It was the North American libertarian philosopher Robert Nozick who famously argued that redistributive taxation is the moral equivalent of forced labour in Anarchy, State, and Utopia (1974), his book-length response to John Rawls’s Theory of Justice.
For his part, Adam Smith goes even farther than Nozick in Book V, Chapter 2, Part 2, Article 3 of The Wealth of Nations (available here; scroll down to Article III). Here, the Scottish scholar concludes that taxes on the incomes of blue-collar workers — “Taxes upon the Wages of Labour” (V.ii.i) — are “absurd and destructive.” (WN, V.ii.i.5) In other words, employment taxes are not only bad on Nozickian moral grounds; they also bad on consequentialist grounds as well!
Why are taxes on blue-collar jobs so “absurd and destructive”? Because, according to Smith, the effect of such employment taxes is to decrease the demand for labour:
“If direct taxes upon the wages of labour have not always occasioned a proportionable rise in those wages, it is because they have generally occasioned a considerable fall in the demand for labour. The declension of industry, the decrease of employment for the poor, the diminution of the annual produce of the land and labour of the country, have generally been the effects of such taxes. In consequence of them, however, the price of labour must always be higher than it otherwise would have been in the actual state of the demand: and this enhancement of price, together with the profit of those who advance it, must always be finally paid by the landlords and consumers.” (WN, V.ii.i.3)
What about taxes on white-collar jobs, i.e. taxes on the income of “ingenious artists and of men of liberal professions”? According to Smith, the main effect of white-collar taxes is to increase costs to consumers:
“The recompense of ingenious artists and of men of liberal professions, I have endeavoured to show in the first book, necessarily keeps a certain proportion to the emoluments of inferior trades. A tax upon this recompense, therefore, could have no other effect than to raise it somewhat higher than in proportion to the tax. If it did not rise in this manner, the ingenious arts and the liberal professions, being no longer upon a level with other trades, would be so much deserted that they would soon return to that level.” (WN, V.ii.i.6)
Nevertheless, despite Smith’s critique of taxes on the incomes of both blue-collar and white-collar workers, there is one specific employment tax that the Scottish scholar approves of: taxes on government jobs! Or in the immortal words of Adam Smith:
“The emoluments of offices are not … regulated by the free competition of the market, and do not, therefore, always bear a just proportion to what the nature of the employment requires. They are, perhaps, in most countries, higher than it requires; the persons who have the administration of government being generally disposed to reward both themselves and their immediate dependants rather more than enough. The emoluments of offices, therefore, can in most cases very well bear to be taxed.” (WN, V.ii.i.7)
To recap, although Smith would spare workers in the private sector, the public sector is fair game: public officials are generally overpaid, so the emoluments of their offices should be taxed! Touché! Nota bene: I will proceed to the fourth and final article of this chapter (“Taxes which, it is intended, should fall indifferently upon every different Species of Revenue”) in my next post.
