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CANNON of TAXATION by Adam SmithAdam Smith 1723 – 1790, „Avuţia Naţiunilor”, Editura Academiei R.P.R., 1962-1965; citatele următoare: pag. 242 – 243

1.The correctness of taxation: taxation must be fair to en- sure justice in

taxation. This is what in time will establish as a fundamental principle:

„The subjects of every state ought to contribute toward the support of

government, as nearly as possible, in proportion to their respective abilities;

that is, in proportion to the revenue which they respectively enjoy under the

protection of the state.”

„Impozitul pe care fiecare persoană este obligat să-l plătească trebuie să fie bine

precizat şi nu arbitrar. Epoca de plată modalitatea de plată suma de plată,

acestea trebuie să fie clare şi evidente, atât pentru contribuabil cât şi pentru

orice altă persoană”.

THE PRINCIPLES OF TAXATION

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2. Certainty of taxation: the amount of tax must be certain and not

fixed arbitrarily, to avoid abuses of tax, i.e. taxation must be

correct;

„The tax which each individual is bound to pay ought to be certain, and

not arbitrary. The time of payment, the manner of payment, the

quantity to be paid, ought all to be clear and plain to the

contributor, and to every other person, so that the taxpayer is not

put in the power of the tax gatherer.”

„Impozitul pe care fiecare persoană este obligat să-l plătească trebuie să

fie bine precizat şi nu arbitrar. Epoca de plată modalitatea de plată

suma de plată, acestea trebuie să fie clare şi evidente, atât pentru

contribuabil cât şi pentru orice altă persoană”.

The Principles of Taxation

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3. Convenience of taxation: mode the settlement and colection to be

made so that they are convenient for the taxpayer – for example to

link tax payment terms with the realization of income; “Any tax

must be charged at the time and how which appears to be the most

convenient for the taxpayer to pay it”;

„Orice impozit trebuie să fie perceput la timpul şi în modul care

reiese a fi cel mai convenabil pentru contribuabil ca sa-l

plătească”;

4. Tax should be as cheap as possible, to have high tax efficiency –

in a modern sense this involves performing the most convenient

ratio between tax revenues and collection costs: “Any tax should

be designed so as to remove and dispose of pockets population as

little as possible, over as far as it brings in the state public

treasury“.

„Orice impozit trebuie să fie astfel conceput încât să scoată şi să

înstrăineze din buzunarele populaţiei cât mai puţin posibil, peste

atât cât poate aduce în tezaurul public al statului”.

The Principles of Taxation

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The principles of taxation are a disputed and controversial topic

because of one period to another, from one economic school to another,

from one author to another, key terms and objectives are interpreted

differently. “The principles may be interpreted in various ways...

depending on how it is treated and understood the contradiction between

equity and efficiency”.

Thus, taxation is also an aspect of nature as economic policy, one technical

and regarding methods and techniques used to determine the taxable object

size and the amount of tax.

In terms of economic policy, currently, the tax is intending that each new

tax introduced, or existing tax practice, to meet the requirements several

principles:

• principles of equity;

• principles of financial policy;

• principles of economic policy;

• social and political principles.

The Principles of Taxation

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The idea of justice in taxation has always been accepted. In

time, the concept has received different interpretations (even

divergent), and virtually however fiscal policy was

improved, taxes have failed to be absolutely fair.

“Mathematical equality . . . cannot be reached in any system

of taxation, and it is useless and idle to attempt it.” - Rufus

W. Peckham (1838-1909)

Echitatea matematică (perfectă) … nu poate fi atinsă în nici

un sistem fiscal şi nu are nici un rost sau motivaţie de-a

încerca să o obţii.

Fiscal Equity

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Theoretically, tax equity was depicted differently by various

supporters of finance’s school. In the Middle Ages, there is

considered fair tax privileges for nobility, church and clergy. In

France, circulating even ther aphorism “nobles serve the king with

sword, clergy with prayers and com- mons with money”.

Throughout history, the notion of fairness, which gives substance to

the notion of social justice in taxation, has been interpreted

differently. Time led to the abolition of tax privileges, being

understood their unfairness.

• In the matter of taxation, every privilege is an injustice. - Voltaire

(1694 – 1778) În materie de impozite orice privilegiu este o

injusteţe;

• Tax exemption is a privilege derived from legislative grace, not a

constitutional right. - Lapsley W. Hamblen Jr. (1926 -) Scutirile

fiscale sunt privilegii din voia legislativului, nu un drept

constituţional;

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• Considering that taxation must be universal, all tax- payers

must pay taxes and all are tax treated equally – so they

claimed a so-called equity before taxes.

