Tax

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The origin of the word “tax” is from “taxation,” which means an estimate.Taxation is a means by which goverments finance their expenditure by imposing charges on citizens and corporate entities.The main purpose of taxation is to accumulate funds for the functioning of the government machinery.Tax has come into forefront on account of the new concept of “Welfare state”.Modern goverments do not confine themselves to law and order only.The importance of public finance (tax) has vastly increased in recent years.

Taxes are compulsory payments to government without expectation of direct return (or) benefit to the tax payer.prof.Selingman also defined a tax as a “a compulsory contribution from a person to the government to defray the expenses incurred in the common interest of all, without refference to special benefits conferred”.

Tax system

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Every type of tax has some advantages and some disadvantages.So we have a tax system,that is,a collection of variety of taxes.All countries use a variety of taxes.There are some characteristics of tax system that economists think should be followed while designing a tax system.These characteristics are called as canons of taxation.From Adam Smith ,many economics have given lists of canons of taxation.It is important to recall those common among them for discussion here.

Canon of equity

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Since tax is a compulsory payment,all economists agree that equity is the cardinal principal in designing the tax system.The equity principal says that the rich should pay more tax revenue to government than the poor, because rich has more ability than the poor to pay the tax.Morever,after payment of tax,you will find the economic difference is reduced between the rich and the poor.You can do an exercise to find out which of the taxes adhere to the canon of equity.

Canon of certainty

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Government should announce in advance the tax system so that every tax payer will be to calculate how much tax amount one may have to pay during a year to the government.In other words, government should not change the tax system frequently and should not announce sudden changes in the tax system.

Canons of Economy and Convenience

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These two canons are related.As tax payers we incur a cost to process our accounts and pay the tax,for example ,salary paid to accountants and auditors.Similarly government also pays salary to its taxmen and run huge institutions.If the tax is simple,then the cost of collecting taxes(tax payer cost + tax collector cost)will be very low.Further,tax should be collected from a person at the time he gets enough money to pay the tax.This is called Canon of Convenience.A convenient tax reduces the cost of collecting tax.

Canons of productivity and Elasticity

Government should choose the taxes that can get enough tax revenue to it.In other words,it should choose a few taxes that can fetch more tax revenue,instead of lots of taxes and each one their incomes.Therefore the tax system should be designed in such a way that the people out their incomes.Therefore the tax system should be designed in such a way that the people automatically pay more tax revenue if their incomes grow.This is called Canon of elasticity.In a broader sense,as the economy is growing the people will get more income and consequently they will also pay more tax revenue to government if the tax system is elastic

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