Adam Smith Canons of Taxation: An Analysis of the IRS vs. GAAP Tax Policy
Keywords:
IRC, Tax canons, Deferred Taxes, ASC 740, Tax Certainty, Tax EquityAbstract
This study applies Adam Smith's principles of taxation—equity, certainty, convenience, and economy canons, along with modern extensions such as flexibility, neutrality, and productivity, to critically analyze the U.S. Internal Revenue Service's deferred tax policies. Deferred taxes, arising from temporary differences between GAAP and the IRC often challenge Smith's ideals. Using a qualitative legal and comparative analysis of over more than 50 deferred tax items, this study evaluates key drivers including depreciation and carryforwards against classical and modern taxation principles. The analysis reveals that no deferred tax item fully satisfies all tax canons simultaneously, with approximately 70% receiving mixed compliance ratings. Certainty emerges as the strongest canon due to clear statutory frameworks, while convenience and economy demonstrate systematic failures due to complex compliance requirements. These findings contribute to economic tax research by bridging classical theory with contemporary fiscal policy, offering recommendations to enhance fairness and efficiency in modern tax systems through targeted simplification, materiality thresholds, and regulatory reform.
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Met – The provision fully complies with the canon’s normative criteria across most taxpayer profiles.
Partially Met – The provision aligns with the canon in principle but exhibits significant exceptions, complexity, or disproportionate impacts.
Not Met – The provision structurally contradicts the canon’s objectives or imposes systemic burdens inconsistent with the principle.
Items are assessed based on legal interpretation (IRC/Treasury regulations), accounting treatment (ASC), and practical administrative implications.
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