Equity before taxes is based on the earlier idea that public service is

a benefit to all and that the payment should be equal for all citizens.

In time, this principle has been violated, becoming arguably

incompatible with the evolution and development of life and

economic thought. Thus, in some countries, certain revenues, such

as those made from investments in bonds of state loans, are not

subject to taxation. Also, a violation of the principle of equity is the

practice of exempting from tax the income of capital for financing

of capital investment.

What seemed questionable or unacceptable in a certain way of

interpretation of tax equity appears, however, in a different light if

we have in order the objective necessity that tax must become and

fiscal lever too.

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• Thus, the equity before taxes was replaced by equity through

taxes. The latter requires different tax treatment depending on

the size of income and wealth, their origin, in relation to social

status, with the personal situation of each payer.

• Tax equity is portrayed us as apparent fairness (or the

mathematics) or actual (or real).

For example, apparently is fair that two employees for their work

receive the same salary to pay the same payroll tax. The two

taxpayers would be equal to such tax. In reality, if they have a

different number of dependents – if they have a different social

situation – their capacity in contribution is different and therefore

real equity is other than appearance. They are equal in terms of

employment equity, but in terms of tax fairness they should be

treated differently.

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Alternative solutions, to achieve a real (and full) tax equity, in the case

stated above would be:

•differentiation of the tax burden, to same taxable terms, depending on

social situation;

•maintaining equity of the tax burden, but differentiation various social

assistance, depending on the social situation.

It is considered by most experts that the last solution is the most

convenient, even if social equity is no longer done through taxes but it is

“pushed” to the welfare.

The Treasury is constantly presented with proposals to accomplish all

sorts of desirable social objectives through the tax system. In general,

these objectives can be accomplished more effectively and economically

by other means. - Stanley S. Surrey

Trezoreria(SUA) prezintă constant propuneri pentru îndeplinirea a tot

felul de obiective sociale prin intermediul sistemului fiscal. În general,

aceste obiective pot fi îndeplinite mai economic şi mai complet prin alte

mijloace;

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• Tax equity is portrayed us as horizontal equity and vertical equity.

• Horizontal equity requires comparison of two tax burden for

taxpayers who perform the same amount of income, but from

different sources.

Starting from this, interpretations are different, however. Thus, in a version

is considered fair tax burden to be different, while the other variant is

considered fair to establish an equal tax burden. Each alternative has

advantages and disadvantages, supporters and opponents.

It is difficult to decide which option would be the most equitable, especially

since a compromise seems impossible to find. We considered that a certain

differentiation of the tax burden according to the sources and material

conditions as it is done in taxable matter is often justified. For example, it

would seem as justified, at least at first sight, some differentiation of the tax

burden when it comes to income from employment or bank deposits or the

other similar situations.

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• Unlike the previous version, vertical equity requires comparison of

taxes due from two persons whit incomes of different size, but the same

source. It is considered fair in this case, that those who produce higher

income pay higher tax (percentage). It is one of the most controversial

issues :

That which angers men most is to be taxed above their neighbors. - Sir

William Petty (1623-1687) Lucrul cei enervează cel mai tare pe cei mai

mulţi oameni este de-a fi impozitaţi mai aspru decât vecinii lor.

Although debatable, such a requirement appears to be fully justified :

When people ask, "Why should the rich pay a larger percent of their income

than middle-income people?" - my answer is not an answer most people

get: It's because their power developed from laws that enriched them. -

Ralph Nader (1934-) Atunci când oamenii întreabă, “ De ce bogaţii

plătesc un procent mai mare din venitul lor decât oamenii din clasa

medie?” – răspunsul meu este diferit de cel obişnuit: Se întâmplă asta

pentru ca ei (cei bogaţi) îşi trag puterea din legile care i-au îmbogăţit;

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In order to be respected the equity in the field of taxes are required to be

satisfied several conditions:

• equity implies a non-taxable minimum, i.e. enacting a minimum

income tax exemption to allow strictly neces- sary living needs. This

minimum must be justified in economic terms – for example, the profit

tax or value added tax would require tax-free minimum to assure

entrepreneur’s “survival”. Taxable minimum is met only if direct taxes

(especially income taxes) have no applica- tion in indirect taxes, which

proves the lack of equity of these taxes;

• the imposition must be universal, general, that all individuals or legal

entities that own taxable matters: income from some source, a certain

kind of property or make certain spending – must pay taxes. This

condition implies the absence of possibilities to steal part of taxable

matter from taxation, in other words, imposing should be established

and conducted in order to avoid tax evasion;

• tax burden – absolute and relative – of each taxpayer in part, should be

established based on the contributory power which it has: the amount

of income or wealth and social tasks;

• the comparability of the tax burden should be vertical and horizontal.

