Canons of Taxation in Economics
Adam Smiths' The Wealth of Nations
Canons of Taxation:
The canons of taxation were first presented by Adam Smith in his famous 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.
Adam Smith originally presented only 4 canons of taxation, which are also commonly referred to as the ‘Main Canons of Taxation’ or ‘Adam Smith’s Canons of Taxation’. Along with the passage of time, more canons were developed to better suit the modern economies. In the following article, you will read the 9 canons of taxation that are most commonly discussed and used.
Adam Smith's Canons of Taxation:
Adam Smith originally presented the following four canons of taxation. The rest were developed later:
1. Canon of Equality
2. Canon of Certainty
3. Canon of Convenience
4. Canon of Economy
These 9 canons of taxation are:
- Canon of Equality
- Canon of Certainty
- Canon of Convenience
- Canon of Economy
- Canon of Productivity
- Canon of Simplicity
- Canon of Diversity
- Canon of Elasticity
- Canon of Flexibility
Let’s start discussing each of these 9 canons of taxation:
1. Canon of Equality:
The word equality here does not mean that everyone should pay the exact, equal amount of tax. What equality really means here is that the 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. It is one of the fundamental concepts to bring social equality in the country.
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.
2. Canon of Certainty:
The tax payers should be well-aware of the purpose, amount and manner of the tax payment. Everything should be made clear, simple and absolutely certain for the benefit of the taxpayer. The canon of certainty is considered a very important guidance rule when it comes to formulating the tax laws and procedures in a country. The canon of certainty ensures that the taxpayer should have full knowledge about his tax payment, which includes the amount to be paid, the mode it should be paid in and the due-date. It is believed that if the canon of certainty is not present, it leads to tax evasion.
3. Canon of Convenience:
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 easy, convenient and taxpayer-friendly. The time and manner of payment must be convenient for the tax payer so that he is able to pay his taxes in due time. If the time and manner of the payment is not convenient, then it may lead to tax evasion and corruption.
4. Canon of Economy:
The whole purpose of collecting taxes is to generate revenue for the company. This revenue, in turn, is spent on public welfare projects. The canon of economy – keeping in view the above-mentioned purpose – states that the cost of collecting taxes should be as minimum as possible. There should not be any leakage in the way. In this way, a large amount of the collections will go directly to the treasury, and therefore, will be spent in the government projects for the welfare of the economy, country and the people. On the other hand, if the canon of economy isn’t applied and the overall cost of collecting taxes is unreasonably high, the collected amount will not be sufficient in the end.
5. Canon of Productivity:
By virtue of the canon of productivity, it is 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:
An ideal system of taxation should consist of those types of taxes that can easily be adjusted. Taxes, which can be increased or decreased, according to the demand of the revenue, are considered 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. 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. Since they are elastic and easily adjustable, many government objectives can be achieved through them.
7. Canon of Simplicity:
The system of taxation should be made as simple as possible. The entire process should be simple, non-technical and straightforward. Along with the canon of certainty, where the amount, time duration and manner of payment is made certain, the canon of simplicity avoids cases of corruption and tax evasion if the entire method is made simple and easy.
Which one do you think is the most important Canon of Taxation?
8. Canon of Diversity:
Canon of diversity refers to diversifying the tax sources in order to be more prudent and flexible. Being heavily dependent on a single tax source can be detrimental for the economy. Canon of diversity states that it is better to collect taxes from multiple sources rather than concentrating on a single tax source. Otherwise, the economy is more likely to be confined, and hence, its growth will be limited as well.
9. Canon of Flexibility:
Canon of flexibility means that the entire tax system should be flexible enough that the taxes can easily be increased or lowered, in accordance with the government needs. This flexibility ensures that whenever the government requires additional revenue, it can be generated without much hassle. Similarly, when the economy isn’t booming, lowering taxes shouldn’t be a problem either.
So these are the 9 canons of taxation that are used as the fundamentals for any taxation system and study about taxation principles. As mentioned earlier, Adam Smith originally presented the first four canons. Later, in order to better suit to modern economies and for the sake of evolution as well, more canons were introduced.
I hope the explanation was easy to comprehend. However, if you still have any questions about the canons of taxation, feel free to ask in the comment section below. Moreover, you will also find the following articles interesting:
This article explains all the various advantages and disadvantages of direct taxes. Along with the merits and demerits, it is also discussed that which benefits of the direct taxes are in accordance of certain canons of taxation.