Discuss the Adam Smith Cannon of Taxation.

Ans.

Adam Smith’s Canons of Taxation

(i) Canon of Equity: According to Adam Smith, “People of every state should pay their share in proportion to their individual abilities, which means that they should pay tax proportionate to that income which they respectively get under the government security.” This means that people should pay taxes according to their capacity. Equity does not mean that all people should pay equal taxes. It, in fact, means that every one should make equal sacrifice. Equity means equality of sacrifice. For the rich, marginal utility of money is less than that for the poor. So, the rich people should pay more amount in taxes than the poor people. Thus, the principle of justice is also vested in this doctrine. According to Adam Smith, “It will be more justified for the rich to contribute to the public expenditure not only what is proportionate to their income, hut more than that.” Mill, Chapman, Seligmen etc., subscribe to the canon of Equity.

(ii) Canon of Certainty : According to this principle, there should be a certainty regarding taxes Adam Smith says. “The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid ought to be clear and plain to the contributor and to every other person.”

Several types of certainty is required in a taxation system. First of all, the individual must know how much tax he has to pay. Secondly, he must know at what time he has to pay tax so that it can be arranged by that time. Thirdly, he must know in how many instalments he has to pay his tax, Fourthly, the tax payer should know where and to whom he has to pay the tax. Certainty of tax is essential not only for the tax-payer, but also for the state. Government ascertains its expenditure only after making an estimate about taxes. The saying, “An old tax is no tax”, illustrates the theme of the canon of certainty.

(iii) Canon of Convenience : According to this canon, the convenience of the tax payer also be kept in mind while imposing taxes. In the words of Adam Smith, “Every tax ought to be levied at the time and in the manner in which it is most likely to be convenient for the contributor to pay it.” Every tax should be collected at the time and in the manner in which there is no difficulty for the tax payer to pay tax. If a tax is collected at the time and in the manner which are inconvenient to the tax payer, even the minimum amount of tax will prove to be burdensome for him. Contrary to it, if a tax is collected at the time and in the manner which are convenient to the tax payer, he will not avoid even the maximum amount of taxes.

(iv) Canon of Economy: According to this canon, the costs of tax collection should be the lowest possible. Taxation system should not be much expensive. Every tax should be levied in such a way that the government does not have to make much expenditure on its collection, and the tax payer, too, does not have to spend much while paying his taxes. Adam Smith says, “Every tax ought to be levied so that the minimum extra amount comes out of the tax payer’s pocket besides the amount to be received by the government exchequer through tax payment.” Modern economists consider the meaning of economy in a wider perspective. They think that if the levying of a tax effects the economic situation, trade and industry adversely, it cannot be termed economical. From this angle, heavy income tax does not satisfy the canon of economy. But heavy taxes on drugs and intoxicants can be justified. Thus, economy means that there should be a minimum expenditure in collecting taxes, and a tax should not have an adverse affect on the production of the society and people’s will to save and invest.