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Compliance or failure of equity resulting ultimately in the types of tax rates

used.

• Tax equity regarding the imposing in fixed amounts is characterized

by the fact that fiscal authorities set a tax in fixed amount charged to

everyone. This kind of taxation is not fair, because the tax is not

intended to consider either the income or capital size or personal, social

situation of the taxpayer.

• Tax equity regarding the imposition in proportionate shares is a

direct manifestation of the principle of equity before taxes, principle

proclaimed with the transition to the capitalist mode of production. In

the case of proportional taxation, because the tax rate remains

unchanged, shall be kept permanently the same proportion between the

tax and income (wealth). Although the introduction of tax in

proportionate shares take a step forward in ensuring equity against the

imposition of a fixed amount, but even in this case does not respect the

principles of tax equity. The imposition in proportionate share does not

mind that the power contribution of different taxpayers vary by the

sheer size of income and property value that each of these are

performed, respectively owned.

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• Tax equity regarding the imposition in simple progressive

rates. As this is a progressive tax means that tax rate will be

greater, within progressivity set by law, that the income or wealth

will be higher. Imposition in simple progressive rates, although

leading to an important approach which means respect for

fairness in taxes, still has some shortcomings. Thus, this method

of tax disadvantages the taxpayers whose income level is at the

next higher limit until acting a certain share.

• Tax equity regarding the imposition in composed progressive

rates. It eliminates the shortcomings mentioned in imposition in

simple progressive rates. Such taxation is mainly used for

imposing the incomes of individuals.

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Tax equity regarding the imposition in regressive shares. This

kind of taxation favors the taxpayers who have high income or

large fortunes important and leads them to increase taxable gross

matter.

In conclusion, the fairest taxation system seems to be the one

that relies on composed progressive rates (per portions). But it

would be unrealistic to say that using a certain progression in

taxation, even if it is high, resolves the problem of equity in this

area.

Thus, the tax law provides quite elastic or “legal loopholes of tax

evasion” or is to offer a whole range of facilities or tax privileges. Tax

equity impose requirements for granted, but it’s only one of the

principles of taxation.

The notion of fairness, strictly interpreted, can seriously damage other

principles, such as social principles.

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The principles of financial policy seek that the tax system be

characterized by: a high tax efficiency, stability and elasticity,

type and number of taxes.

The tax efficiency, like any efficiency imply the reference of the

results to the effort (or vice versa) in our case the reporting of the

amounts raised by a tax at the costs incurred. To achieve a higher

tax efficiency should be find the optimum ratio between earnings

made through a tax and collection costs. For large revenue must

be respected the same way as equity: universal taxation, no tax

evasion and tax unit should not be expensive.

Thus, in order for a tax to have a high efficiency, several

conditions have to be fulfilled:

The Principle of Financial Policy

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• Taxes must have a universal character, i.e. to be paid by all

persons (natural or legal) that obtain incomes from the same

source or have the same kind of wealth. Universality tax also

involve ton impose the whole object of taxation which the

taxpayer poses.

• to eliminate tax evasion, there should not be opportunities to

evade taxation (by legal means or fraud) part of the taxable

matter.

• the amount of expenditures related to the establishment and

collection of taxes to be reduced to the minimum necessary in a strict interpretation, this condition may lead to absurd conclusions: the

fiscal apparatus (its costs) should be as reduced as possible, but then the taxes

will also (probably) be low as tax evasion will be high.

These demands are indisputably rational, but are practically difficult to

implement.

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• A tax may be appreciated as stable, if it is not influenced one

way or another, by short term mutations of the economy – not to

increase in periods of prosperity, i.e. does not decrease into

recession.

This means that a tax yield considered stable should not increase in

same time with production and incomes growth during periods of

economic prosperity or decrease in economic bad times of the

economic cycle. Noted, however, that virtually, stability tax is difficult

given the current economic conditions.

• Regarding the tax elasticity, this means that tax can be

continuously adjusted to income needs of the state budget.

A tax is elastic if it can be increased or decreased depending on the

evolution of government spending, in other words, if there is an

increase in spending is necessary that taxes can be increased

accordingly and vice versa.

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• About the type and number of taxes, we can say that,

theoretically, you could use one or more taxes.

Idea about the use of a single tax, met both during pre-monopolistic

capitalism (e.g. phisiocrates pleaded for introduction of a single

financial tax, and later with the development of heavy industry views

have emerged on the establishment of a single tax on the raw

materials) and in the conditions of contemporary capitalism.

