There have been taxes for many centuries, but Adam Smith’s “The Wealth of Nations” is widely regarded as the first work to articulate a set of universally accepted principles for levying and collecting them. These tax canons provide various guidelines and concepts upon which a sound taxation system must be based. Although these tax concepts were first stated quite some time ago, they continue to serve as the basis for discussions about tax policy.
Let us analyze the canons of taxation through this article.
Adam Smith
Adam Smith, a Scottish philosopher, economist, and novelist from the 18th century, is often regarded as the intellectual progenitor of contemporary economics. Smith was a strong supporter of laissez-faire economic policy and an opponent of mercantilism. Smith initially presented the concept of an invisible hand in his book The Theory of Moral Sentiments. This is the propensity of free markets to regulate themselves via competition, supply and demand, and self-interest. Smith also coined the four canons of taxation to ensure fair tax planning.
The four canons
The topic of taxation generates intense debate. Building a tax system that is widely accepted as equitable is difficult. As a result, in his seminal work, The Wealth of Nations, economist Adam Smith laid forth four guidelines and principles for sound tax policy. The four principles he espoused are considered by many to be taxation’s “four canons.” To wit: Namely (1) equity, (2) certainty, (3) convenience, and (4) economy. Below, we’ll take a closer look at each one.
Equity
Having to pay a percentage of one’s income in taxes is not always equitable, but in this case, fairness requires that taxes be fair. That’s why tax rates have to be progressive, increasing as income rises and decreasing as income falls. The ability-to-pay concept is a frequent name for this notion. The reasoning behind this is that individuals with more financial means should contribute a greater share of their income to the government than those with less.
In truth, then, almost every tax system is structured to ensure that the wealthy pay a higher percentage of their income in taxes.
Certainty
The term “certainty” relates to the concept that tax laws should be easy to understand and follow. This implies that everyone should be aware of their tax obligations and be able to immediately ascertain their tax liability and payment schedule. This is significant because it enables individuals to include their tax obligations in their financial plans. In addition, it has been shown that openness fosters support from the general population.
Convenience
Taxpayers should be able to choose a time and a mode of payment that works best for them. This implies that the system must be set up so that individuals can easily submit their taxes and make timely payments. Accordingly, the canon of convenience is often seen as an extension of the canon of certainty that places greater emphasis on the administrative procedure to understand importance of tax planning.
Economy
The term “economy” is used here to imply the principle that tax collection expenses should be kept to a bare minimum. That’s why the government has to make sure tax collection costs are as little as feasible. The rationale for this is that taxpayers should get the most advantage from the expenditure of tax money.
Conclusion
Tax authorities are responsible for guaranteeing that the tax code is administered fairly and consistently at all levels of the taxpaying public.
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