Canons of Taxation

These are the necessary principles or attributes which a good tax system should adhere to as to achieve its objectives.

Canon of Equality: The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities. This implies in absolute term, the richer should pay more taxes because without the protection of the government they could not have earned or enjoyed that extra income.

Two possibilities follow from this: a) it could mean that both the poor and the rich should be subjected to proportional taxation, each person paying percentage of his income as tax; b) if it is assumed that income is subject to diminishing marginal utility, it could mean that the richer should pay a larger proportion of their income as tax.

Canon of Certainty: The tax which each tax payer is to pay, should be certain and not arbitrarily. The time of payment, the amount to be paid and the manner of payment should be clear to the payer. None of the above should be subject to arbitrariness and discretion of the tax officials. Otherwise, there would be a scope for corrupt tax administration.

Canon of Convenience: The mode and timing of tax payment should as far as possible be convenient to the payer. This is to avoid all sorts of ill-effects that may result from tax payment.

Canon of Economy: The cost of collecting tax should little as possible. Otherwise unnecessary and additional burden would be imposed on the society in the form of administrative expenses. Moreover, if it is realized that tax collections are being wasted, tax payers are likely to evade tax.

Canon of Productivity: This is also referred to as Canon of Fiscal Adequacy. It demands that the tax system should be able to yield enough revenue for the treasury so that government will not be forced to resort to deficit financing.

Canon of Buoyancy: Tax revenue should have an inherent tendency to increase along with an increase in national income even if the rates and coverage of taxes remained unchanged.

Canon of Flexibility: It should be possible for the authorities to revise without undue delay the tax structure with respect to the coverage and rates to suit the changing requirement of the treasury and the economy.

Canon of Diversity: This demands that the sources of tax revenue should be as diverse as possible so that any shortfall in revenue on account of any one source would not be very large. However, too much multiplicity of taxes is also to be avoided since it may lead to unnecessary cost of collection and thus violate the principle of economy.

Canon of Simplicity: The tax system should be simple, plain and intelligible to the common tax payer. It should be simple to understand; how it is calculated or determined, the amount to be paid.

Canon of Elasticity: These cannon require that the government be able to raise the rates of taxes when it is in need of more revenue. In other word, taxes should be elastic. However caution must be exercised when raising the rates so as not to give rise to undesirable economic situation.

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