“What in France is called the personal taille is, perhaps, the most important tax upon the profits of stock employed in agriculture that is levied in any part of Europe.” (WN, V.ii.g.5)
How should business firms and self-employed workers (e.g. people engaged in particular trades) be taxed? Adam Smith surveys these two types of taxes — “Taxes on Profit, or upon the Revenue arising from [Capital] Stock” (V.ii.f) and “Taxes upon the Profit of particular Employments” (V.ii.g) — in Book V, Chapter 2, Part 2, Article 2 of The Wealth of Nations (available here; scroll down to Article II). Here, Smith makes five timeless observations about business and income taxes, five points that are still relevant to us today:
1. CAPITAL IS MOBILE
First off, Smith explains why business taxes are such a tricky enterprise compared to land taxes: unlike land, capital is mobile. If business taxes are too high, then the owners of capital will simply pack up and move to a lower-tax jurisdiction:
“The proprietor of land is necessarily a citizen of the particular country in which his estate lies. The proprietor of stock is properly a citizen of the world, and is not necessarily attached to any particular country. He would be apt to abandon the country in which he was exposed to a vexatious inquisition, in order to be assessed to a burdensome tax, and would remove his stock to some other country where he could either carry on his business, or enjoy his fortune more at his ease. By removing his stock he would put an end to all the industry which it had maintained in the country which he left. Stock cultivates land; stock employs labour. A tax which tended to drive away stock from any particular country would so far tend to dry up every source of revenue both to the sovereign and to the society. Not only the profits of stock, but the rent of land and the wages of labour would necessarily be more or less diminished by its removal..” (WN, V.ii.f.6; my emphasis)
2. WHY BUSINESS FIRMS ARE UNDER-TAXED
Secondly, Smith explains why most business firms are under-taxed and thus end up paying hardly any taxes at all. Simply put, because capital is mobile and responsive to tax rates (see point #1 above), those countries that have tried to tax revenue or profits tend to under-estimate the tax liability of business firms:
“The nations, accordingly, who have attempted to tax the revenue arising from stock, instead of any severe inquisition of this kind, have been obliged to content themselves with some very loose, and, therefore, more or less arbitrary, estimation. The extreme inequality and uncertainty of a tax assessed in this manner can be compensated only by its extreme moderation, in consequence of which every man finds himself rated so very much below his real revenue that he gives himself little disturbance though his neighbour should be rated somewhat lower.” (WN, V.ii.f.7)
3. BUSINESS TAXES HURT CONSUMERS
Next, Smith surveys “Taxes upon the Profit of particular Employments” (V.ii.g), where he explains why business taxes are ultimately paid for by consumers:
“A tax, however, upon the profits of stock employed in any particular branch of trade can never fall finally upon the dealers (who must in all ordinary cases have their reasonable profit, and where the competition is free can seldom have more than that profit), but always upon the consumers, who must be obliged to pay in the price of the goods the tax which the dealer advances; and generally with some overcharge.” (WN, V.ii.g.3)
4. WHY FRANCE’S INCOME TAX SYSTEM (THE TAILLE) SUCKS
Fourthly, Smith explains why France’s tax system — the taille — is one of the worst tax systems imaginable. By way of background, the taille was a direct tax levied by the monarchy on peasants and non-nobles (clergy and noblemen were exempt) from the late Middle Ages until 1789. Although the monarchy in pre-Revolutionary France levied two types of taille — a tax on land value (taille réelle) and a tax on personal income (taille personnelle) — Smith’s focus here is on the personal income tax. For Smith, the main problem with the taille personnelle is that it changed so frequently and was riddled with so many exemptions that no one knew ahead of time what their tax liability was! Or in the immortal words of Adam Smith:
“No man subject to such a tax, it is evident, can ever be certain, before he is assessed, of what he is to pay.” (WN, V.ii.g.7)
Sound familiar?
5. BADGE OF LIBERTY OR BADGE OF SLAVERY?
Lastly, amid a digression on “poll-taxes” — i.e. direct taxes (or “head tax”) levied on every able-bodied man rather than on his property or income — the Scottish scholar makes the following surprising observation — “surprising” given everything else he has already said about taxes in the rest of this chapter:
“Every tax … is to the person who pays it a badge, not of slavery, but of liberty. It denotes that he is subject to government, indeed, but that, as he has some property, he cannot himself be the property of a master.” (WN, V.ii.g.11)
What are we to make of this sentence? Is it pure hyperbole? Is it meant to be read with a sense of irony? Or is it just plain bullshit? Whatever the case, the French Revolution would occur 13 years after Smith wrote those words, and for what it’s worth, in an appendix to this chapter, Smith also writes:
“There is no art which one government sooner learns of another than that of draining money from the pockets of the people.” (WN, V.ii.h.12)
Nota bene: We will proceed to Article 3 of Part 2 of this chapter (“Taxes upon the Wages of Labour”) in my next post.
One of my daughters (Adys Ann) asked me to post this number today; it’s her new favorite Laufey song. According to Wikipedia (links in the original; footnotes omitted), “‘How I Get’ was released as a single for the album’s deluxe edition [A Matter of Time] on 25 February 2026. Laufey performed the song with the BBC Concert Orchestra on BBC Radio 2.”
