Study of Taxation System


Tax is a compulsory contribution imposed by government authority on the tax payer on revenues earned by them. In accordance with Adam Smith, a good taxation system must be able to generate sufficient revenue in order to satisfy social objectives of government (Iwin-Garzyńska, 2014). Present study is based on the description of Canons described by Adam Smith. In this report, description will be provided regarding applicability of these characteristics in present environment by considering the example of direct and indirect tax.

Question 1

Main characteristics of good tax

According to the view point of Adam Smith, an effective taxation system is designed on the basis of appropriate set of principles. Further, it must be able to create balance between interest of taxpayer and tax authorities. In this aspect, Adam had described following characteristics of good taxation system-

Canon of equity- An ideal taxation system must be socially and economically justifiable to the public. By considering this aspect, Adam had argued that citizens must pay tax in proportion to their revenue (Frecknall-Hughes, 2014). It is because; rich people cannot earn high revenue without protection provided by government.

Canon of certainty- Imposed tax on taxpayer must be certain in nature and it should not be supported by the aspects of arbitration. Thus, tax payer should have knowledge about quantum, mode and due date of tax liability. In addition to this, taxation system should also provide assurance that government authorities have certain norms regarding collection of amount through tax.

Canon of convenience- Government authorities are required to consider convenience of taxpayers thus, mode and timing of tax payment should be kept as far as possible (Sandmo, 2014). This factor will encourage the taxpayers to fulfil their obligations in a proper manner and consequently, there will be increase in tax revenue.

Canon of economy- In accordance with this principle, there should be economy for the administration of tax. Further, assurance should be provided by taxation system that cost of collection of tax is less than the amount collected through tax.

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Importance of canons of taxation outlined by Adam Smith

Maxims described by Adam Smith is the precursors of principles given by the Modern economists. It is because; it provides basic guidelines for the ideal taxation system. Approach given by Adam regarding taxation system also highlights the components of federal state and local taxes. By this theory, ideal of benefit principle was developed in modern discourse. In this canon, they had described that equality does not refer to the equal amount as it means justice (SAMUEL and TYOKOSO, 2014). In simple words, it can be said that broadest shoulders are required to bear the heaviest burden. In addition to this, described maxims appeared to be derived directly from the concepts of the rule of law. Taxation from the perspective of Adam Smith is equivalent to a meaningful source that can be used for the development of society. Approach given by Adam also supports both ethical and administrative aspects.

Applicability of these characteristics in present environment

Canons described by Adam are still considered to be ideal for taxation system. However, these characteristics are not perfectly applicable because there is vital development in the economic theory. Principles given by Adam are mainly concerned with two objectives. First objective was to make increase in wealth and productivity of nation while second objective was to make efficient use of resources by implementing free market mechanism for private enterprises (Akrani, 2010). By considering the functions of modern government, it can be noticed that both of these objectives have increased postulating higher resources. Due to this aspect, modern economists have added other canons for the ideal taxation system in order to satisfy the objectives of government in an effective manner.

Additional characteristics that are required to be considered

In accordance with the view points of modern economists, following canons are added to the approach given by Adam Smith-

  • Canon of productivity
  • Canon of elasticity
  • Canon of flexibility
  • Canon of Simplicity
  • Canon of diversity

By the addition of above described canons, appropriate tax structure can be formed by the government authorities in order to form better economic organization (Chand, 2010).

Question 2

Applicability of canon principles on PAYE (direct tax)

Canon of equity- Aspect of equity provided by Adam is appropriately satisfied by indirect taxation of UK. By considering the provisions implemented by PAYE, tax payers are required to pay higher tax with the proportionate increase in their income (Terra and Wattèl, 2005). In addition to this, one of the accepted functions of British taxation is to make redistribution of wealth in order to make reduction in income in-similarities.

Canon of certainty- Provisions of PAYE is quiet specific and coherent. HMRC had provided description of this tax in detail at their official site. With this information, tax payer is able to know about their tax liability, due dates and other requirements to be fulfilled at the time of submission of return. In addition to this, tax calculator is also provided online by which assessee can know about their due amount in a proper manner.

Canon of convenience- Taxation through PAYE is directly collected by making deduction from the income of the tax payer (Income Tax, 2015). By this provision, canon of convenience is also satisfied in PAYE. It is because, tax payer had not to make payment efforts as tax obligation is directly satisfied by the source through income was earned.

Canon of economy- In accordance with the economy canon stated by Adam, income from taxes should be higher than its cost. In this aspect, HMRC assured that PAYE is cost convenient (Akrani, 2010). In situation where cost of administration is higher than its profitability then such tax is not introduced by the UK government.

Provisions imposed by UK government in direct tax are effective in nature as they are in accordance with the provisions described by Adam. In addition to this, PAYE system has been modified with the changing economy requirements.

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Applicability of canon principles on Value Added Tax (indirect tax)

Canon of equity- Provisions of value added tax in UK is regressive in nature. It is because; ability of tax payer is not considered by the government. By considering this aspect, it can be noticed that canon of equity is not satisfied in the provisions of VAT. It is because; VAT is chargeable on the amount of purchase with flat rate.

Canon of certainty- Administration of VAT is difficult in comparison to the direct taxes. It is because; determination of payable amount is not clear (McGuire, 2013). Due to this aspect, it is difficult for the government for further financial planning.

Canon of convenience- Aspect of convenience is completely ignored in provisions of VAT. It is because; if norms such as timing and method of tax payment are not suitable to the tax payer then it can lead to the situation of evasion.

Canon of economy- Canon of economy is properly satisfied through the provisions of value added tax. It is because; this tax is chargeable on the amount of purchase by which government is able to make good collection of revenue (Citron, 2001).

In accordance with the above description, it can be noticed that approach given by Adam is not satisfied through the provisions of VAT tax. However, it does not imply that indirect tax approach in UK is not effective because government requirements have been changed and those provisions are not covered in canons of Adam.


In accordance with the present study, conclusion can be drawn that taxation system is said to be efficient if it is in interest of both government and tax payer. For this aspect, it is required to be in accordance with canons provided by Adam. However, with the change in environmental practices, an effective taxation system can be developed by considering the additional canons described in the present study.


  • Citron, D. B., 2001. The valuation of deferred taxation: Evidence from the UK partial provision approach. Journal of Business Finance & Accounting. 28(78). Pp.821-852.
  • Frecknall-Hughes, J., 2014. The Theory, Principles and Management of Taxation: An Introduction. Routledge.
  • Iwin-GarzyÅ„ska, J., 2014. Common Consolidated Corporate Tax Base (Ccctb) Versus Canons of Taxation. Journal of Economics & Management. 18. pp. 58-71.
  • McGuire, E. B., 2013.  The British tariff system. Routledge.
  • SAMUEL, S. E. and TYOKOSO, G., 2014. Taxation and Revenue Generation: an Empirical Investigation of Selected States. Journal of Poverty, Investment and Development. 4. pp. 102-114.
  • Sandmo, A., 2014. Adam Smith and Modern Economics. Routledge.
  • Terra, B. and WatteÌ€l, P., 2005. European tax law. The Hague: Kluwer Law International.

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