Let us study about the Canons of Taxation. After reading this article you will learn about: 1. Meaning of Canons of Taxation 2. Types of Canons of Taxation 3. Characteristics.
Meaning of Canons of Taxation:
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:
i. 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.
ii. 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.
iii. 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.”
iv. 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.
We now present other canons of taxation:
i. Canon of Productivity:
According to a well-known classical economist in the field of public finance, Charles F. Bastable, taxes must be productive or cost-effective. This implies that the revenue yield from any tax must be a sizable one. Further, this canon states that only those taxes should be imposed that do not hamper productive effort of the community. A tax is said to be a productive one only when it acts as an incentive to production.
ii. Canon of Elasticity:
Modern economists attach great importance to the canon of elasticity. This canon implies that a tax should be flexible or elastic in yield.
It should be levied in such a way that the rate of taxes can be changed according to exigencies of the situation. Whenever the government needs money, it must be able to extract as much income as possible without generating any harmful consequences through raising tax rates. Income tax satisfies this canon.
iii. Canon of Simplicity:
Every tax must be simple and intelligible to the people so that the taxpayer is able to calculate it without taking the help of tax consultants. A complex as well as a complicated tax is bound to yield undesirable side-effects. It may encourage taxpayers to evade taxes if the tax system is found to be complicated.
A complicated tax system is expensive in the sense that even the most honest educated taxpayers will have to seek advice of the tax consultants. Ultimately, such a tax system has the potentiality of breeding corruption in the society.
iv. Canon of Diversity:
Taxation must be dynamic. This means that a country’s tax structure ought to be dynamic or diverse in nature rather than having a single or two taxes. Diversification in a tax structure will demand involvement of the majority of the sectors of the population.
If a single 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 resulting in a low degree of incidence of a tax in the aggregate.
The above canons of taxation are considered to be essential requirements of a good tax policy. Unfortunately, such an ideal tax system is rarely observed in the real world. But a tax authority must go on maintaining relentlessly the above canons of taxation so that a near- ideal tax structure can be built-up.
Characteristics of Canons of Taxation:
A good (may be a near-ideal) tax system has to fulfil the following characteristics:
i. 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.
ii. 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.
iii. 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.
iv. 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.