Question

n terms of Adam Smith’s canons of economy in collection, how does the Federal income tax fare?

Answer 1

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Well renowned economist Adam Smith laid four canon of taxation in his famous book "The Wealth of Nations" which are -
1. Equality
2. Certainity
3. Convenience of Payment
4. Economy in Collection

The first maxim Canaon of Equality deals with the ability to pay which means people of a country should contribute towards the support of Government in their own capacity i.e., taxes should be levied in proportion of the revenue earned by the people.

Federal Income Tax is built on progressive tax system, where higher income earners are taxed at higher rate.

The second maxim Canon of Certainity tells that taxes system should be transparent which means every individual should know how tax to be paid and the time of the payment and consequences of non payment. All the when, how, what to pay should be clear and certain.

In Federal Income Tax, every individual is setup in a marginal tax bracket which depicts the tax rates along with a pre-defined threshold, below which no or low tax is to be paid. It also laid out the time limits within which taxes are to be paid.

The third maxim is about convenience deals that when taxes should be levied i.e., taxes should be levied at the time and manner which is convenient to pay for taxpayers.

The federal income tax is a pay-as-you-go tax. You must pay the tax as you earn or receive income during the year. Similarly, filing of return is also clearly laid out with time limits.

The fourth maxim is economy which means every tax levied should be lowest possible waste or cost of collection is as small as possible because if cost of collection is high, it will take much out of the people's pockets but brings very leass to the Government.

In Federal tax law, delimiting the dead weight can be done through online payment and filing of taxes and return. Along with proper audit of administration costs properly documented and are in check.