Tax principles by Adam Smith
| Tax principles by Adam Smith |
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Adam Smith's tax principles are the set of guidelines that should characterize good and effective national tax system. Adam Smith described those tax principles in his most famous book An Inquiry into the Nature and Causes of the Wealth of Nations. These basic principles were described as:
- Every taxpayer have to contribute to the state income to the same extent. This, however, raises a question what does to the same extent mean? It can be interpreted as giving to the state budget the same percentage of income by every taxpayer - what is called a flat tax nowadays (this view was supported by Adam Smith) or diversifying the tax rate between taxpayers. Within the second approach, taxpayers that have bigger income should pay bigger percentage of that income to the state budget, so the tax progression is applied.
- Every taxpayer has to be sure how much taxes he will have to pay. According to Adam Smith, this rule is of great importance. He indicated it as one of the most important features of the tax system. The confidence on how much tax should be paid determines often the overall condition and assessment of the tax system.
- Every tax should be collected at the time and in the manner that is most appropriate for the taxpayer. Adam Smith shows that this is very important as well for the taxpayer, because then he can pay taxes on time, and for the tax collector, because then he can collect taxes on time.
- Every tax should return to the society in the value similar to the value of the tax collected from the society. The perfect situation would be that the same value that was collected comes back to the society, however this would mean no administration costs, which is impossible. However, the lower the administration costs, the better for the tax system.
Universality of Adam Smith's tax principles
The principles mentioned above are standard tax principles, despite they were presented in 1776, they are still of very great importance, since they present the fundamentals of every effective tax system.
The taxation systems changed during centuries. In ancient times they were mainly based on taxes paid in kind, then they evolved to payments in money. Taxation systems also became more and more complex, including tax relieves and introducing variety of tax rates. Due to the growing number of international connections the issue of double taxation was raised.
Nowadays, when the globalization process is inevitable, the transfer pricing issue and tax evasion are important topics. All this makes tax systems different from what they used to be, however tax principles introduced by Adam Smith should still be applied. They are universal and whatever the tax system is it should represent those principles. Despite different economic circumstances the statement that the more simple the tax system is, the better it is, still stays true.
See also:
Examples of Tax principles by Adam Smith
- The Principle of Equality: All citizens should be taxed proportionately and equally, regardless of their social status or wealth. This means that taxes should be based on income or consumption and should be applied uniformly.
- The Principle of Certainty: Taxpayers should be able to calculate their tax liabilities with clarity and certainty. This means that tax laws should be clearly written and applied without any discretion or favoritism.
- The Principle of Convenience: Taxpayers should be able to pay their taxes easily and without too much trouble. This means that taxes should be collected in a convenient manner and at a convenient time.
- The Principle of Economy: The cost of collecting and administering taxes should be kept as low as possible. This means that the tax system should be designed to minimize the cost of collection and administration.
- The Principle of Transparency: The tax system should be open and transparent. This means that taxpayers should be able to understand the rules and regulations that apply to them.
Advantages of Tax principles by Adam Smith
Adam Smith's tax principles are a set of guidelines that should characterize a good and effective national tax system. These principles, which can be found in his most famous work An Inquiry into the Nature and Causes of the Wealth of Nations, provide a sound basis for taxation that is fair, efficient, and promotes economic growth. The advantages of these principles are as follows:
- Taxes should be equitable and should be based on the ability to pay, so that those with higher incomes pay higher rates of tax. This is to ensure that those who have more resources to contribute to the system do not have a disproportionate advantage.
- Taxes should be transparent and simple, so that taxpayers understand their obligations and are able to comply with them easily. This reduces the administrative burden on taxpayers and increases compliance.
- Taxes should be certain, so that taxpayers know what their obligations are and when they must pay them. This eliminates unnecessary uncertainty and promotes compliance.
- Taxes should be low, in order to encourage economic growth. Lower rates of tax enable businesses to expand and hire more workers, leading to increased economic growth and prosperity.
- Taxes should be collected effectively and efficiently, so that the costs of tax collection are minimized. This reduces the costs of the tax system, allowing more of the taxes collected to be put to productive use.
Limitations of Tax principles by Adam Smith
Adam Smith's tax principles are the set of guidelines that should characterize good and effective national tax system. Adam Smith described those tax principles in his most famous book An Inquiry into the Nature and Causes of the Wealth of Nations. These basic principles are as follows:
- The tax should be certain, meaning that the rate and the time of payment should be known and fixed in advance.
- The tax should be proportionate to the taxpayer's ability to pay.
- The tax should be imposed in the way that is least burdensome to the taxpayer.
- The tax should be imposed in the way that is most conducive to economic growth.
- The tax should be collected in the simplest and most cost-effective manner.
- The tax should be collected with minimal administrative costs.
- The tax should be as equitable as possible, meaning that similar taxpayers should be taxed similarly.
- The tax should be transparent, meaning that taxpayers should be aware of the impact and consequences of the tax imposed on them.
- The tax should be flexible, meaning that it should be able to adjust to changing economic conditions.
- The tax should be compatible with other taxes, meaning that the overall burden of taxes should be minimized.
Adam Smith’s tax principles are the set of guidelines that should characterize good and effective national tax system. These basic principles were described in his most famous book An Inquiry into the Nature and Causes of the Wealth of Nations. The other approaches related to tax principles by Adam Smith include:
- Equality: Tax systems should be equitable and should not favor certain individuals or groups. The idea is that everyone should pay their fair share.
- Certainty: Tax laws should be certain and predictable. This means that taxpayers need to know how much they owe and when they need to pay it.
- Convenience: Tax systems should be convenient and easy to use for taxpayers. This means that taxpayers should not have to spend too much time and effort in order to comply with the laws.
- Economy: Tax systems should be cost-effective and should not impose an undue burden on taxpayers.
- Revenue: Tax systems should be designed to generate an adequate amount of revenue for the government.
In summary, Adam Smith's tax principles are important guidelines that should be followed in order to ensure that a tax system is fair, efficient, and effective. These principles emphasize the importance of equity, certainty, convenience, economy, and revenue.
References
- David, R. (1817). On the principles of political economy and taxation. Bohn's Economic Library (London: G. Bell & Sons, 1891), passim.
- Blundell, R. (2006). Earned income tax credit policies: Impact and optimality: The Adam Smith Lecture, 2005. Labour Economics, 13(4), 423-443.
- Smith, A. (1776). An inquiry into the nature and causes of the wealth of nations: Volume One.
- Viner, J. (1927). Adam Smith and laissez faire. The Journal of Political Economy, 198-232.
Author: Maciej Sawicki
