Income Tax Theories - Canons of Taxation - What makes a good tax?
The 'Canons of taxation' were first developed by Adam Smith as a set of criteria by which to judge taxes. They are still widely accepted as providing a good basis by which to judge taxes. Smith's four canons were:
- The cost of collection must be low relative to the yield
- The timing and amount to be paid must be certain to the payer
- The means and timing of payment must be convenient to the payer
- Taxes should be levied according to ability to pay
Modern economists have added three more canons to these to update and extend them:
- A tax must not hinder efficiency or should involve the least loss of efficiency
- A tax should be compatible with foreign tax systems (in the UK's case, with Europe's)
- Tax should automatically adjust to changes in the rate of inflation (particularly important in high inflation economies)
The best taxes will tie in with all these. The worst taxes won't!