Tax is an effective fiscal tool to influence the economy. It has also certain norms which have to be followed to make it more effective and popular. That state is a welfare state which imposes less amount of tax and collects more amount of revenue. So the tax should be effective. A good tax system should help to establish fair income distribution and socio-economic stability.
According to Adam Smith, "A tax is a contribution from citizens for the support of the state."
Adam Smith has given the most comprehensive and exhaustive concept of a good tax system which is known as the canon of taxation.
1 Canon of equity
A good tax should be based on the ability to pay principle of taxation, and it has to assure social justice to all taxpayers. In general, in this canon of equity, everybody must be treated equally for tax or according to capacity or ability they should pay the tax and unequal must be treated unequally.
2 Canon of certainty
Every taxpayer must know the time of payment, amount to be paid, method of payment, where and whom to be paid. This certainty creates confidence for the taxpayers. In general canon of certainty is related to the collection of tax. Amount of tax collection must be certain.
3 Canon of simplicity
The tax system must be simple and easy to understand. Everybody should know what they actually paid for tax and when also how much?
4 Canons of economy
The tax collection should be the minimum and the contribution of tax revenue in the government treasury should be the maximum. Hence, the government has to collect more amount of tax revenue by spending the minimum administrative cost.
5 Canon of elasticity
The tax imposed by the government should be possible to change according to the requirement of the economy so that the government is able to collect more revenue and provides social justice to the people. In general, as the income of consumer changes the government tax collection also changes.
6 Canons of diversity
It should be diversified in such a way that every taxpayer must pay according to his ability to pay. By collecting tax revenue from a variety of taxes, the burden of tax can be diversified among people.