We began our review of Adam Smith’s survey of “stamp-duties and duties upon registration” — i.e. stamp taxes and registration/recording fees — in my previous post. Today, I want to focus on Smith’s nuanced critique of France’s unpopular “tax farm” system, since France would be the scene of a major world-changing revolution just a few years after the publication of The Wealth of Nations.
By way of background, both stamp taxes (droit de timbre) and registration fees (contrôle des actes) were collected by the agents of a wealthy group of private tax collectors known as fermiers généraux or “tax farmers”, who paid the royal government a fixed sum for the right to collect specific taxes, like the salt taxes and customs taxes. It should come as no surprise that these tax farmers were unpopular for their aggressive collection methods. (These despised tax farmers, a symbol of Ancien Régime excess and corruption, are illustrated below in an engraving from 1791, Le Doyen des Fermiers Généraux, depicting the final downfall of the hated French tax-farming institution during the Revolution.)
Adam Smith, however, draws a distinction between “stamp-duties and duties upon registration.” According to the Scottish tax scholar, stamp-duties and registration fees in France were levied by two entirely different and non-overlapping set of tax officials:
“In France there are both stamp-duties and duties upon registration. The former are considered as a branch of the aides or excise, and in the provinces where those duties take place are levied by the excise officers. The latter are considered as a branch of the domain of the crown, and are levied by a different set of officers.” (WN, V.ii.h.11)
Furthermore according to Smith, “In France the stamp-duties are not much complained of. Those of registration, which they call the Controle, are.” (WN, V.ii.h.16) Why? Supposedly (“it is pretended”, says Smith), because of the heavy-handed tactics of the tax farmers. But the Scottish scholar explains why this critique is, in fact, wrong:
“They [the tax farmers] give occasion, it is pretended, to much extortion in the officers of the farmers-general who collect the tax, which is in a great measure arbitrary and uncertain. In the greater part of the libels which have been written against the present system of finances in France the abuses of the Controle make a principal article. Uncertainty, however, does not seem to be necessarily inherent in the nature of such taxes.” (WN, V.ii.h.16)
In other words, much to my surprise, Smith defends the tax farmers against “the greater part of libels that have been written against [them]”! [1] Instead, Smith lays the blame for the popular discontent in France not on the tax farmers but on the royal government itself for enacting poorly-drafted tax laws:
“If the popular complaints are well founded, the abuse must arise, not so much from the nature of the tax as from the want of precision and distinctness in the words of the edicts or laws which impose it.” (WN, V.ii.h.16)
In other words, it’s not the despised private tax collectors who deserve the blame for France’s terrible system of taxation; it’s the central government that does for giving those tax collectors too much discretion!Nota bene: I will proceed to Article 3 of Part 2, Ch. 2, Book V of The Wealth of Nations on Monday, 30 March.
[1] Could one of these “libels” include Roussel de la Tour’s provocative 1763 pamphlet Richesses de l’etat? See my 2025 paper “Adam Smith’s blind spot”, an ungated version of which is available here.
“There is no art which one government sooner learns of another than that of draining money from the pockets of the people.” (V.ii.h.12; my emphasis)
At this point in The Wealth of Nations — i.e. between Articles 2 and 3 of Part 2, Ch. 2, Book V of his magnum opus, for those keeping score at home –, Adam Smith includes an intriguing appendix on “Taxes upon the Capital Value of Land, Houses, and Stock” (available here; scroll down to “Appendix to Articles I and II”). Here, Smith draws a temporal distinction between the ownership and the transfer of property, such as land, houses, and capital or “stock”:
“While property remains in the possession of the same person, whatever permanent taxes may have been imposed upon it, they have never been intended to diminish or take away any part of its capital value, but only some part of the revenue arising from it. But when property changes hands, when it is transmitted either from the dead to the living, or from the living to the living, such taxes have frequently been imposed upon it as necessarily take away some part of its capital value.” (WN, V.ii.h.1; my emphasis)
In plain English, when the government imposes a tax on property such as land (L), houses (H), or capital (C), that tax should not be based on the value of L, H, or C. Instead, the government should only tax any revenue streams produced by that property, i.e. the revenue generated by L, H, or C. But when the ownership of L, H, or C is transferred to another person — either by agreement (e.g. purchase and sale), by death (a will), or by a donation inter vivos (a gift) — any tax imposed on the transfer of L, H, or C will be bad in an economic or wealth-maximization sense because such a tax will “necessarily” reduce “some part of [L, H, or C’s] value.”
