Question

In terms of Adam Smith’s canons of taxation, how does the Federal income tax fare as far as economy is concerned?

Answer 1

Adam Smith’s 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.

1. Canon of Equity
2. Canon of Certainty
3. Canon of Convenience
4. Canon of Economy
5. Canon of Productivity

6. Canon of Elasticity

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

2. Canon of Certainty

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.

3. Canon of Convenience

The mode of payment should be as easy as possible 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.

4. Canon of Economy

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.

5. Canon of Productivity

It is also known as the canon of fiscal adequacy

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.

                The Federal income tax fare as far as economy is concerned

At a recent fund-raiser for Hillary Clinton, the billionaire investor Warren E. Buffett said that rich guys like him weren’t paying enough. Mr. Buffett asserted that his taxes last year equaled only 17.7 percent of his taxable income, compared with about 30 percent for his receptionist.

Mr. Buffett was echoing a refrain that is popular in some circles. Last year, Robert B. Reich, labor secretary during the Clinton administration, wrote on his blog that “middle-income workers are now paying a larger share of their incomes than people at or near the top.”

“We have turned the principle of a graduated, progressive tax on its head,” Mr. Reich added.

These claims are enough to get populist juices flowing. The problem with them is that they don’t hold up under close examination.