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Friday, October 26, 2018

Public Finance Noter: Public Revenue

Unit – 3: Public Revenue
MEANING OF PUBLIC REVENUE AND ITS SOURCES
A government needs income for the performance of a variety of functions and meeting its expenditure. Thus, the income of the government through all sources like taxes, borrowings, fees, and donations etc. is called public revenue or public income.
However, Prof. Dalton has defined the term in two senses – broader and narrow sense. In broad sense, it includes all the income and receipts, irrespective of their sources and nature, which the government happens to obtain during any period of time. In the narrow sense, it includes only those sources of income of the government which are described as revenue resources. In broader view of the concept is that is includes all loans which the government raises under the term ‘public revenue’ or public income. The distinction in both can also be explained as the term ‘public revenue’ used in public finance. It includes only those sources of government income which are not subject to repayment. In a broad sense, it means all receipts of the government irrespective of the fact whether they are subject to repayment or not.
In a modern welfare state, public revenue is of two types:
(a)    Tax revenue and
(b)   Non-tax revenue.
(a) Tax Revenue: A fund raised through the various taxes is referred to as tax revenue. Taxes are compulsory contributions imposed by the government on its citizens to meet its general expenses incurred for the common good, without any corresponding benefits to the tax payer. Seligman defines a tax thus: “A tax is a compulsory contribution from a person to the government to defray the expenses incurred in the common interest of all, without reference to specific benefits conferred.
Examples of Tax Revenue 
Ø  Income Tax(on income of the individual as well as joint Hindu families) 
Ø  Corporation Tax (on income of the companies both domestic and foreign companies operating in India ) 
Ø  Interest Tax (on the gross interest income of the financial institutions like Bank) 
Ø  Expenditure Tax(expenditure incurred in luxury hotels and restaurants) 
Ø  Wealth Tax(total wealth of individuals and Hindu undivided families) 
Ø  Custom Duty.(import and export duty) 
Ø  Central excusive Duty.(duties on industrial products) 
Ø  Service Tax.(on services provided by hotels,telephones,port services etc.) 
(b) Non Tax Revenue: The revenue obtained by the government from sources other then tax is called Non-Tax Revenue. The sources of non-tax revenue are:
1. Fees: Fees are another important source of revenue for the government. A fee is charged by public authorities for rendering a service to the citizens. The government provides certain services and charges certain fees for them. For example, fees are charged for issuing of passports, driving licenses, etc.
2. Fines or Penalties: Fines or penalties are imposed as a form of punishment for breach of law or non fulfillment or certain conditions or for failure to observe some regulations. Like taxes, fines are compulsory payments without quid pro quo. But while taxes are generally imposed to collect revenue. Fines are imposed as a form of punishment or to prevent people from breaking the law.
3. Surplus from Public Enterprises: The Government also gets revenue by way of surplus from public enterprises. In India, the Government has set up several public sector enterprises to provide public goods and services. Some of the public sector enterprises do make a good amount of profits. The profits or dividends which the government gets can be utilized for public expenditure.
4. Special assessment of betterment levy: It is a kind of special charge levied on certain members of the community who are beneficiaries of certain government activities or public projects. For example, due to a public park in a locality or due to the construction of a road, people in that locality may experience an appreciation in the value of their property or land. Thus, due to public expenditure, some people may experience 'unearned increments' in their asset holding.
5. Grants and Gifts: Gifts are Voluntary contributions by individuals or institutions to the government. Gifts are significant source of revenue during war and emergency. A grant from one government to another is an important sources of revenue in the modern days. The government at the Centre provides grants to State governments and the State governments provide grants to the local government to carry out their functions.
6. Deficit Financing: Deficit means an excess of public expenditure over public revenue. This excess may be met by borrowings from the market, borrowings from abroad, by the central bank creating currency. In case of borrowing from abroad, there cannot be compulsion for the lenders, but in case of internal borrowings there may be compulsion.
Different classifications of public revenue
Different economists have given various classifications of public revenue. Looking from different angles, they classified public revenue in one manner or another. The following are the main classifications given by different economists or authors:
                    I.            Adam Smith’s Classification: Adam Smith was of the opinion that revenue of the government ultimately depends on the property in possession of the inhabitants of the country and the extent to which the state has control over the wealth of the country. Adam Smith classified public revenue into the following two categories:
1)      Revenue from Public: Revenue from public includes all those sources which are generally known as the sources of revenue of the government from the public.
