: The aforementioned taxation canons are regarded as basic prerequisites for effective tax policy. Unfortunately, such a perfect tax system does not exist in the actual world. However, a tax authority must continue to adhere to the aforementioned taxation canons in order to construct a near-ideal tax system.