Equity: Tax and Adam Smith

Topics: Tax, Progressive tax, Tax incidence Pages: 6 (2038 words) Published: November 1, 2010
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 enjoyed under the protection of the state and should also pay according to there ability. Smith like Henry Home (1774) emphasised that the richer the person is in the society is, therefore they should pay more than the poor. Smith (1776) said “It will be more justified for the rich to contribute to the public expenditure not only what is proportionate to their income but more than that”. Another idea of equity which was discussed by early thinkers and political economists including as Adam Smith was that the tax burden should be split up according to the benefits gained from the government expenditures which are funded by the taxation. Canons of Taxation' fit with Today’s UK Tax System

The canon of equity attributes in the UK taxation system where we fund similar group of people pay the same tax. E.g. individuals earning fall starter rate band should pay the same rate of tax. Another category focused on different classes of organization will pay the different rate of the tax on classified volume. It is justifying the vertical equity on of the aspect of Adam smith’s canon. Certainty is also retaining with the modern taxation systems. In the UK, the government applies the fiscal policies for the financial. For the reason, people know the amount of the tax proportion for their financial activities during the year exemption. The government applies a term of basis year to identifying the tax, due date for payment and availability of any tax.

One of the Canons of taxation' developed by Adam Smith said that the tax should be linked to the 'ability to pay'. Income tax clearly ties in with this because, as defined from the explanation of income tax, the higher а person’s taxable income, the greater rate they pay. This signifies that the income tax is progressive. In other words, the more a person earns, the greater the proportion of their income they pay in tax. (Young, 2005, p91).

Adam Smith’s book is the basic of economics, it has broadened the scope...
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