Canon Taxation - revenue law PDF

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LAW 3538 REVENUE LAW ADAM SMITH’S CANONS OF TAXATION

_____________________________________ PROF. MOHSIN

Introduction Tax is the major source of Government revenue. Back in the time, there is no proper attention was given to the tax by the economists as they believed that the Government should collect minimum revenue from tax. However, taxation is one of the economic tools that the Government employs to regulate the economy and can be used to achieve certain economic objectives such as full employment, control of inflation, balance of payments and also stimulation of economic growth. This is why tax affects every section of the society in one way or the other and it should be levied very carefully with a view to avoid unnecessary hardships to those who have no capacity to pay. In order to solve this kind of issues, the economists have classified taxation in number of ways. Some have promulgated tax norms or canons. The most famous of such canons are those by Adam Smith written in his book ‘The Wealth of Nations’. These canons of taxation define numerous rules and principles upon which a good taxation system should be built. Although these canons of taxation were presented a very long time ago, they are still used as the foundation of discussion on the principles of taxation. In order for the economic administration to work effectively in every countries, the Government should follow the canons of taxation propounded by various economists. Adam Smith originally presented only four canons of taxation, which are also commonly referred to as the ‘Main Canons of Taxation’ or ‘Adam Smith’s Canons of Taxation’. However as the passage of time, more canons were developed to better suit the modern economies nowadays. Tha main canons of taxation are canon of equity, canon of certainty, canon of convenience or ease and canon of economy. These four are the major canons of taxation to helps the government with their economic administration. The rest comes later such as canon of productivity, canon of elasticity of economy, canon of simplicity, canon of diversity and canon of expediency.

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1 .Canon of Equity

The most important and the first canon of taxation is Canon of Equity. Interestingly enough, the first canon is “equality.” But relating back what do we mean by “equality” and “equity?” It is important to note that Adam Smith’s concept was clear from an economist’s perspective. The word equality here does not mean that everyone should pay the exact, equal amount of tax. However, it means that rich people should pay more taxes and the poor pay less. This is because the amount of tax should be in proportion to the abilities of the taxpayer. This is what Adam Smith’s interpretation of equity is all about in terms of taxes. It is one of the most fundamental concepts to bring social equality in the country. So, the question is, how do we as tax administrators ensure equity and fairness at all levels of our taxpayer population? It is important for the tax administrators to enforce the tax laws, not auto-enact legislation by their own individual actions and values that they believe to be fair and equitable. In a complex economic and social environment, it may not be possible to design and administer a tax system that is fair and equitable in an absolute sense. However, a tax system that is generally perceived as fair and equitable is a desirable and achievable goal. Thus, the canon of equality states that there should be justice, in the form of equality, when it comes to paying taxes. Not only does it bring social justice, it is also one of the primary means for reaching the equal distribution of wealth in an economy. As equality comes in all forms and sizes in this case in taxation this is what equality is all about.

2. Canon of Certainty

In canons of taxation, Adam Smith had included on the canons of certainty. This cannon is very essential in taxation as it shows the clarity of taxation itself. Being ambiguous and equivocal is the most least favourable to taxpayers as this would instigate the taxpayers to evade tax since taxation has been quite a pain to implement and too complicated to be understood. By

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specifying the tax in terms of amount, value, to whom should be paid, the procedures and the principles of taxation, this would not just benefit the taxpayers, but also to the government as well. This is what we call as a win-win situation whereby it’s not just taxpayer being able to pay tax by their own free will,the taxpayers would be able to plan their budget, expenditures and income and most importantly, this would also prosper the country’s economy due to the commitment of taxpayers paying taxes.

3. Canon of Convenience or Ease

Next, Adam Smith also included convenience or ease as one of the principles in canons of taxation. Canon of convenience can be understood as an extension of canon of certainty. Where canon of certainty states that the taxpayer should be well-aware of the amount, manner and mode of paying taxes, the canon of convenience states that all this should be easy, convenient and taxpayer-friendly. The time and mode of payment must be convenient for the taxpayer so that he is able to pay his taxes in due time. Therefore, Adam Smith is of the view that, the government should consider whether the taxpayer suffers any inconvenience during the payment of taxes. As instance, the government made an easement for the taxpayer of agricultural to pay the income tax after the harvest, whereas the one who is employed and salaried, will be taxed at the time after receiving the wages. This is due to the fact that if the time and manner of the payment is inconvenient, then it may lead to tax evasion and corruption.

4. Canon of Economy

Canon of economy principle states that the cost of collecting tax should be in minimal, so that a major part of collections may bring to the Government treasury. If the administration expenses in the collection of taxes consume a major portion of the total revenue collected, then it is considered not be a good tax system.