Next, Smith draws a secondary — but no less important — distinction between transfers of L and H (land and houses) on the one hand and transfers of C (other capital assets) on the other:
“The transference of all sorts of property from the dead to the living, and that of immovable property, of lands and houses, from the living to the living, are transactions which are in their nature either public and notorious, or such as cannot be long concealed. Such transactions, therefore, may be taxed directly. The transference of stock, or movable property, from the living to the living, by the lending of money, is frequently a secret transaction, and may always be made so. It cannot easily, therefore, be taxed directly.” (WN, V.ii.h.2; my emphasis)
In brief, it is easier to tax transfers of L and H than transfers of C because such L and H transfers “are in their nature either public and notorious, or such as cannot be long concealed.” Does this mean the government won’t try to tax transfers of C? Of course not! The government can tax all types of property transfers in one of two ways: “stamp-duties” (stamp taxes) and “duties upon registration” (registration fees). In the words of the Scottish tax scholar:
“The transference of stock, or movable property …. has been taxed indirectly in two different ways; first, by requiring that the deed containing the obligation to repay should be written upon paper or parchment which had paid a certain stamp-duty, otherwise not to be valid; secondly, by requiring, under the like penalty of invalidity, that it should be recorded either in a public or secret register, and by imposing certain duties upon such registration.” (WN, V.ii.h.2; my emphasis)
In other words, because transfers of capital assets and other moveable property are easy to conceal, the government can try to flush out these underground transfers, forcing them to the surface, so to speak. How? By refusing to enforce or to otherwise recognize the legality of those transfers unless they are recorded in a government registry — with the government charging you a hefty registration fee for this privilege — or recorded on a piece of official paper sold to you by the government. Smith then makes two additional points about these two types of property-transfer taxes. Although registration fees and stamp taxes “are of very modern invention”, they are now — in Smith’s day as well as ours! — “almost universal”:
“Those modes of taxation, by stamp-duties and by duties upon registration, are of very modern invention. In the course of little more than a century, however, stamp-duties have, in Europe, become almost universal, and duties upon registration extremely common.” (V.ii.h.12)
It is here, after the words “extremely common”, that Smith adds the following snide — though no less true! — remark: “There is no art which one government sooner learns of another than that of draining money from the pockets of the people.” (V.ii.h.12; my emphasis) In other words: don’t steal; the government hates competition! Nota bene: I will have more to say about Smith’s appendix on stamp taxes and registration fees in my next post.
“In general there is not, perhaps, any one article of expence or consumption by which the liberality or narrowness of a man’s whole expence can be better judged of than by his house-rent.” (WN, V.ii.e.7)
Thus far this week, we have seen Adam Smith’s four maxims of taxation (see here) and his tax treatment of agriculture (here), but what about residential real estate? That is, what about houses? Should one’s primary residence be taxed, and if so, by how much? As it happens, Smith explores “Taxes upon the Rent of Houses” in the third and last subsection of Article 1 of Part 2, Chapter 2, Book V of The Wealth of Nations (WN, V.ii.e). But Smith’s tax treatment of houses is not just about housing; it’s really about taxing the rich, making them pay their fair share of taxes:
“The luxuries and vanities of life occasion the principal expence of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess. A tax upon house-rents, therefore, would in general fall heaviest upon the rich; and in this sort of inequality there would not, perhaps, be any thing very unreasonable. It is not very unreasonable that the rich should contribute to the public expence, not only in proportion to their revenue, but something more than in that proportion.” (WN, V.ii.e.6)
