Dalton defined tax as ‘a compulsory contribution imposed by the public authority, irrespective of the exact amount of service rendered to the taxpayer, in return for which no specific and direct quid pro quo is rendered to the payer’. In accordance to this definition, it is clear that paying tax is a compulsory contribution to which the state is entitled to. Even if the benefit in return to the tax paid is not proportional to the taxpayer, the taxpayer must pay taxes or face the consequences of avoiding taxes. Prof. Seligman also defined tax as ‘a compulsory contribution from the person to the State to defray the expenditure incurred in the common interest of all without any reference to the special benefits conferred’. As it can also be concluded from the statement, tax liability must be incurred by a taxpayer in order to fund the operations performed by the state, regardless of the service the taxpayer might or might not enjoy.
The primary reason for the imposition of tax is to gather revenue for the functioning of Government. Services such as road maintenance, schools, hospitals, etc. require funds which are collected via taxation. These are the most basic operations of government which requires tax funds. A few other complicated reasons for the collection of tax can be to fund wars or encourage a rapid economic development – which all requires funds. Tax policy can also be very useful and effective to attain price stability, control business boom and depressions and to maintain full employment. Tax is also used to diminish inequalities in society via income and wealth taxation, where those with high income and wealth are affected more than those with lower income and wealth.
It is now understood that tax is an imposition upon people, a burden which they are compelled to carry. The debate lies in the manner in which this burden is shared – what would be a fair manner in which this burden can be shared among the taxpayers? The structure of an efficient tax system is not a constant throughout the world. The basis of tax structure primarily depends on the nature and amount of public expenditure as well as the public’s view of the role of the government. It is also dependent upon the state of a country, i.e., in case of developing countries the state plays a dynamic role and in case of advanced countries, it plays an active role. During the 18th century, an economist named Adam Smith laid down four canons or principles of taxation. These principles have been seen as a guideline for tax structure through time, and should also be included in any sound tax structure. In order to entertain the notion that the principles set out by Adam Smith so long ago are still relevant in modern tax structure, it is important to analyse these principles or canons first. These canons are as follows:
• Canon of Ability:
Smith defined the first canon as the ability to pay tax. According to Smith, all citizens must pay tax ‘as nearly as possible in...