The paper "Canons of Taxation and Real World" is an excellent example of an essay on law. Tax is the most important tool for raising revenue for a Government. While it is the responsibility of the general public to pay their taxes, the Government also needs to make sure that the taxes levied are fair. Adam Smith put forth four principles that can make sure that the taxes are fair. These are known as the Canons of Taxation. The first canon is that of proportionality. It means that all individual units that are eligible to pay tax must contribute in equal proportions.
The ratio of the sacrifice of income should be the same. The rich must pay more than the poor. Second canon concerns certainty. It means the amount, manner and time of the payment of tax must be certain and not arbitrary. The law must be clear and a layman should be able to understand it. The third canon is the canon of convenience. The time and manner of the tax must be such that is convenient for the taxpayer. For instance, the demand for tax from a farmer who has just planted the seeds is unreasonable and inconvenient.
Lastly, Adam Smith emphasized the fact that the collection of tax must be economical both for the taxpayers and the Government. If the collection becomes cumbersome for any of them, it is better than the tax is not collected at all. These canons are looked at as the benchmark but the tax system has become very complex these days. It is very hard to employ these canons in a manner in which they are compatible with each other.
Some canons are hard to apply in their singular capacity too. The canon of equity is hard to maintain since there are some factors that are purely qualitative and cannot be measured. Also, the problem of tax evasion enables most of the rich people to pay lesser tax than they should have. Income is deliberately hidden from the tax authorities and valuable funds are not received by the Government which also violates the canon of the economy to some extent. The canon of equality can also be brought into question where similar amounts of income are taxed at different rates under different heads.
The fiscal policy of a country changes once a year. A taxation is a tool of fiscal policy. The tax laws can change each year and there is a need to stay updated. The canon of certainty is difficult to maintain as a there are a number of people that are unable to stay updated with the tax laws which become more and more complicated. The predictions turn out to be wrong when a new law is explained.
The amendments are made out of necessity as a stale law of taxation enables the taxpayers to find loopholes and hence evade their taxes. On the other hand, when a tax system changes a lot, it loses its certainty automatically. The economy has become very complex and there are many sources of income these days. Certainly, the timing of earning income for each of the sources is diversified. It is impossible to set a particular time for the payment of tax which is convenient for all the taxpayers.
For example, at a given time, one farmer may have reaped all his crops but the other may just have planted the seeds because of the nature of his crops. Demand for the payment of tax at this time would be convenient for the former but not for the latter. The Government has attempted to fix this problem and maintain the canon of convenience by declaring different times for tax payment for different sources but the problem still persists for many sources of income. Also, the system of self-assessment has made the method of tax collection burdensome for the taxpayer and this additional responsibility is very inconvenient for him. The canon of the economy has a clash with the canon of convenience.
In practice, it turns out that the tax system cannot be convenient for both the taxpayer and HMRC. There is a trade-off between convenience and efficiency i. e. convenience for the taxpayer and efficiency for HMRC. The self-assessment system has become very economical and efficient for HMRC but it has also provided chances to the taxpayers to evade taxes and hide taxable incomes.
This makes it a very unfair system for the taxpayers who declare their incomes honestly. HMRC loses a lot of revenue and the system no longer remains very economical. Therefore, the economy is forgone for the benefit of convenience. If HMRC attempts to achieve economy and efficiency, a fair deal of convenience would have to be forgone. It might be possible to achieve a balance between the two canons but it is very difficult to do that practically. The taxpayers will have to be segregated on the basis of income or source of income but the system would be regarded as unfair and discriminatory: the canon of equality would be at stake. The canons of taxation were put forth in 1776.
Since then, the economy has become a very intricate system and it has become impossible to apply the canons in an ideal manner. In order to follow one canon, another canon needs to be violated. General fairness can never be forgone but it demands a trade-off among other canons. These canons may have been given a long time ago but they still are very much applicable in today’ s tax system.
It has become very complex but if some issues are tackled with, these canons may still be complied with. For instance, the double taxation treaties which are made to avoid double taxation must find a way to bring two different tax system into harmony. There should be no competition as to which country generates more revenue by lowering tax rates. Tax is an obligation and should be separated from a price war.
Strict penalties for tax evasion may cause every taxpayer to declare his/her income honestly. The canons of taxation are made for the benefit of both the taxpayer and the tax collector. Therefore, it is important that there is a mutual understanding between the two so that nobody is at loss. If the canon of certainty is strengthened, it may fix a lot of problems because if the method and determination of tax payable are simple and easy to understand, people may not try to evade their taxes. Nothing is ideal but ideal models are presented so that there is a direction to follow.
The canons of taxation by Adam Smith are a good direction to follow and attempts must be made to abide by these canons.