To note that in practice, the idea of a single tax has not been translated

into life. Use of a single tax is considered by most specialists in

contemporary capitalist countries as unattainable and ineffective. In

this regard, it is considered that a single tax based on the contributory

power of payers would lead to many complaints, to accentuate evasion

trends and to repercussion of burden in the expense of others.

However as mentioned, is considered by most experts that the plurality

tax is currently the most appropriate solution, especially since the tax

is used as fiscal lever and each taxable object should be treated in a

specific way.

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• In conclusion, we can say that a tax system can be

appreciated only in light of all its consequences on the socio-

economic plan and not only depending on the type and number of

taxes.

Opinions regarding the consequences and the socio-economic

implications of a tax system can be made following issues such

as: what is the object of the imposition; income (wealth),

expenses or both; what tax rate are used: fixed, proportional,

progressive or regressive; whose classes belong the incomes

(wealth); from the consumption of whose classes are goods or

services subject to taxation; to what extent can occur or not, in

some cases, double taxation, and in others an evasion from the

taxation of income or wealth, etc.

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• There are some taxes that are good for our economy, because

they discourage harmful activities. - David M. Roodman / Sunt

câteva impozite care sunt “bune” pentru economie, pentru că

descurajează activităţile “rele”;

• All taxes discourage something. Why not discourage bad things

like pollution rather than good things like working or

investment? - Lawrence Summers (1954-) / Toate impozitele

descurajează ceva. De ce să nu descurajăm fenomenele negative,

cum ar fi poluarea, în locul celor bune cum ar fi munca şi

investiţiile.

The Principle of Economic Policy

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• For a long time, the tax has become a real economic lever and

therefore by introducing a new tax, the state often aimed not only

to purchase the necessary revenues to cover the public expenses,

but also to exercise a certain influence in boosting the economic

development of branches and sub-branches, stimulate or reduce

production or consumption of goods, extend or, on the contrary,

restricting commercial relations with foreign countries.

• Encouraging or discouraging the development of an economic

branch or sub-branches can be performed by the state by

overcharging or reduction of taxes in several variants such as:

establishment of high duties at imported goods of the same kind

from other countries; reduction or exemption of indirect taxes for

local goods; reduction of direct taxes set to producers and local

traders; accelerated amortization of fixed capital facility, which

leads to which results in reduction of the taxable profits of capital

companies in that industry and its rapid replacement possibility.

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• Also in this regard acts subsidies from the state budget for

companies that operates in a particular industry or economic sub-

branch.

If you want more of something, subsidize it; if you want less, tax it. -

Old Economic Adage / Dacă vrei, din ceva mai mult,

subvenţionează-l; dacă vrei mai puţin, impozitează-l – veche

pildă economică.

• Certainly, granting subsidies solution is not very simple, because

usually it has as source taxes collected by the State. In other

words, encourage on the one hand, discourage on other.

All taxes are a drag on economic growth. It's only a question of

degree. - Alan Greenspan (1926-) - Toate impozitele sunt o frână

în calea creşterii economice. Este numai o chestiune de (cât este)

nivel.

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• In general, the art of government consists of taking as much

money as possible from one class of citizens to give to the other. -

Voltaire (1694 – 1778) / În general, arta guvernării constă în

strângerea a cât mai mulţi bani, de la o clasă socială şi de a “da”

alteia;

Tax policy promoted by the State aims, frequently, the development of

socio-political objectives. These principles require that in

taxation to take account of individual and social position of the

payer. It is known, for example, the practice of granting tax relief

to low income persons and those who maintain a number of

children and elders.

Taxes are also used, to limit consumption some products that have

harmful effects on health (tobacco, alcohol). There are countries

in which, to influence the increase of rate birth is practicing a

special tax on the bachelors and married persons without

children.

Socio-political Principle

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It should be here noted that tax policy is sometimes marked also by

purely political interests: during elections, those in power try to

mitigate taxation (or promise to reduce them) or to grant privileges and

tax incentives to certain categories of taxpayers. After the elections, it

is found that economic and fiscal situation is actually known also

during the period of election and they must reconsider their position,

forgetting electoral promises and raising taxes again.

•A government that robs Peter to pay Paul can always depend upon

the support of Paul. - George Bernard Shaw. / Un guvern care fură de

la Peter pentru a-l plăti pe Paul, poate întotdeauna să se bazeze pe

sprijinul lui Paul.

•The promises of yesterday are the taxes of today. - William L.

Mackenzie King (attributed). / Promisiunile de ieri sunt impozitele de

astăzi.