2)      Revenue from State Property: Revenue from state property includes revenue obtained from public enterprises as well as those revenues which are derived from the property in possession of the state.
This classification as given by Adam Smith does not serve the purpose of modern finance. Hence it is subject to criticism.
                  II.            Bestable’s Classification: Like Adam Smith, Bestable also classified public revenue into the following two categories:
1)      Those incomes which the state receives from its various functions just like a private individual or corporation. It includes all the incomes which the state derives in the form of fees and prices.
2)      Thos incomes which the state derives in its own capacity as ‘state’. It includes taxes and levies.
Like Adam Smith this classification is also limited and narrow.
                III.            Adam’s Classification: Prof. Adam classified public revenue into the following three categories:
1)      Direct Revenue: It includes income which the state derives from public land, public enterprises like rail, roads, highways, posts and telegraph and all other revenues which the state derives on account of the ownership of productive enterprises.
2)      Derivative Revenue: It includes the income derived from the citizens, such as, taxes, fees assessments, fines, penalties etc.
3)      Anticipatory Revenue: It includes income from the sale of bonds or other forms of commercial credit. It also includes income from the treasury notes.
This classification suffers from the defect of overlapping and there is no clear-cut demarcation of different heads. It has a wide range of revenues, as it includes both commercial and administrative revenues in one group in spite of the fact that both are fundamentally different in nature. Hence this classification is also not satisfactory.
                IV.            Seligman’s Classification: Seligman classified public revenue into the following three categories:
1)      Gratuitous Revenue: Gratuitous revenue is that revenue which is derived by the government free of cost, such as, gifts from the public and others.
2)      Contractual Revenue: It is that revenue which is derived by the state as a result of the contracts entered into between the public and government. It includes income from land mines and public enterprises.
3)      Compulsory Revenue: It includes the income derived from state’s authority for administration, justice and taxation, such as, taxes fees, fines etc.
This classification suffers from various lacunae and may not be regarded as satisfactory. However, it is more comprehensive that the earlier classifications already discussed.
                  V.            Lutiz’s Classification: Lutiz classified public revenue into the following six categories:
1)      Administrative Revenue;
2)      Commercial Revenue;
3)      Taxation;
4)      Public Debt;
5)      Subventions and Grants; and
6)      Book-keeping revenue or transfers.
This classification is outdated and thus unsatisfactory. For example, the last three, i.e. public debt, subventions, and grants and book-keeping revenues or transfers are not included in public revenue now.
                VI.            Dalton’s Classification: According to Dalton, there are two main sources of public revenue, i.e. taxes and prices. A tax is a compulsory charge imposed by public authority, whereas prices are paid voluntarily by private persons, who enter into contracts with authorities. Thus, taxes are paid compulsorily, whereas, prices are contractual payments. Dalton classified public revenue into the following twelve categories:
1)      Taxes;
2)      Gifts and Reparations;
3)      Compulsory Loans;
4)      Public Property;
5)      Public enterprise;
6)      Fines in courts;
7)      Fees and other Payments;
8)      Special Assessment;
9)      Public Monopolies;
10)   Mint;
11)   Voluntary Gifts; and
12)   Tributes and Indemnities whether arising out of war or otherwise.
As a matter of fact, it is not a classification of public revenue on some sound principles, but actually it is a list of items enumerated above.
              VII.            Taylor’s Classification: Taylor classified public revenue into the following four categories:
1)      Grant-in-aid: Grant-in-aid are the means by which one government provides financial assistance to another, usually in the performance of a specified function in a specified manner, e.g. education and health. Grants are made to the state government by the central government for some specific purpose. The state government has no obligation to repay the amount of grant-in-aid sanctioned by central government.
2)      Administrative Revenue: These revenues include fees, licenses, fines forfeitures, escheat and special assessment. Most of these are voluntary in nature on the part of the payer as to whether or not he will pay and more or less for the direct benefit conferred upon him. They generally arise as a by-product of administrative control or function of government, and hence, they are called as administrative revenue by Taylor.
