Canons of Taxation

Since taxation is compulsory, a well-designed tax system must follow certain principles so that it raises revenue fairly and efficiently. Adam Smith, in The Wealth of Nations, laid down four classic canons (principles) of taxation that remain the foundation of sound tax policy even today:

1. Canon of Equity — a tax should be levied according to the taxpayer's ability to pay; those with higher income/wealth should bear a proportionately (or progressively) higher tax burden than those with less.
2. Canon of Certainty — the amount of tax a person must pay, the time of payment, and the manner of payment should all be clear and certain, both to the taxpayer and to the government — not arbitrary or left to the discretion of a tax official.
3. Canon of Convenience — a tax should be collected at a time and in a manner that is convenient to the taxpayer — for example, deducting income tax at source from a salary as it is earned, rather than demanding a lump sum at an inconvenient time.
4. Canon of Economy — the cost of collecting a tax should be as small as possible relative to the revenue it yields; a tax that costs almost as much to administer and collect as it raises is a poorly designed tax. …