Simply put, “house-rents” should be taxed, and since the rich devote a greater share of their income to housing — i.e. because the rich have bigger and fancier houses than the common people — it is “not very unreasonable” that the rich should pay more in property taxes. In addition, Smith argues that to the extent high property values are the result of good government, it is only fair that the direct beneficiaries (the rich) pay more in taxes:
“Ground-rents, so far as they exceed the ordinary rent of land, are altogether owing to the good government of the sovereign, which, by protecting the industry either of the whole people, or of the inhabitants of some particular place, enables them to pay so much more than its real value for the ground which they build their houses upon; or to make to its owner so much more than compensation for the loss which he might sustain by this use of it. Nothing can be more reasonable than that a fund which owes its existence to the good government of the state should be taxed peculiarly, or should contribute something more than the greater part of other funds, towards the support of that government.” (WN, V.ii.e.9; my emphasis)
But how would property taxes be calculated? What if a rich family already owns the house they live in? How would their “house tax” (so to speak) be calculated? The Scottish scholar addresses these logistical questions as follows in Paragraph 8 of this subsection:
“The rent of houses might easily be ascertained with sufficient accuracy by a policy of the same kind with that which would be necessary for ascertaining the ordinary rent of land [i.e. a formal public registry where leases are recorded]. Houses not inhabited ought to pay no tax. A tax upon them would fall altogether upon the proprietor, who would thus be taxed for a subject which afforded him neither conveniency nor revenue. Houses inhabited by the proprietor ought to be rated, not according to the expence which they might have cost in building, but according to the rent which an equitable arbitration might judge them likely to bring if leased to a tenant.” (WN, V.ii.e.8)
In other words, house taxes should be based on fair market values, on the rent a house would have obtained if it were put on the market.
Now, before proceeding any further, however, a crucial clarification is in order. Although Smith is clearly in favor of taxing the rich, he would probably be strongly opposed to a “wealth tax”. To see why, recall from my previous post Smith’s opposition to property taxes based on land values. I could be wrong, but I suspect that Smith’s critique of property taxes based on land values applies with equal force to most, if not all, proposed “wealth taxes” of our day: a wealth tax would have bad incentive effects, would invite government corruption, and would be arbitrary and unfair.
Nota bene: I will proceed to Adam Smith’s appendix for Articles 1 and 2 of Part 2, Chapter 2, Book V in my next two posts.
“The attention of the sovereign can be at best but a very general and vague consideration of what is likely to contribute to the better cultivation of the greater part of his dominions. The attention of the landlord is a particular and minute consideration of what is likely to be the most advantageous application of every inch of ground upon his estate.” (WN, V.ii.c.18)
Remember Adam Smith’s stinging critique of landlords way back in Book I, Chapter 6 of The Wealth of Nations: “Landlords, like all other men, love to reap where they never sowed, and demand a rent even for the natural produce of the earth.” (WN, I.vi.8)? Well, landowners are not just economic parasites; they are also an important group of potential taxpayers — so important that Smith begins his substantive survey of taxation in Article 1 of Part 2, Chapter 2, Book V of his magnum opus with landlords.
(As an aside, Smith’s general emphasis on landowners should come as no surprise, especially since agriculture was still the most important economic activity of his day. Today, I will explore the first two subsections in this article: “Taxes upon Rent” (WN, V.ii.c) and “Taxes which are proportioned, not to the Rent, but to the produce of Land” (WN, V.ii.d). I will turn to the third and last subsection of Article 1, “Taxes upon the Rent of Houses” (WN, V.ii.e) in my next post.)