3)      Commercial Revenue: These revenues are received in the form of prices paid for government-produced commodities and services, such as, payments for postage, tolls, tuition fee of public educational institutions, interest on funds borrowed from government credit corporations, price paid for liquor in government stores, electricity and water distributed by government authorities etc.
4)      Taxes: Taxes are compulsory payments to government without expectation of direct return in benefit to the tax-payer, such as, income-tax, toll-tax, property tax etc. they involve varying degrees of coercive powers.
PRINCIPLES OF PUBLIC REVENUE
There are various principles of public revenue as under:
1.       Principle of Least Aggregate Sacrifice.
2.       Principle of Equity.
3.       Principle of Economy.
4.       Principle of Productivity.
5.       Principle of Certainty.
6.       Principle of Uniformity.
1. Principle of Least Aggregate Sacrifice: Prof. Pigou and Prof. Dalton developed the principle of least aggregate sacrifice. According to them, “State should raise money in such a manner that the sacrifice imposed on the people is the least. As pointed out earlier, taxation is irksome and the act of raising money a necessary evil. Taxation therefore imposes sacrifice and pain. The State exists for the welfare of the masses and therefore should see to it that the sacrifice or pain is least.”
2. Principle of Equity: Economists like A. Smith and Chapman, Robert Jones considers equity or equality as the right principle of taxation. Seligman and Cohn accept this principle but understand it to imply progressive taxation while walker and some other classical economists think that equality or equity leads to proportional taxation. All these economists, however, believe in equity. It is worth while therefore considering in some detail the meaning and implications of equity, as the basis of taxation.
3. Principle of Economy: Hobson, Wicksteed and Jones believed in the principle of economy. According to them, Taxation is an act of production and therefore one must effect as much economy in production as possible. Whatever the demand side may be, if a certain amount has to be produced that producer’s has concern is always to produce it at the lowest cost. Economy is then the correct principle of taxation. But since the cost of taxation consists in the sacrifices made by the tax-payers, the cost is least when the sacrifice is the lowest. Thus, the principle of economy is precisely the same as the principle of least aggregate sacrifice.
4. Principle of Productivity: Principle of productivity was propounded by Bastable. According to Bastable, the idea of productivity comes close to that of economy. Taxation is an act of production. And therefore it should be as productive as possible. Taxation should be as productive of revenue as the State can make it to be.
5. Principle of Certainty: This principle was dates back to the name of President Hadley. According to him, tax should be certain in its manner of imposition and its rate, is not to be doubted. Uncertainty is never desirable. The statesmen as also the tax payers should know how and when and what taxes are imposed. It gives greater confidence to the govt. about its estimates and the tax payers feel certain about his budget. Certainty reduces the cost of paying taxes for the tax payers and the cost of them for the govt. certainty helps to reduce cost and thereby increases welfare.
6. Principle of Uniformity: Principle of uniformity was analyzed by Nitty and Conrad. According to them, “If uniformity implies that the taxes should burden the people uniformly, then it is the same principle as that of equal sacrifice. But if the word uniformity refers to the manner of levying taxes or the rates of taxes no such similarity between this principle and that of equal sacrifice can be deduced. It is desirable of course that tax should possess the feature of uniformity even in the rates and the manner of their imposition. That reduces the complexity of the system and thereby conduces to smooth working of the entire machinery.
EFFECTS OF PUBLIC REVENUE
The effects of public revenue can be discussed under the following heads as:
1. Effects of Revenue-Direct and Indirect: For the consideration of effects of public revenue on social welfare it is best to suppose that revenue is raised and then destroyed. That would enable us to ignore effects that the knowledge and expectation of public expenditure has the minds of the tax payers. When a tax is levied on an individual his income decreases. If pays out of his income, then it is directly and immediately reduced. He decides to pay it out of his savings and current income is not used but future income derived from his saving decreases. In any case the effect of taxation is thus to reduce the income of people. This accounts for the sacrifice of taxation. We may study effects of direct reduction of income and indirect reduction of it.
The immediate decrease of income takes place, as we have when the tax payer pays tax out of his current consumable income when that happens he is force to cut down his present consumption of goods and services. If he consumes less of luxuries, the adverse effect of taxation occurs. But if he cuts down his consumption of necessaries more than luxuries the effects are more pronounced.
