Adam Smith's Canons of Taxation

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Adam Smith's Canons of Taxation. In this article you can learn about Adam Smith's famous book, The Wealth of Nations and his canons of taxation. Adam Smith's contribution to this part of economic theory is still regarded as classic. His enunciati

Adam Smith's Canons of Taxation

Adam Smith's contribution to this part of economic theory is still regarded as classic. His enunciation of the canons of taxation has hardly been surpassed in clarity and simplicity. His four celebrated canons are as follows:

1. Canon of Equality. Equality here does not mean that all tax-payers should pay an equal amount. Equality here means equality or justice. It means that the broadest shoulders must bear the heaviest burden.

This canon has given rise to two theories:

(i) Equality of Sacrifice Theory. It means that the burden of taxation should involve an equal sacrifice for every individual. This equality, however, though good in theory, is difficult to attain in practice. Sacrifice is subjective, something in the mind and feelings of a person. It is difficult to measure. Besides, it has to take into consideration the number of dependants on the earning member in the family and their standard of living.

(ii) The second principle indicating justice is the Ability or Faculty Theory, which holds that the rich should be made to pay something more than proportionate to their income. A man with an income of Rs. 500 per month will not, other things being equal, feel the same pinch in parting with Rs. 50, as a man with an income of only Rs. 50 feels in paying Rs. 5, because the formers faculty to pay is greater. On this principle is based progression in taxation i.e., increasingly higher rates of taxation as incomes increase. Proportional taxation will not do justice.

2. Canon of Certainty. The individual should know exactly what, when and how he is to pay a tax. Otherwise, it causes unnecessary suffering. Similarly, the State should also know how much it will receive from a tax.

3. Canon of Convenience. Obviously, there is no sense in fixing a time and method of payment which are not suitable. Land revenue in India is realized after the harvest has been collected. This is the time when the cultivators can conveniently pay.

4. Canon of Economy. This means that the cost of collection should be as small as possible. If the bulk of the tax is spent on its collection, it will take much out of the people's pockets but bring little into the State's pocket. It is not a wise tax

5. Canon of Simplicity. This cannon means that the collection of taxes should not be so confusing that everyone cannot figure out what they owe, which today seems like a joke considering the many different tax laws, categories and deductions. Most people today need an accountant of special software each year just to figure what they owe in taxes each year.

All in all, there are actually 9 canons of taxation, but 4 main ones that Adam Smith wrote in his famous book, “The Wealth of Nations”.  


Taxation has become more and confusing and many countries try and try to reduce or fix their tax laws, yet the more politicians try, the more confusing it has gotten.