Canons of taxation are sets of criteria by which to judge taxes. These canons are still widely accepted as providing a good basis by which to judge taxes. Adam Smith laid down four canons of taxation. They are:
- Canon of Ability: According to this principle of taxation, the people in a country should contribute towards the government expenditure. Their contribution should be according to the ability to pay of each individual. A rich man should contribute more and the poor either should contribute less or can be exempted. This principle of taxation will ensure that the cost of public expenditure is shared by the people in accordance with their individual ability.
- Canon of Certainty: Adam Smith insisted that the government should know in advance the amount of revenue that it could raise and the time when it could mobilize the revenue. On the part of individual tax payers, they must know clearly the amount of tax that they have to pay, the time when they should pay and the method of paying the tax. Adam smith felt that it is necessary that the people should be certain about their tax commitment, so that there cannot be any exploitation of the tax payers either by the government or by the tax collectors. This implies, once the people are clear about the amount of lax, they will plan their expenditure accordingly so that tax payment will not be felt a penalty.
- Canon of Convenience: According to this canon, the tax should be such that it is levied at the time when it is convenient for the people to pay. Similarly the manner in which the tax has to be paid should also be convenient for the tax payers. For example, the sales tax paid on any commodity is included in the price and the consumer does not feel when he pays the tax. At the same time, the government is able to collect the tax effectively without any possibility of evasion or avoidance.
- Canon of Economy: This is a very important principle of taxation stating that the cost of collection of tax should be less than the tax revenue. In other words, the purpose of imposing tax will be defeated if the government has to spend more money to collect less tax revenue. Only when there is economy in tax collection, that the tax revenue realized can be spent usefully. For example, in the case of direct tax like income tax, the government may organize tax raids on people who evade tax. If the cost of these raids is greater than the amount of tax recoverable, then it is not wise. On this ground, indirect tax like sales tax is more economical than income tax.
Several other canons of taxation have been introduced by the modem economists. One important among these canons is the canon of simplicity, according to which the tax structure should be easily understandable to the common men so that payment of taxes will not be difficult. Another canon is canon of productivity which implies that the taxes should fetch adequate revenue to the government to meet the public expenditure. Other canons like canon of elasticity, canon of flexibility, canon of diversity and canon of neutrality have also been introduced.
- The Canons of Taxation (Library of Economics and Liberty)