2. Effects of Present and Future Generation: This brings us to the consideration of the effects of taxation on the present and future generation. When taxes are paid out of current consumable the present generation directly and immediately suffers. However, they are affected in two ways. First, the reduction of consumer goods may decrease the efficiency of the people and thereby the amount of wealth they can produce and save for succeeding generation. But they also such effects will be partly or wholly offset by expenditure policy of the govt. But the payment of taxes will themselves have the effect of shifting the incidence of sacrifice on future generation to some extent. In the second place, they may suffer due to adverse effects on production caused by increased demand for consumption goods.
3. Effects on Tax Distribution: The effects of taxes do not only differ according to the aggregate volume of revenue raised or according to its impact on current consumable income and savings; they also depend on the distribution of the tax burden between the tax payers. Taxes not levied equally on all. They are so levied as to minimize the sacrifice. Thus some have to pay more than others. If the Govt. is successful in so fixing the rates of taxes as to minimize sacrifice jointly made by the tax payers, we have to consider only effects of taxation on the people in the manner that we have done. But the government is not likely to succeed in minimizing the aggregate sacrifice.
4. Other Effects on Public Revenue: It is worthwhile considering if taxation can produce some favourable effect on social welfare. We had seen while considering the favourable effects of public expenditure on social welfare; how such expenditures can also have an adverse effect on the well-being of the people.
SIGNIFICANCE OF PUBLIC REVENUE
The public revenue of one country differs in amount from that of another country. The difference is due partly to the size of country and partly to other causes. India is not a small country. It is sub-continental in itself. Its stages are as big as some counties of the west. But its public revenue is not very big in size. What does the size of public revenue then indicate. It depends on the following aspects.
1. Sign of Prosperity: A man who has a big income is in general respected more than the other who has a smaller income. It is only rarely that people with small income are held in high esteem by society. And in the same way a country that has a small volume of public revenue is not regarded as a big power and consequently not respected by other counties. A State that has a big volume of public revenue considered as a power to be reckoned with. America and United Kingdom have public revenue that is several times higher than that of our country. And we knows they do, that they can afford to do things that require much money.
2. Welfare of Country: Other things being equal, however, the welfare of a country can be judged from the size of its public revenue. A country whose resources, both natural and human, are not fully developed is a poor and backward country. And the government of such a country must necessarily be poor also. And with poverty of wealth goes also the poverty of welfare unless other things are not the same.
3. Composition of Public Revenue: Yet, it is not merely the size of public revenue the one should look to in order to form some idea of the prosperity or otherwise of a country. The composition of public revenue is as much important as its size. If a large part of the wealth of the government comes from the poor it is not a sign of a healthy state of affairs.
4. Mere Availability of Means: Public revenue is only, a means and the mere availability of means indicates nothing. All depends on how the means are utilized. It is not safe, therefore, to reckon with merely the size of revenue. Some countries of the world have public revenue in thousands of millions. The tendency today is on the one hand to spend an increasing percentage of public revenue on social services and social security. On the other hand, everywhere more and more money is being diverted to the building up of strong defensive and offensive force.
5. Manner of Public Revenue: A word may again be said about the manner in which revenue is obtained from the people. Every government tries to get more money from the rich that from the poor. But not all succeed in so doing. Some fail because they are ignorant and some fail because they are careless. And we have to say also that some fail because they are mischievous.
Meaning and Definition of Tax
In simple words, it is a compulsory payment by the people. If a person defies the tax payment, he may be punished in the court of law. However, different economists tried to define taxation in a different style as stated below :
Adam Smith : “A tax is a contribution from citizens for the support of the state.”
Saligman: “A tax is compulsory payment from a person to govt. to defray the expenses incurred in the common interests of all without reference to special benefits conferred.”
Bastable : “Tax is a compulsory contribution of the wealth of a person or body of persons for the service of the public powers.”
Taussig : “The essence of a tax is distinguished from other charges by govt. in the absence of direct quid pro quo between the tax-payer and public authority.”