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Adam Smith’s canon is to limit deadweight loss, “Every tax has to be contrived as both to take and 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.” The word “take out” refers to money taken from the people, and the word “keep out” refers to unrealized income due to tax burdens, distortions and disincentives. There are four ways of taxes that can create deadweight losses which are, presence of cost of hiring tax collectors to collect taxes, taxes can discourage the industry, it will lead to tax evasions and black market activity, and lastly paying high and unnecessary taxes can be burdensome to some people. Most of the economists have agreed that fair and simple taxes would support the economic growth. Thus, by applying Smith’s fourth maxim of a good tax system, the cost of imposing and collecting tax in minimal form can encourage the economic growth of one’s industry.

5. Canon of Productivity

According to this canon of taxation, the tax should be of such a nature as to yield sufficient income to the Government to run the administration efficiently and to work for the welfare of the people. Tax yield is important and every finance minister considers the yield before proposing any new tax. If a tax yields poor income, it cannot be said to be a good and productive tax. It is much better to have fewer taxes with large revenues, rather than more taxes with lesser amounts of revenue. It is always considered better to impose the only taxes that are able to produce larger returns. More taxes tend to create panic, chaos and confusion among the taxpayers and it is also against the canon of certainty and convenience to some extent.

6. Canon of Elasticity of Economy

In addition to that, an ideal system of taxation should consist of those types of taxes that can easily be adjusted as per Adam Smith. What the Government should take note to what is a flexible system of taxation? So what is” elastic” that is meant by Adam Smith? It is a measure of

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a variable's sensitivity to a change in another variable. For example, in business and economics refers the degree to which individuals, consumers or producers change their demand or the amount supplied in response to price or income changes. In the contexts of taxes it refers to which that can be increased or decreased, according to the demand of the revenue, this is was is are considered elastic and very ideal for the system. An example of such a tax can be the income tax, which is considered very much ideal in accordance with the canon of elasticity. Also, this example can also be taken in accordance with the canon of equality. Flexible taxes are more suited for bringing social equality and achieving equal distribution of wealth. Therefore, since they are elastic and easily adjustable, many government objectives can be achieved through them.

7. Canon of Simplicity

Canon of simplicity should also be included in the implementation of tax to the taxpayers. This means anybody would be able to understand taxation without the help of any expert. Speaking of which, this would safeguard taxpayers from the exploitation of tax authorities and experts and manipulation of tax and also legal complications. As we can see, this failure shows that ambiguous and equivocal of tax implementation had severely affect the taxpayer’s will of paying tax and the growth of the country’s economy. Thus, that is why this canon of simplicity plays a vital role in the implementation of tax by providing clarity and clear information on every aspect of it so that the taxation can be executed effectively.

8. Canon of Diversity

The above canons of taxation are considered to be essential requirements of a good tax policy. This means that a country’s tax structure must be dynamic or diverse in nature rather than having a single or two taxes. Diversification in a tax structure will demand involvement of the large amount of the sectors of the citizens. Therefore, the government should not only centralize

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taxes on one class of people. This is because, if a single or general tax system is introduced, only a particular sector will be asked to pay to the national exchequer leaving a large number of population untouched. Obviously, incidence of such a tax system will be greatest on certain taxpayers. A dynamic or a diversified tax structure will result in the allocation of burden of taxes among the vast population. Moreover, Adam Smith believes that when there are varieties of taxes imposed, it would be difficult for the taxpayer to avoid and manipulate them. Thus, this canon of taxation will benefit the government, however, too much diversity in taxes is undesirable as it increases the cost of tax collection.

9. Canon of Desirability or Expediency This principle explains that a tax should be prudent and flexible to the taxpayers of the country. Every new tax that is introduced to the society must have a reasonable justification to create an acceptance of mind of the tax-payers. A tax should be convenient and desirable, so that the Government can defend itself against the public criticism and avoid evasion, by supporting its expediency. An inequitable tax would lead to unwillingness of the taxpayer to pay and they will most likely try to dodge them. Hence, in this last maxim of a good tax system, the tax must be for a desirable cause to the public, and the taxpayer has the right to be given a justification as to why he must pay the particular tax.

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Conclusion In conclusion, we could see that imposing tax is good for nationals development. As per said by Douglas J. Amy, Professor of Politics at Mount Holyoke College, “Most conservative criticisms about the ill-effects of taxes are exaggerated or untrue. Taxes are in fact good -- they are dues we pay to enjoy the numerous vital benefits that government provides for our society. ” It is vital and important to know that taxes are needed to support these government activities which should be seen as a positive good. For example, caring for the elderly, establishing justice, providing public education, fighting terrorism, and protecting the environment. These are efforts made by the government on good faith. However, our government, specifically the exchequer must not overlook towards these principles as a guideline when collecting the taxes from the nations. These canons of taxation would help the both parties, the government and taxpayer as the activity of paying and collecting taxes will be smooth when we take into consideration every canons of taxation by Adam Smith. Therefore, taxes are the lifeblood of government and so if government is basically good, then so are taxes in a country.

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