Principles of taxation

Adam Smith, a philosopher and economist who lived in the 18th century, made an effort to codify the principles that should guide a fair taxation system.

He established four general canons in Chapter 2 of Book V of The Wealth of Nations. In other words, we can write those canons as:-

(1) As nearly as practicable, each state's citizens should contribute to the government's support based on their various capacities, or more specifically, based on the income they each get from the state's protection.

(2) The tax that each person must pay must be definite and not arbitrary. To the contributor and to everyone else, the time of payment, the method of payment, and the amount to be paid should all be obvious and transparent.

(3) Every tax must be imposed at the time or in the way that is most likely to make it easy for the donor to pay.

(4) Every tax should be designed in such a way as to take as little money as possible out of the pockets of the people and keep as much money in the public purse of the state as feasible.

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These concepts still hold a remarkable amount of relevance, despite the occasional need for reinterpretation. Some influential ideas regarding how to fairly distribute the cost of taxes among taxpayers may be deduced from the first. These are (1) the belief that taxes should be determined by an individual's capacity to pay, also known as the ability-to-pay principle; and (2) the benefit principle, which postulates that there should be some correlation between what an individual pays and the advantages he subsequently receives from governmental actions.

The focus many economists place on such a tax system that does not obstruct market decision-making, in addition to the more evident requirement to avoid complexity and corruption, can be understood as being supported by the fourth of Smith's canons.

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