Quantifying taxation into specific canons or principles was a task first undertaken by Adam Smith in his now very famous publication. “The Wealth of Nations”. These canons basically define principles and several rules for good taxation system. Though put to paper long back, they still hold food in today’s discussions on taxation.
The original list contained just 4 canons though over the years, these have expanded to include 5 more canons and today the modern list contains a globally accepted 9 canon’s of taxation.
Here the word equality does not refer to the fact that every individual ought to pay the same amount of tax. Instead, it is actually the notion of paying tax in direct proportion to one’s earnings thus rich people pay more tax and poor people pay less. In other words, tax should be charged based on one’s ability to pay.
We believe that necessary appliances, such as food processors should be tax free – since every home typically needs these, and these are considered “necessities”. Why should consumers pay tax on a food processor, and the manufacturer pay tax on the profit?
According to this canon, a tax payer should understand the amount, manner and purpose of his tax payment. All things concerning his tax must be absolutely certain, simple and clear. Thus an efficient taxing system should always be clear with everything transparent. The absence of certainty leads to tax evasion.
Some call this the extension of the canon of certainty. According to this canon, taxpayers must always be aware of the mode of payment, amount and manner too. The time and mannerism must provide a convenient outlet to the tax payer because inconvenience in time or manner promotes corruption and tax evasion.
According to this concept, tax collection must be economical at all times. The act of collecting taxes should not burden the state. Collections that are done at the least cost naturally guarantee a large coffer for the government to utilize. Higher the cost of collection, less is the available fund at the end.
Productivity defines a balance between revenue and tax. It is always better to have more revenue and less tax than the alternative. Thus, imposing taxes on larger returns makes better sense because more tax can lead to chaos, confusion and panic.
Taxation should be elastic. It should be capable of increasing and decreasing depending on the situation. Flexible taxes help usher in equal wealth distribution and social equality.
Taxes should be made as simple as possible. They should be straightforward, non-technical at all times.
Diversity in the tax source allows for being more flexible and prudent. When tax sources are concentrated the strain on economy is higher. Greater the number of sources the less strain on a single payer.
According to this cannon, taxes should be capable of increment and decrease as the government needs change. It also stresses on the lowering of taxes in an adversely hit economy as much as increasing it at times of boom.