Assessing the Canon Principles in UK Taxation System

The provided content discusses the applicability of Adam Smith's canons of taxation on Pay As You Earn (PAYE) and Value Added Tax (VAT). The analysis concludes that PAYE satisfies the canon of convenience, canon of economy, and provisions imposed by UK government are effective in nature. In contrast, VAT does not satisfy the canon of equity as it is regressive in nature, does not consider the ability of taxpayers. Additionally, the canon of certainty is difficult to apply due to unclear determination of payable amounts.

Tax

TABLE OF CONTENTS
Introduction......................................................................................................................................3
Question 1........................................................................................................................................3
Main characteristics of good tax..................................................................................................3
Importance of canons of taxation outlined by Adam Smith........................................................4
Applicability of these characteristics in present environment.....................................................4
Additional characteristics that are required to be considered......................................................4
Question 2........................................................................................................................................5
Applicability of canon principles on PAYE (direct tax)..............................................................5
Applicability of canon principles on Value Added Tax (indirect tax)........................................6
Conclusion.......................................................................................................................................7
References........................................................................................................................................8
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INTRODUCTION
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- This canon has been developed by considering fiscal adequacy. In
accordance with this principle, taxation system of the economy should be able to attain
sufficient earning for the treasury in order to prevent aspects of deficit financing. Canon of elasticity- In accordance with this principle, tax imposed by regulatory
authority should be elastic (Sandmo, 2014). This aspect has been inserted by economist
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because tax approaches are required to be adjusted as per the changing requirements of
the country. Canon of flexibility- In order to cope up with the changing demand of the economy, tax
authorities should be in position to revise their tax structure along with its coverage
provisions and rates (Akrani, 2010). For the aspect, developed system for the taxation
should be flexible in nature. Canon of Simplicity- According to this principle, tax system must not be too complex to
understand. It is because, complex system creates issue for the administration and
interpretation. Canon of diversity- As per this canon of taxation, government must collect tax from the
multiple sources instead of making focus on the single source. It is because dependency
on the single source may lead to the situation of inequality. In addition to this,
government will face issue in generation of funds (Chand, 2010). Similarly, if tax is
collected by government from the diversified resources than reduction in tax revenue will
not be able affect government authorities drastically.
By the addition of above described canons, appropriate tax structure can be formed by the
government authorities in order to form better economic organization.
QUESTION 2
Applicability of canon principles on PAYE (direct tax) Canon of equity- Aspect of equity provided by Adam is appropriately satisfied by in
direct 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 function 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 proper manner.
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 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 UK government.
Provisions imposed by UK government in direct tax are effective in nature as it are in
accordance with the provisions described by Adam. In addition to this, PAYE system has been
modified with the changing economy requirements.
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 is not suitable to
the tax payer than 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.
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CONCLUSION
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 additional
canons described in the present study.
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REFERENCES
Books and journals
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-Garzyńska, 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 Wattèl, P., 2005. European tax law. The Hague: Kluwer Law International.
Online
Akrani, G., 2010. Adam Smith's Canon of taxation. [Online]. Available through: < http://kalyan-
city.blogspot.in/2010/12/what-is-tax-definition-adam-smith.html>. [Accessed on 17th
November 2015].
Chand, S., 2010. Canons of Taxation and Equity in Taxation. [Online]. Available through: <
http://www.yourarticlelibrary.com/tax/canons-of-taxation-and-equity-in-taxation-
explained/26284/>. [Accessed on 17th November 2015].
Income Tax. 2015. [Online]. Available through: < https://www.gov.uk/income-tax/how-you-pay-
income-tax>. [Accessed on 17th November 2015].
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