THE COMMUNITY LEADER'S LETTER

ECONOMIC BRIEF NO. 3

Deciding Which Tax Is the Best Tax

In a democracy, when No one likes taxes, but they produce sufficient revenue to such thing as a perfect tax.
revenue must be raised,
the tax selected is often
are a necessary evil in any support whatever it is that The property tax, for instance,
based upon plucking civilized society. Whether you citizens want their govern- scores fairly low on convenience
the goose that squawks
the least.
believe in big government or ment to do. Some have ar- and efficiency, but fairly high
small, governments must gued for a Benefit Principle on certainty. The income tax
have some resources in order whereby the amount of tax scores fairly high on equality,
to perform their essential ser- each is called upon to pay but is costly to administer and
vices. So how does one go about bears some relationship to the (in the U.S.) is so complicated
evaluating a particular tax? benefits each taxpayer re- that it leaves much to be de-
No one has yet come up ceives from government. Oth- sired on certainty. A sales tax
with a better set of criteria ers have argued that a tax scores high on convenience,
for judging a tax than the should be neutral in its effect certainty, and efficiency, but
Canons of Taxation first pro- on the way markets work. poorly on equality.
posed by Adam Smith more But Smith’s Canons are the Because there is no perfect
than two hundred years ago. starting point for any serious tax, an argument can be made
According to Smith, a good evaluation of a tax. that the best tax system is one
tax should meet four stan- Applying Smith’s Canons that uses all three major types
dards: standards of equality, to any particular tax is large- of taxes in small doses. By
convenience, certainty, and ly a subjective undertaking. combining all three major
efficiency. Yet, if one attempts to evalu- types, it is possible to offset the
Other students of taxation ate the principal taxes — weaknesses of each with the
at other times have added to that is, property tax, income strengths of the others.
Smith’s criteria. Some have tax, and sales tax — against In the final analysis, how-
noted that a tax should be Smith’s Canons, one will ever, the standard for judg-
adequate, meaning it should quickly find that there is no ing a tax is often political.
In a democracy,
when revenue
ADAM SMITH'S CRITERIA FOR EVALUATING A TAX must be raised, the
Equality: When ability to pay is taken into consideration, a good tax should distribute the burden of tax selected is of-
supporting government more or less equally among all those who benefit from government. ten based upon
Convenience: The time and manner of payment of a tax should be as convenient as possible for the plucking the goose
taxpayer. that squawks the
Certainty: The amount of tax that is due, the method of payment, and the deadline for payment should
least. Some have
be clear so that each taxpayer can be certain about his or her obligations.
called this politi-
Efficiency: The cost of administering the tax should be as low as possible so that a large fraction of what
cal test the Fifth
is taken from the taxpayer’s pocket is not used up in collecting the tax.
Canon.

COMMUNITY & ECONOMIC DEVELOPMENT PROGRAM

1 CLEMSON UNIVERSITY