Dalton : “A tax is a compulsory contribution imposed by a public authority irrespective of the exact amount of service rendered to the tax-payer in return and not imposed as penalty for any legal offence.”
From these mentioned definitions, it is clear that the taxes are not a voluntary contribution by the tax-payer but it is compulsory in nature. Therefore, one can say that every payment by individuals to the state is not a tax. It is just like withdrawal from the people’s income which reduces their purchasing power. It should be noted here that tax checks production where as public expenditure may spurt the productive process. In the opinion of Dr. R.N. Bhargava, taxes are as much compulsory as other payment, like fees etc. In this context, Dalton says, “Where taxation, taken alone, may check production, public expenditure taken alone, should almost certainly increase it.” So, tax is a necessary contribution by the tax-payer to social objectives like reducing inequalities in income and wealth, securing high level of employment as well as promoting economic stability with growth.
OBJECTIVES OR AIMS OF TAXATION IN A DEVELOPING COUNTRY LIKE INDIA
The main objectives of taxation are as follows:
1)      Raising Public Revenue: Normally, the foremost objective for the imposition of taxes, that is, to collect revenue for the govt. Today the govt. has assumed responsibilities of providing social services, promoting economic development and meeting war expenditure. All these expansions in the scope of economic activities have created necessity of greater funds to be spent by the govt. The greater the need of funds, the greater is the resort of taxation.
2)      Regulation and Control: The objective of taxation is regulation and control. The govt. not only raises public revenue through taxation but also imposes restrictions on the use of certain goods and service in a way desirable and respectable for a healthy state of society. To restrict the consumption of harmful goods – excise duty on tobacco, liquor etc. is imposed to restrict the consumption of these harmful goods. On the other hand, there are import and export duties which also raise public revenue but their specific objectives are otherwise. Import duties (taxes) are levied in order to restrict imports of these goods which may harm the infant industries in the country. Similarly, luxury goods may be taxed heavily while being imported so as to divert the national funds to some other forms of production necessitated inside the country.
3)      Reduction of Inequalities in Income and Wealth: Another objective of taxation is to reduce the inequality of income and wealth. One of the chief characteristics of underdeveloped countries is that there is a vast gap between the income of persons in the highest income group and of those in the lowest income group. That is why one of the objectives of taxation is to redistribute income and wealth in such a way as to ensure more just and equitable distribution.
4)      Promotion of Capital Formation: Another objective of taxation is the promotion of capital formation. In underdeveloped and developing countries, one of the main objectives of taxation is to make savings more dynamic and promote capital formation. Thus, the savings can be easily directed towards production and capital formation through the assistance of taxation.
5)      Business Stability and Maintaining Full Employment: Another objective of taxation is to bring about business stability and maintain full employment conditions. Low rate taxation during a business depression shall accelerate more income to the people and help in raising demand and, thus, revive business activity. On the contrary, high rates of taxes and additional taxes may be useful to check inflationary pressure on prices.
6)      Political Objectives: In democratic countries taxation is used as weapon for attaining political objectives. For instance, lower and middle-class voters may be attracted by imposing high taxes on rich people and luxury goods and nominal or no taxes on goods consumed by poor and middle-class people. Thus, it also fulfils the need of political objective in a country.
7)      Increase in National Income: Another objective of taxation is to increase the national income. Tax is the main source of the govt. income. This income is used for productive purposes and thereby overall production is increased. This increase in production leads to increase in national income of the country along with increase in per capital income.
8)      Restriction on Unnecessary Consumption: Another objective of taxation is to restrict the unnecessary consumption particularly of harmful commodities, such as wine, cigarettes, biris, bhang etc. When heavy tax is imposed on such commodities, the consumption of such commodities are automatically reduced. According to A.P. Lerner, “Individuals should be taxed only to the extent to make the tax-payer poorer.”
9)      Proper Standard: Another objective of taxation is the maintenance of proper standard. According to A.P. Lerner, “Taxes should not be imposed simply because the govt. needs money. Economic transaction should be taxed only when it is thought desirable to discourage these transactions. Individuals should be taxed only when it is desirable to make the tax-payer poorer.”