But instead of asking, How much taxes should landowners pay?, Smith asks a different question. He asks, How should a landlord’s overall tax liability be calculated? (a) On the actual amount of rent the landlord is able to collect from his farmer-tenants, (b) on the overall value of his land, or (c) on the amount of crops his land is able to produce? Smith’s general answer to this key question is crystal clear: don’t tax the crops or value of his land; tax the rent instead. (The meme pictured below is therefore false and misleading.) More specifically, Smith provides three reasons why land taxes should be based on the landlord’s stream of income or rents:
REASON #1: INCENTIVE EFFECTS [1]
To begin, Smith explores the incentive effects of land taxes. His verdict is that a tax on the value of one’s land might be counterproductive because such a tax might deter the landlord from making any improvements to his land:
“The discouragement which a variable land-tax [i.e. a tax based on the value of land] might give to the improvement of land seems to be the most important objection which can be made to it. The landlord would certainly be less disposed to improve when the sovereign, who contributed nothing to the expence, was to share in the profit of the improvement.” (WN, V.ii.c.18)
Ditto taxes on crops, such as tithes:
“The tythe … is always a great discouragement both to the improvements of the landlord and to the cultivation of the farmer. The one cannot venture to make the most important, which are generally the most expensive improvements, nor the other to raise the most valuable, which are generally too the most expensive crops, when the church [or the government, in the case of a tax on the produce of land], which lays out no part of the expence, is to share so very largely in the profit.” (WN, V.ii.d.3)
In other words, if a landlord or one of his tenant-farmers invests extra money and labor to increase the yield or output of their crops, the tax collector (or the church in the case of tithes) will take a share of this increased output without having contributed to the landlord or tenant-farmer’s initial investment.
So, what about a tax on rents? Although Smith throws some shade on the famed Physiocrats of France for their “metaphysical arguments” (WN, V.ii.c.7) in favor of taxing rents, the Scottish scholar devotes most of Article 2 explaining why a tax on rent is “less bad” (so to speak) than the alternatives. See below.
REASON #2: INVITATION TO GOVERNMENT CORRUPTION [2]
According to Smith, a tax based on land values or on the amount of crops (i.e. the produce of the land) would invite government corruption in one form or another. Consider, for example, a tax on crops, especially one that must be paid to tax officials “in kind”:
“The servants of the most careless private person are, perhaps, more under the eye of their master than those of the most careful prince; and a public revenue which was paid in kind would suffer so much from the mismanagement of the collectors that a very small part of what was levied upon the people would ever arrive at the treasury of the prince.” (WN, V.ii.d.7)
Ditto a tax on land values:
“A land-tax assessed according to a general survey and valuation, how equal soever it may be at first, must, in the course of a very moderate period of time, become unequal. To prevent its becoming so would require the continual and painful attention of government to all the variations in the state and produce of every different farm in the country. The governments of Prussia, of Bohemia, of Sardinia, and of the duchy of Milan actually exert an attention of this kind; an attention so unsuitable to the nature of government that it is not likely to be of long continuance, and which, if it is continued, will probably in the long-run occasion much more trouble and vexation than it can possibly bring relief to the contributors.” (WN, V.ii.c.26)
In other words, a tax based on land values would require tax officials to conduct a general survey and valuation, but how accurate would their valuation be? If you were an 18th-century landowner, would you really trust the government to accurately assess the value of your land? Why wouldn’t the government inflate its value in order to squeeze more tax dollars from you?
REASON #3: FAIRNESS [3]
But Smith saves his best argument for last: a tax based on the value of land would, in the end, be arbitrary. Why? Because the Herculean task of trying to figure out the true value of all the land in a kingdom inevitably requires the exercise of discretion by government officials, and this discretion is likely to be abused. (See WN, V.ii.c.27.) A tax on the landlord’s rent, by contrast, is much more easier to figure out and is not subject to the whims of government officials.
Likewise, although a flat land tax or tithe (e.g., 10% of crops) appears to be equal and fair, the effect of such a tax would have an unequal impact on landowners. Why? Because the cost of cultivation varies wildly between land plots. On rich land, a farmer can easily pay a portion of the produce and still make a profit, while on poor land, that same land tax could wipe out his profit. (See WN, V.ii.d.2)
THE BIG PICTURE
For Smith, the main job of the government is not to micromanage the activities of landlords and their farmer-tenants. In two words, its role is to legalize freedom, to allow landlords and farmers “to pursue their own interest in their own way and according to their own judgment”:
“The principal attention of the sovereign ought to be to encourage, by every means in his power, the attention both of the landlord and of the farmer, by allowing both to pursue their own interest in their own way and according to their own judgment; by giving to both the most perfect security that they shall enjoy the full recompense of their own industry; and by procuring to both the most extensive market for every part of their produce, in consequence of establishing the easiest and safest communications both by land and by water through every part of his own dominions as well as the most unbounded freedom of exportation to the dominions of all other princes.” (WN, V.ii.c.18)
In short, the role of the government is to open markets and promote production. The tax system should therefore be consistent with these goals, not undermine them! (To be continued …)
Alas, with respect to Adam Smith, this meme is false!
