By canons of taxation we simply mean the characteristics or qualities which a good tax system should possess. In fact, canons of taxation are related to the administrative part of a tax. Adam Smith first devised the principles or canons of taxation in 1776.
Even in the 21st century, Smithian canons of taxation are applied by the modern governments while imposing and collecting taxes.
Types of Canons of Taxation:
In this sense, his canons of taxation are, indeed, ‘classic’. His four canons of taxation are:
(i) Canon of equality or equity
(ii) Canon of certainty
(iii) Canon of economy
(iv) Canon of convenience.
Modern economists have added more in the list of canons of taxation.
(v) Canon of productivity
(vi) Canon of elasticity
(vii) Canon of simplicity
(viii) Canon of diversity.
Now we explain all these canons of taxation:
- Canon of Equality:
Canon of equality states that the burden of taxation must be distributed equally or equitably among the taxpayers. However, this sort of equality robs of justice because not all taxpayers have the same ability to pay taxes. Rich people are capable of paying more taxes than poor people. Thus, justice demands that a person having greater ability to pay must pay large taxes.
If everyone is asked to pay taxes according to his ability, then sacrifices of all taxpayers become equal. This is the essence of canon of equality (of sacrifice). To establish equality in sacrifice, taxes are to be imposed in accordance with the principle of ability to pay. In view of this, canon of equality and canon of ability are the two sides of the same coin.
- Canon of Certainty:
The tax which an individual has to pay should be certain and not arbitrary. According to A. Smith, the time of payment, the manner of payment, the quantity to be paid, i.e., tax liability, ought all to be clear and plain to the contributor and to everyone. Thus, canon of certainty embraces a lot of things. It must be certain to the taxpayer as well as to the tax-levying authority.
Not only taxpayers should know when, where and how much taxes are to be paid. In other words, the certainty of liability must be known beforehand. Similarly, there must also be certainty of revenue that the government intends to collect over the given time period. Any amount of uncertainty in these respects may invite a lot of trouble.
3. Canon of Economy:
This canon implies that the cost of collecting a tax should be as minimum as possible. Any tax that involves high administrative cost and unusual delay in assessment and high collection of taxes should be avoided altogether.
According to A. Smith: “Every tax ought to be contrived as both to take out and to 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.”
- Canon of Convenience:
Taxes should be levied and collected in such a manner that it provides the greatest convenience not only to the taxpayer but also to the government.
Thus, it should be painless and trouble-free as far as practicable. “Every tax”, stresses A. Smith: “ought to be levied at time or the manner in which it is most likely to be convenient for the contributor to pay it.” That is why, after the harvest, agricultural income tax is collected. Salaried people are taxed at source at the time of receiving salaries.
These canons of taxation are observed, of course, not always faithfully, by modern governments. Hence these are basic and classic canons of taxation.
Characteristics of Canons of Taxation:
A good (may be a near-ideal) tax system has to fulfil the following characteristics:
- The distribution of tax burden should be equitable such that every person is made to pay his ‘fair share’.
This is known as the ‘fairness’ criterion which focuses on two principles:
Horizontal equity— equals should pay equal taxes; and vertical equity—un-equals should pay unequal taxes. That is to say, rich people should pay more taxes.
2. But equity must not hamper productive efficiency such that burdens should be provided to correct inefficiencies. This ‘efficiency’criterion says that it should raise revenue with the least costs to the taxpayers so that tax system can allocate resources without distortion.
3. The two other criteria are: ‘flexibility’ and ‘transparency’.
A good tax system demands changes in tax rates whenever circumstances change the system. Further, a good tax must be transparent in the sense that taxpayers should know what they are paying for the services they are getting.
A good tax system is expected to facilitate the use of fiscal policy to achieve the goals of:
(b) Economic growth.
For the attainment of these goals, there must be built-in-flexibility in the tax structure.
From the above discussion, it follows that taxation serves the following purposes:
(i) To raise revenue for the government
(ii) To redistribute income and wealth from the rich to the poor people
(iii) To protect domestic industries from foreign competition
(iv) To promote social welfare.