CHARACTERISTICS OF IDEAL TAX SYSTEM OR REQUIESTES OF A SOUND TAX SYSTEM
A good or ideal tax system is one which fulfils all the canons of taxation, which is helpful to provide sufficient revenue to the government for meeting the expenditure and at the same time offer minimum inconvenience to the tax-payer. According to Edmund Burke, “It is difficult to tax and to please as it is to love and to be wise.” That we mean by a good or deal tax system is simply the predominance of good taxes; taxes which fulfils most the canons taxation. The following characteristics should be there in order to be called a good or deal tax system:
1)      Tax Ratio: It is difficult to determine the tax ratios by a fixed norm. The opportunity cost of raising more revenue, the benefit to be derived from extra public spending and cost of servicing public sector debt all changes over time and differ across countries. Decisions on public spending, borrowing the revenue are highly interrelated, if they are to set, they must be set jointly.
2)      Efficiency and Growth: It is often difficult to design a tax structure that will satisfy the aims of efficiency as well as growth. In order to raise higher revenue, there is need to change the base or rate of some taxes at least. In that case firms and individuals will bring about a change in the allocation of resources from heavily taxed industries to lightly taxed one. In the event of market prices reasonable reflecting social costs and benefits, the above tax change will require a tradeoff between revenue and efficiency. When market price do not reflect social costs and benefits, taxes can be utilized to improve allocation of resources.
3)      Equity in Taxation: Equity is another issue that is associated with any tax reform. There are two types of equity viz. horizontal equity and vertical equity. The former is concerned with the treatment of person with similar incomes, while the latter is more concerned with reduction in income inequality. Tax system of developing countries fails miserably in terms of horizontal equity. In the case of vertical tax equity too, the record is no better and it is so in spite of progressive tax structure because it is not fully applied. Another factor is large scale tax evasion.
4)      Taxes should observe all the Canons: The taxes should be so imposed that they are equitable, convenient to pay, certain, economic, productive, elastic and simple. The essence of the argument is that majority of the taxes should observe most of the canons.
5)      Taxes should ensure maximum Social Advantage: Another major characteristic of a good tax system is that it should ensure maximum social advantage. The imposition of taxes should be on the basis of this fundamental principle of public finance. It must ensure maximum social advantage or least aggregate sacrifice.
6)      Balanced Tax System: Another major pre-requisite of good tax system is that it should be balanced. It means that tax system is simply that it should exist not one kind of taxes but all kinds of them in a proper balance. For example, both direct and indirect tax systems have their advantages and disadvantages. But it is required of a good tax system to have both kinds of taxes in a proper balance.
7)      Many Dimensions of Tax System: A tax has many dimensions. We should look into its volume, composition, rates, coverage, timings of collection, mode of collection and so on in order to see its effects in their totality. Each system will have its own merits and demerits in terms of its social and economic effects. Thus, in general, it is very difficult to evolve a tax system which is the best or ideal in every respect.
8)      Universal Application of Taxes: Another main characteristic of a good tax system is that it should ensure universal and uniform application of taxes to each individual of the society without any discrimination.
9)      Desirable Effects on Production and Distribution: A good tax system is one which has desirable effects on production and distribution. It should ensure a rapid economic development of the country. A good tax system always promotes production, encourages people to work, save and invest, and increases national income and its equitable distribution.
10)   Source of Public Revenue: To consider a tax system ideal, it must have the quality to provide public revenue. Tax is an important part of the total revenue of the budget. It is a source of public revenue and hence it should provide necessary revenue to the government.
11)   Freedom from Harassment: A good or deal tax system recognizes that tax-payer has some basic rights. He is prepared to pay his taxes but would not like to undergo any harassment. With this in view, tax laws should be simple in language and the tax liability should be easily determinable with certainty.
CANONS OF TAXATION
In the modern age, tax is the main source of Income. Every tax is an additional burden on the tax-payer. Thus, it is essential that the burden of a tax should be divided in equitable manner. Every govt. bears the responsibility to provide certain facilities to its subject. For this purpose, the govt. has to adopt a definite principle. Further, it needs a definite machinery for imposing, collecting and utilizing the money. Therefore, a better taxation system speaks of the better taxing capacity and efficient economic administration of the governments.
