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What is Tax ? Definition - Adam Smith's

Canons of Taxation
Post: Gaurav Akrani.
Date: 12/02/2010 10:13:00 PM IST.
Comments (11)
Label: Economics.

What is Tax ? Meaning and Definition

The tax revenue is the most important source of public revenue. A tax is a
compulsory payment levied by the government on individuals or companies to
meet the expenditure which is required for public welfare.

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According to Hugh Dalton, "a tax is a compulsory contribution imposed by a
public authority, irrespective of the exact amount of service rendered to the
taxpayer in return, and not imposed as penalty for any legal offence."

What are Canons of Taxation ?

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Canons of Taxation are the main basic principles (i.e. rules) set to build a
'Good Tax System'.

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Canons of Taxation were first originally laid down by economist Adam Smith
in his famous book "The Wealth of Nations".

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In this book, Adam smith only gave four canons of taxation. These original
four canons are now known as the "Original or Main Canons of Taxation".
As the time changed, governance expanded and became much more
complex than what it was at the Adam Smith's time. Soon a need was felt by
modern economists to expand Smith's principles of taxation and as a
response they put forward some additional modern canons of taxation.

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Adam Smith's Four Main Canons of Taxation

A good tax system is one which is designed on the basis of an appropriate
set of principles (rules). The tax system should strike a balance between the
interest of the taxpayer and that of tax authorities. Adam Smith was the first
economist to develop a list of Canons of Taxation. These canons are still
regarded as characteristics or features of a good tax system.

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Adam Smith gave following four important canons of taxation.

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and Limitations of Decentralization

1. Canon of Equity
The principle aims at providing economic and social justice to the people.
According to this principle, every person should pay to the government
depending upon his ability to pay. The rich class people should pay higher
taxes to the government, because without the protection of the government
authorities (Police, Defence, etc.) they could not have earned and enjoyed
their income. Adam Smith argued that the taxes should be proportional to
income, i.e., citizens should pay the taxes in proportion to the revenue which
they respectively enjoy under the protection of the state.

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and Theory Y - Employee Motivation

2. Canon of Certainty
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According to Adam Smith, the tax which an individual has to pay should be
certain, not arbitrary. The tax payer should know in advance how much tax he
has to pay, at what time he has to pay the tax, and in what form the tax is to be
paid to the government. In other words, every tax should satisfy the canon of
certainty. At the same time a good tax system also ensures that the
government is also certain about the amount that will be collected by way of
tax.

3. Canon of Convenience
The mode and timing of tax payment should be as far as possible, convenient
to the tax payers. For example, land revenue is collected at time of harvest
income tax is deducted at source. Convenient tax system will encourage
people to pay tax and will increase tax revenue.

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This principle states that there should be economy in tax administration. The
cost of tax collection should be lower than the amount of tax collected. It may
not serve any purpose, if the taxes imposed are widespread but are difficult to
administer. Therefore, it would make no sense to impose certain taxes, if it is
difficult to administer.

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Additional Canons of Taxation

Activities and functions of the government have increased significantly since
Adam Smith's time. Government are expected to maintain economic stability,
full employment, reduce income inequality & promote growth and
development. Tax system should be such that it meets the requirements of
growing state activities.

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Accordingly, modern economists gave following additional canons of taxation.

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5. Canon of Productivity

Principles of Good Lending

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It is also known as the canon of fiscal adequacy. According to this principle,

the tax system should be able to yield enough revenue for the treasury and
the government should have no need to resort to deficit financing. This is a
good principle to follow in a developing economy.

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6. Canon of Elasticity
According to this canon, every tax imposed by the government should be
elastic in nature. In other words, the income from tax should be capable of
increasing or decreasing according to the requirement of the country. For
example, if the government needs more income at time of crisis, the tax
should be capable of yielding more income through increase in its rate.

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7. Canon of Flexibility
It should be easily possible for the authorities to revise the tax structure both
with respect to its coverage and rates, to suit the changing requirements of
the economy. With changing time and conditions the tax system needs to be
changed without much difficulty. The tax system must be flexible and not rigid.

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8. Canon of Simplicity

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The tax system should not be complicated. That makes it difficult to

understand and administer and results in problems of interpretation and
disputes. In India, the efforts of the government in recent years have been to
make the system simple.

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9. Canon of Diversity
This principle states that the government should collect taxes from different
sources rather than concentrating on a single source of tax. It is not advisable
for the government to depend upon a single source of tax, it may result in
inequity to the certain section of the society; uncertainty for the government to
raise funds. If the tax revenue comes from diversified source, then any
reduction in tax revenue on account of any one cause is bound to be small.

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Requirement of a Good Tax Structure / System

The tax structure is a part of economic organisation of a society and therefore
fit in its overall economic environment. No tax system that does not satisfy
these basic condition can be termed a good one.
However, the state should pursue mainly following principles in structuring its
tax system :1. The primary aim of the tax should be to raise revenue for public services.
2. People should be asked to pay taxes according to their ability to pay and
assessment of their taxable capacity should be made primarily on the
basis of income and property.
3. Tax should not be discriminatory in any aspect between individuals and
also between various groups.

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What is Tax ? Definition - Adam Smith's Canons of Taxation

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Godfrey said...
November 9, 2012 at 9:20 PM

It's good. I've learnt something from a great guru in economics:thanks to

Adam's Smith
innocent mdemu said...
March 28, 2013 at 6:39 PM

well done this is what we want excellence to adam smith he tried a lot
Julius Lokopu said...
April 2, 2013 at 12:18 PM

Adam smith, although departed has laid a solid foundation to the modern
economists,well done.
Anonymous said...
April 11, 2013 at 7:18 AM

The income which they enjoy under the protection of the state is the rental
value of land. It is a misinterpretation to equate it with income and if you
read through Wealth of Labour you will see that Smith was strongly
against taxation of the wages of labour, which he regarded as absurd.
The protection of the state refers to land rights which cannot exist without
such protection.
Danjuma Manga said...
April 12, 2013 at 2:05 AM

only the low income earners pay tax in Nigeria. this negates the principle
of equity as envisage by Smith. And further widen the gap between the
rich and poor in the society, invariebly distance the realisation of income
redistribution which the tax system seeks to achieve.

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katumba brian said...

May 2, 2013 at 1:28 PM

i have found this so usefull to me in making my course work

Tenzin Pema said...
July 1, 2013 at 6:24 PM

Salute to our father Adam Smith...... This site is really informative and
concepts are given so clear...... Thank you so much.....
with regards
MA Economics
Pema Pelmo (Tibetan)
diya safe said...
March 16, 2014 at 11:42 AM

It is so helpfull...he revealed the basics in a simple manner.thank u very

much
john ekudel said...
December 27, 2014 at 5:40 PM

This article has been very useful in my research in constructing an ICT

system to enhance local revenues for local govornments
Wingani Winmoung said...
April 10, 2015 at 6:11 PM

this article is very helpful to me as a student of business administration,

precise and simple to understand thank you very much..
Mrisho Mohamed s said...
May 13, 2015 at 4:46 PM

Basically most of the tax systems are diverting from the provided
principles due to unavoidable circumstances that limit successful tax
policies that bring equity in social and economic life

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