Canon of Economy These are canons of productivity, elasticity, simplicity, diversity and desirability (expediency). In other words, the levy of a tax should not only increase the income of the state, it must not also destroy the incentives of the people to undertake productive enterprises. Canon of elasticity It should be certain to the lax payer how much tax he has to pay, to whom and by what time the tax is to be paid. A good tax system must try to follow all these principles. Canon of Diversity – It states the principle of multiple taxation (charging various direct and indirect taxes rather than one single tax) so that all sections of the society can be brought under the taxation network. To illustrate this, imagine that the collection of federal income taxes was costly and accounted for about 90 percent of all tax revenues. The tax mix in any country comprises of complex sets of taxes and tax rates. The canon of productivity implies that taxes should be imposed in such a manner as not to hamper production or to decrease the amount of revenues collected. This post is for general overview and guidance and does not in any way amount to professional advice. In other words, the taxes would account for 1% of the millionaire’s income, whereas the cashier would have to spend 50% of his income to pay his tax bill. Taxes should be levied in such a way as to minimise the cost of collection in terms of revenues collected. But too much diversity in taxes is undesirable as it increases the cost of tax collection. For example, imagine what would happen if the United States didn’t have any official regulations on how taxes are determined and when they are due. The pay-as-you-earn (PAYE) method of collecting personal taxation under which an employer deducts tax on behalf of employees and pays it to the Finance Department is a good example of this quality. Most people wouldn’t consider that fair. That means they would have to withdraw large sums of money from their bank, show up to the IRS offices in person, and hand over their money at a dedicated desk.
Australian Tax Forum, 579-624.
This is extremely inconvenient for several reasons: (a) It’s much more complicated than simple wire transfers, (b) it’s a lot more time-consuming, and (c) withdrawing large sums of cash exposes people to an unnecessary risk of being robbed.
The principle of certainty requires that the tax which every individual has to pay should be certain and not arbitrary. In this context, equity means that the taxes people or organizations have to pay should be proportional to their income.
Simply put, the more you have, the more tax you should pay. The entire process should be simple, non-technical and straightforward. But a person who earns Rs.10, 000 a year does not have the same taxable capacity as the person who earns Rs.100, 000 a year.
Hence, the tax must not be expensive to collect and not frustrating and a daunting task to the taxpayer. However, there are other canons though not of lesser importance. So, this rule of Adam Smith is also known as the canon of equity.