It is an important question as to how the taxes can be levied and what should be pattern of distribution of the taxes. Moreover, taxation does not have only economic but also social and political implications. For every new tax, it is correct to note the ‘motive’ behind such proposals. In short, it carries the motives of capacity to pay, no discrimination and positive effect on the balance of payment.
However, these motives cannot be achieved unless a clear cut policy regarding the imposition of taxation is followed. Economists have suggested various principles regarding taxation. But none of had given the exact canons of taxation. The canons or principles given from time to time bear the testimony of a good taxation policy.
ADAM SMITH’S CANNONS TAXATION
Adam Smith was the first writer to give a detailed and comprehensive statement of the principles of taxation. Basically, he laid stress on the ways in which an economy could increase its productive capacity and ultimately achieve a higher rate of economic growth. According to him, if the principles enunciated by him, were adopted in a full spirit, the govt. would have a very sound taxation policy. Findlay Shirras has strongly commented on the contribution made by Adam Smith, “No genius, however, has succeeded in condensing the principles into such clear and simple canons as has Adam Smith.” Adam Smith has enumerated the following four canons of taxation which are accepted universally:
1)      Canon of Equality.
2)      Canon of Certainty.
3)      Canon of Convenience.
4)      Canon of Economy.
1)      Canon of Equality: According to this canon, a good tax is that which is based on the principle of equality. In a broader sense, equality may be considered to be same as justice. In this principle, it is maintained that the tax must be levied according to the taxpaying capacity of the individuals. Adam Smith had defined this principle as follows: “The subject of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities that is , in proportion to the revenue which they respectively enjoy under the protection of states.”
In other words, the principle of benefit states that the burden of taxation should be fair and just. Thus, rich people must be subjected to higher taxation in comparison to poor. The higher the income and higher the tax, the lower the income of lower the tax.
2)      Canon of Certainty: Another canon of taxation is the certainty which implies that the tax-payer should determine the following manners carefully: (a) The time of payment, (b) Amount to be paid, (c) Method of payment, (d) The place of payment, (e) The authority to whom the tax is to be paid.
With this, a tax-payer will be able to keep equilibrium between his income and expenditure. There should not be any embarrassment and confusion about the payment of tax. Every tax-payer must know the time of payment, manner and mode of payment, so that he may adjust his expenditures accordingly. In the words of Adam Smith, “The tax which each individual is bound to pay ought to be certain the not arbitrary. The time of payment, the manner of payment, the quantity to be paid, all ought to be clear and plain to the contributor and to every other person.” This certainty creates confidence in the contributor of the tax.
3)      Canon of Convenience: The taxes should be levied and collect in such a manner that it provides the maximum of convenience to the tax-payers. The public authorities should always keep this point in view that the tax-payers suffer the least inconvenience in payment of the tax. For example, land revenue should best be collected at the harvest time. The income-tax from the salaried class be collected only when they get their salaries from their employers. To quote Adam Smith, “ Every tax ought to be levied at the time or in the manner in which it is most likely to be convenient for the contributor to pay it.” This canon is important both for the tax-payers and the govt. The tax-payer feel convenient in payment of tax. The authorities also come to know the incidence of taxation and get increased income by way of taxes.
4)      Canon of Economy: It implies that minimum possible money should be spent in the collection of taxes. The maximum part of the collected amount should be deposited in the govt. treasury. Thus, all unnecessary expenditure in the collection should be avoided at all costs. In the words of Adam Smith, “Every tax ought o be so contrived as little to take out and to keep out of the pockets of the people as possible over and above what is brings into public treasury of the state.” So more addition should be secured to the public revenue at the minimum maintenance cost. It also implies that a tax should interfere as little as possible with the productive activity and general efficiency of the community so that it may not create any adverse effect on production and employment.
Incidence of Tax
Incidence of tax or taxation is the burden of paying tax ultimately. In other words, when the money burden of a tax finally settles or comes to rest on the ultimate tax payer, it is called the incidence of a tax. The incidence of tax remains upon that person who cannot shift its burden to any other person, i.e. who ultimately bears it. The burden of a tax falls either on the buyer or on the seller. If the price of a commodity rises by the full amount of the tax, the incidence is wholly on the buyer. On the contrary, if the price of the commodity does not rise at all, the incidence is wholly on the seller. In case the p

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