Equity: Tax and Adam Smith
Introduction
This piece of eassy will contain two sections. In this part of the eassy I will discuss the meaning and importance of equity in taxation since Adam Smith included it as one of the Canons of taxation.
Equity is defined as “redistributive taxation induces allocative distortions by driving a wedge between the price the consumer pays and the price the producer receives” (Begg et al. 2005, p.219). There are two types of equity to be considered: the horizontal equity, and vertical equity. “The horizontal equity requires that people in similar situations should be treated in the similar way”. (Kate. 2003, p-8). It seems to be a fair version of taxation to the people paying tax on their earnings. On the other hand, “Vertical equity requires that people in unequal situations be treated with the necessary degree of inequality. This system requires rich people to pay more than poor people, it indicate the progressive approach of tax systems” (Kate .2003, p-8)
Adam Smith Canons of taxation
During the 18th century researchers, philosophers, and economists produced theories and discourses on taxation; the most influential being Adam Smith and his ‘The Wealth of Nations’, which proposed four canons for UK taxation: Equity, Certainty, Convenience, and Efficiency. Since the 21st century economy and its structures are more diverse and developed than those of the 18th century the government has had to reform and develop taxation policies and procedures to overcome limitations and conflicts that have arisen.
In 1776 Adam Smith established the four canons of taxation, however, there has been a significant development in economic theory and policy since Adam Smith wrote his book. These four canons help to evaluate the policy of taxations and its implications in economical activities through the country. The first canon of a good tax system emphasised by Adam Smith is equity. According to the canon of equity, every person should contribute according to the benefit
This piece of eassy will contain two sections. In this part of the eassy I will discuss the meaning and importance of equity in taxation since Adam Smith included it as one of the Canons of taxation.
Equity is defined as “redistributive taxation induces allocative distortions by driving a wedge between the price the consumer pays and the price the producer receives” (Begg et al. 2005, p.219). There are two types of equity to be considered: the horizontal equity, and vertical equity. “The horizontal equity requires that people in similar situations should be treated in the similar way”. (Kate. 2003, p-8). It seems to be a fair version of taxation to the people paying tax on their earnings. On the other hand, “Vertical equity requires that people in unequal situations be treated with the necessary degree of inequality. This system requires rich people to pay more than poor people, it indicate the progressive approach of tax systems” (Kate .2003, p-8)
Adam Smith Canons of taxation
During the 18th century researchers, philosophers, and economists produced theories and discourses on taxation; the most influential being Adam Smith and his ‘The Wealth of Nations’, which proposed four canons for UK taxation: Equity, Certainty, Convenience, and Efficiency. Since the 21st century economy and its structures are more diverse and developed than those of the 18th century the government has had to reform and develop taxation policies and procedures to overcome limitations and conflicts that have arisen.
In 1776 Adam Smith established the four canons of taxation, however, there has been a significant development in economic theory and policy since Adam Smith wrote his book. These four canons help to evaluate the policy of taxations and its implications in economical activities through the country. The first canon of a good tax system emphasised by Adam Smith is equity. According to the canon of equity, every person should contribute according to the benefit
References: • Begg, D., Fischer, S., and Dornsbuch, R. (2005) Economics (7 Ed) Maidenhead: McGraw Hill • James, S. R., and Nobes, C. (1999) The Economics of Taxation: Principals, Policy and Practice (7 Ed) Harlow: Pearson Education • Kath, N.(2002) Taxation Theory & Practice Fourth edition • HM Treasury (2009) Pre-Budget Report [online] http://www.hm-treasury.gov.uk/prebud_pbr09_speech.htm [accessed: 24 February 2010]. • Young, Jeffrey T. (2005) Unintended Order & Intervention: Adam Smith 's Theory of the Role of the State, History of Political Economy, Vol. 37, p91-119 • James, S. R., and Nobes, C. (1999) The Economics of Taxation: Principals, Policy and Practice (7 Ed) Harlow: Pearson Education. • http://www.hg.org/tax.html