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Chapter II Basic tax theory I Theory of tax principles 1. Establishment and development of tax principle 1.1 Adam Smith Adam Smith was the first person to describe all the elements that establish a modern free market system. An 18th Century Scottish philosopher, his landmark An Inquiry into the Nature and Causes of the Wealth of Nations was published in 1776, the same year that the Declaration of Independence was signed. (1) The subjects of every state ought to contribute towards the support of the 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. (2)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.  (3)Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it. (4)Every tax ought to be contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state. These four maxims have been summarized in four words: Equity, Certainty, Convenience and Efficiency. 1.2 Wagner’s tax principles (1)Fiscal Revenue (2)Economic Policy (3)Social Policy (4) Tax Administration Words and Phrases 1.compliance cost A compliance cost is expenditure of time or money in conforming with government requirements such as legislation or regulation. For example, people or organizations registered for value added tax have the extra burden of having to keep detailed records of all input tax and output tax to facilitate the completion of VAT returns. This may necesitate them having to employ someone skilled in this field, which would be regarded a compliance cost. 2．Tax avoidance Tax avoidance is the legal ut