Define tax. Discuss different types of canon of taxation.
Tax has been defined as, compulsory contribution of wealth by person or a body of persons for the services of the public powers.
Definition of Tax
“Taxes are compulsory contribution of wealth levied upon persons, natural or corporate, to defray the expenses incurred in conferring a common benefit upon the residents of the state”.
Cannon of taxation:
taxation is one of the sensitive issues for the govt. it requires a balanced strategy to be adopted so as to avoid its negative effects on the socio-economic activities. Taxation, if brings revenue to the govt. on one hand, it may decrease investment on the other hand.
Canons (principles) of taxation, thus include the income expected from taxes, reaction of the people etc. to overcome the problems, which may come in taxation, the economists have designed some principles, which form the basis of a good tax system. These are of two types:
- Adam Smith’s canon of taxation.
- Other canons of taxation.
Adam smith’s canon of taxation:
Adam smith, the father of modern political economy, has laid down four principles of taxation in his famous book “wealth of nations”. These principles are:
Canon of equality of ability:
according to Adam smith “the subjects of every state ought to contribute towards the support of the government as really as possible, in proportion to their respective abilities, i.e. in proportion to the revenue which they respectively enjoy under the protection of the state”.
Canon of certainty:
according to Adam smith “the tax which each individual has to pay ought to be certain and not arbitrary. The time of payment, the amount to be paid, ought to be clear and plain to the contributor and to every other person”. The individual should know exactly, what, when a how he is to pay the tax, otherwise, it causes unnecessary suffering. Similarly, the state should also know how much it would receive from tax.
Canon of convenience:
Adam smith wrote “every tax ought to be levied at the time or in the manner in which it is most convenient to pay”. In this cannon, the two elements, time and manner of payment, must be convenient for the tax payers so that he is able to pay his taxes in de time.
Canon of economy:
Adam smith said “every tax ought to be so contrived as both, to take out 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”. This canon implies that the expenses of collection of taxes should not be excessive. They should be kept as little as possible, consistent with the administrative efficiency.
OTHER CANON OF TAXATION
Canon of productivity:
according to this canon, the taxes should bring an ample amount of money to the state. After all, the main objective of the taxing authority is to secure funds. Therefore, a tax, which does not yield a fair income, is useless. It is much better to have few taxes that yield good revenue instead of many taxes yielding a little.
Canon of elasticity:
it states the tax system should be fairly elastic. If govt. requires more funds, it can increase its revenue from the same taxes without incurring any additional costs of collection and reducing the incentive to production. Income tax is a very good example of an elastic tax.
Canon of simplicity: –
the canon of simplicity refers to tax system, which should be fair, simple and logical to the taxpayer. If it is difficult and complicated to understand, then it will lead to oppression and corruption.
Canon of diversity:
this canon says that taxation should be broad based. It must cover all the citizens who can afford to contribute to the government revenue. For this purpose, a variety of taxes are, sometimes, introduced. But it implies that taxes should be spread over trade, industry, agriculture, transport, profession etc.
Canon of flexibility:
flexibility in taxes is different from elasticity, discussed earlier. A flexible tax quickly adjusts to the new conditions. Presence of flexibility is a pre condition for elasticity. Lack of flexibility in a tax can cause financial trouble to the state.
Canon of development:
taxation intends to bring socioeconomic development in the country as a whole. It should reduce the economic inequalities. It must not slow down the rare of investment in the country. The tax revenue should be utilized to the maximum for promotion the welfare of the people.