Classical Principles of Taxation

A number of principles that characterize taxation in general and the taxation system more specifically were set forth by Adam Smith. These are:

  1. The principle of justice, which promotes the universality of taxation and the evenness of tax distribution among citizens in correspondence with their revenues (“the subjects of the state must participate in the maintenance of the government in correspondence with the income that they make use of under the protection and with the help of the state”). This principle means that taxes must be deducted in conformity with the capacity of the payer, who is obligated to take part in financing a corresponding share of the state’s expenditures. In the international practice, there are two methods of implementing the justice and equality principle. The first method entails insuring the benefit of the taxpayer. According to this approach, taxes paid must correspond to the benefits received by the taxpayer from the services of the state, i.e. the taxpayer receives back a part of the tax paid through various transfers from the state budget covering compensations, the financing of education, health protection, etc. Hence, in this case the approach is connected to the structure of budget expenditures. The second approach depends on the capacity of the taxpayer to pay taxes. Each entity must pay its share in accordance with the capacity to pay. Usually these two approaches complement each other when a taxation system is elaborated; this leads to the creation of the best possible conditions for the implementation of this principle.
  2. The principle of determination, which requires the exact determination of the sum payable, the payment method and deadline (“the tax, which each individual is obligated to pay, must be determined exactly.”) This implies that the main types of taxes and tax rates are fixed for a number of years. On the other hand, the taxation system must be flexible and should easily adapt to the dynamic socio-economic conditions.
  3. The principle of convenience implies that the tax should be deducted in the manner and at the time most convenient to the payer. The system and procedure of tax payment should be comprehensible and convenient to the taxpayer.
  4. The thrift principle implies the reduction of deductions from the tax amounts, in the rationalization of taxation. The sums collected through each individual tax should exceed the expenses for their collection and service (“each tax must be conceived and developed in such a way that it deducts from the pocket of the people as little as possible in addition to what it brings to the state treasury.”)