Canon of Taxation by Adams Smith

The famous literature on principles of taxation was embodied in Adams Smith “Canons of taxation”. Since then, economies have adopted (and adapted where necessary) these basic principles for what is regarded as the most important tool of fiscal policy.

Taxation is a compulsory levy imposed on the income, value of goods and services of individuals, partners and companies by the government. It is can be said to be an approach of imposing tax on the citizen. This imposition of tax, is expected to yield income which should be utilized in the provision of both basic and substantial infrastructural amenities, both social and security, as well as creates conditions for the economic well-being of the society at large.

Aamir et al (2011) put forward four main purposes of taxation, which include;

1. Revenue collection for the government. This will provide for the administrations, internal and external defense, maintenance of laws and order as well as social services that the government provides.

2. Alteration of wealth from the high-income earners to the low-income earners so as to reduce inequality.

3. Imposing duties on detrimental goods such as tobacco so as to control their consumptions.

4. The obligation of the government to stand for the entire public as it designs and manages the economy by shaping the economic growth and development.

ELEMENT OF TAX

The two elements of tax include;

I. Tax Base can be referred to as the object that is charged. For instance, the tax base for income tax is the taxable income.

II. Tax rate refers to the percentage of the tax base, which is settled in tax. It is the tax charged by the government on a taxpayer’s income.

CLASSIFICATION OF TAX

Tax can be classified based on

A. INCIDENCE, which are

I. Direc...

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...distribution of wealth favours the low-income earners.

5. Optimal Taxes Should Depend On Personal Characteristics As Well As Income: Reliance on individual income as the only source of determining ability to pay tax is discouraged. Mirrlees (1971) suggests that other characteristics such as I.Q, number of degrees, age and colour should be used in determining the ability of a taxpayer. Other barometers referred to as “Tagging” was put forward by Akerlof (1978) to supplement the income oriented tax system. This provided more information on individuals, which the policymakers can capitalize on while determining tax liability.

6. Only Final Goods Ought to be Taxed, And Typically They Ought To be Taxed Uniformly:….

7. Capital Income Ought To be Untaxed, At least in Expectation:….

8. In Stochastic, Dynamic Economis, Optimal Tax Policy Requires Increased Sophistication:…..