Adam Smith gave four maxims on taxation in The Wealth of Nations that have been largely forgotten today. Taxes should be fair, non-arbitrary, cost-effective and convenient.
The rich or those who have the ability to pay more should pay more than those who are less able to. Smith's pro-poor taxation policies are found in Book 5, Chapter 2, and are as clear as day:
This maxim applies to the valuation of certain taxes, such as land taxes.
Smith gives an example of this in the excise and customs duties:
For this, Smith mentions the inefficient collection method of certain taxes:
We use these maxims on current taxes to see if they pass. This will then determine whether the tax is just or if it needs to be revised. In this example, we will apply it to income taxes which are assessed according to 'tax brackets' and exemptions, by running four tests.
The income tax in this case is progressive -- the rate increases with the increase in the base taxable income. So it somewhat passes the first test by allowing the less-able-to-pay pay less. However, it is uncertain whether such a tax rate would be really fair because there is no information on the socio-economic conditions of the people being taxed.
Result: Pass Somewhat
Since the amount to be paid can be arrived at clearly by using the table, this tax passes the second test.
The convenience of the tax in this case is not so perfect since, just from the information given, it is evident that computations must be done and that the filing requirements might cause added burdens to the taxpayer.
Since there is no information on the costs on collecting this kind of tax, we cannot run this test objectively. However, the advances in technology generally allow taxes to be administered via the internet and be paid via electronic bank transfers, reducing the cost in manual labour in the long run.
The tax in this example needs to be revised to meet Maxim 3
Note (Sept 2016):
This idea of putting taxes and economic policies through a standardized test is inspired by unit testing in software development, wherein code is tested to see if it meets certain criteria. Using this system, various tax policies can be put through the test to see pass or fail more easily.
Below is a sample of a failed test in our own app. (In other words, our resource allocation app is still very buggy!)