Canons of taxation

 Adam Smith laid down four principles to guide the taxing authority.

The principles of canons of taxation enunciated by Adam Smith were so important that they have become classic. They are:

(1) Canon of equality: The subjects of every state,” Smith asserted, ought to contribute towards the support of the Government as nearly 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. Equality here does not mean that all tax-payers should pay an equal amount. Equality here means quality or justice. It means that the broadest shoulders must bear the heaviest burden. It lays the moral foundation of the tax system.

(2) Canon of Certainty: Adam Smith further said, the tax which each individual has to pay ought to be certain and not arbitrary. The individual should know exactly what, when and how he is to pay a tax; otherwise, it will cause unnecessary suffering. Similarly, the State should know much it will receive from a tax.

(3) Canon of Convenience: Smith wrote, “Every tax ought to be levied at the time or in the manner which it is most likely to be convenient to pay it.”

(4) Canon of Economy: Lastly, Adam Smith held that “every tax ought to be so contrived as both to take out and keep out of the pockets of the people as possible over and above what it brings into the public treasury of the State. “ This means that the cost of collection should as small as possible. If the bulk of the tax is spent on its collection, it will take much out of the people's pockets but bring very little into the State’s pocket. It is not a wise tax.

Other canons of taxation:

(5) Canon of Productivity: This canon emphasizes that a tax should bring in a substantial amount of money to the state. After all, the main object of the taxing authority is to secure funds. It is much better to have a few taxes which yield good revenue instead of many taxes yielding a little.

(6) Canon of Elasticity: This canon points out that a tax should automatically bring in more revenue as the country’s population or income increases. There should be an automatic link between the needs of the State and the resources of the people. If in an emergency, an increase in the rate of the tax brings in increased income, the tax is elastic.

(7) Canon of Simplicity: It argues that the tax system should be simple; otherwise there would be confusion and worse still corruption. During the war and after, certain taxes, e.g., on the sale of cloth and other essential supplies in India resulted in corruption mainly because they lacked simplicity.

(8) Canon of Variety: It is also necessary that the tax system of a country should be diversified. Reliance on just a few taxes is risky. In order to be just, a tax system must be broad-based. In order to be adequate, it must be diversified, having a wide coverage over commodities and persons.

(9) Canon of Flexibility: Flexibility connotes the absence of rigidity in the tax system. A flexible tax quickly adjusts to the new conditions. The presence of flexibility is a pre-condition for elasticity. Lack of flexibility in a tax can cause financial troubles to a State.