Taxation Canons
March 7, 2009
Taxation is compulsory payment to the state by companies and individuals. These government-imposed taxes help to raise revenue that is used to cover administration, maintenance of law and order, defense, housing, education, family allowances and pension expenses. In addition to that, these taxes are used to cover all other government expenditure that may crop up during administration. Some taxes however are imposed for economic and social purposes. For example, some taxes may be imposed to reduce very large incomes or increase the purchasing power. This in turn helps to check demand or acts as a stimulus to product and service demand.
In his book ‘wealth and Nations’, Adam Smith laid down canons of taxation that are still regarded today as the foundations of the principles of taxation. By looking at each of them, we will be in a better position to understand the simplicity of these provisions. Although people do not like taxes, one will also better understand the vital role that some sort of taxation do to ensure such things as monopolization of resources and the gap between the rich and the poor is kept in check.
Cannon of Equality. This is regarded as the most important of all cannons of taxation. This is because it embodies principles of justice and equity. In addition to this, it helps us have a clearer concept of equality of sacrifice when it comes to taxation. According to the cannon of equality, the amount of tax paid is not the same for all people and is usually in proportion to the respective abilities of those being taxed. Thus, the more a tax payer earns, the more he or she is to be taxed. It is very reasonable that the rich in society should contribute in proportion to their revenue to the public expense and even beyond that proportion.
While the progressive income tax, which conventionally is based on the ability to pay, is used, some critics question its fairness. This is because it does not take into account earned and unearned incomes. This means that if an individual is an honest and a hard worker, then if his ability to pay is being taxed, it burdens production. To counter this, an alternative approach is also used, which is ‘benefits received’. This is where taxes are levied according to the opportunities that one has or has been given. Thus, fairness is achieved.
Cannon of Certainty. According to Adam Smith, this is the most fundamental cannon in taxation. According to him, the tax to be paid by each individual should not be arbitrary but certain. Thus, such things as time of payment, the amount to be paid and the manner by which the tax is to be remitted should all be made clear and plain to each individual contributor. Due to possibility of disturbances for both the tax-payer and the state that may come up if this cannon is not implemented, its implementation should thus not be left to the will of income tax departments. Certainty is needed from both points of view, i.e. the tax-payer and the state.
When rules of taxation become complex, it is likely that they will be subverted and evaded. If the tax code becomes clear only to specialists, those who can afford to pay these specialists will thus take advantage of the loopholes available. Certainty is also needed since production of wealth fluctuates year to year. This makes the prediction of revenue uncertain and any shortfalls will thus be met through public borrowing.
In the final analysis, taxes should be evaluated according to sound tax theories that have evolved over the course of centuries and much from the principles just reviewed.
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