[1] Cf. Adam Smith’s first maxim of taxation: “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.” (WN, V.ii.b.3)
[2] Cf. Smith’s insightful discussion of transaction costs in Paragraph 6 of Part 2 of Chapter 2 of Book V of The Wealth of Nations. According to Smith, a given tax is bad if “the levying of it may require a great number of officers, whose salaries may eat up the greater part of the produce of the tax, and whose perquisites may impose another additional tax upon the people.” (WN, V.ii.b.6)
[3] Cf. Smith’s second maxim of taxation: “The tax which each individual is bound to pay ought to be certain, and not arbitrary.” (WN, V.ii.b.4)
Alternative title: Adam Smith’s Maxims of Taxation
What does ICE and the IRS have in common? Broadly speaking, the main job of the IRS is to collect federal taxes; ICE’s job, by contrast, is to deport taxpayers! [1]
For his part, Adam Smith introduces four general principles or global criteria that all good tax systems should satisfy in Part 2 of Chapter 2 of Book V of The Wealth of Nations (available here; scroll down to “PART II”). Moreover, this is Adam Smith at his finest, for his maxims of taxation are still relevant and foundational today, for they explain why the IRS should not be run like ICE. (See my conclusion below.) But first, for reference, all four of Smith’s maxims are reproduced below:
MAXIM #1: EVERYONE MUST PAY THEIR FAIR SHARE OF TAXES (EQUALITY)
“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…. Every tax, it must be observed once for all, which falls finally upon one only of the three sorts of revenue above mentioned [i.e., rent, profit, and wages], is necessarily unequal in so far as it does not affect the other two….” (WN, V.ii.b.3; my emphasis) Notice how Smith does not distinguish between citizens and illegal aliens here; instead, he refers to the subjects of every state.
MAXIM #2: THE TAX SYSTEM SHOULD BE CLEAR AND SIMPLE (CERTAINTY)
“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. Where it is otherwise, every person subject to the tax is put more or less in the power of the tax-gathered, who can either aggravate the tax upon any obnoxious contributor, or extort, by the terror of such aggravation, some present or perquisite to himself. The uncertainty of taxation encourages the insolence and favours the corruption of an order of men who are naturally unpopular, even where they are neither insolent nor corrupt. The certainty of what each individual ought to pay is, in taxation, a matter of so great importance that a very considerable degree of inequality, it appears, I believe, from the experience of all nations, is not near so great an evil as a very small degree of uncertainty.” (WN, V.ii.b.4; my emphasis)
MAXIM #3: THE PAYMENT OF TAXES SHOULD BE SIMPLE AND EASY (CONVENIENCE)
“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. A tax upon the rent of land or of houses, payable at the same term at which such rents are usually paid, is levied at the time when it is most likely to be convenient for the contributor to pay; or, when he is most likely to have wherewithal to pay. Taxes upon such consumable goods as are articles of luxury are all finally paid by the consumer, and generally in a manner that is very convenient for him. He pays them by little and little, as he has occasion to buy the goods. As he is at liberty, too, either to buy, or not to buy, as he pleases, it must be his own fault if he ever suffers any considerable inconveniency from such taxes.” (WN, V.ii.b.5; my emphasis)
MAXIM #4: TAXES SHOULD BE AS LOW AS POSSIBLE (EFFICIENCY)
“Every tax ought to be so 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.” (WN, V.ii.b.6; my emphasis) More importantly, right after describing his fourth and final general maxim of taxation, Adam Smith identifies four ways that taxes distort the economy:
Collection and enforcement costs: “First, the levying of it may require a great number of officers, whose salaries may eat up the greater part of the produce of the tax, and whose perquisites may impose another additional tax upon the people.” (WN, V.ii.b.6) In two words, transaction costs: we need tax officials to collect taxes and enforce tax law, and these collection and enforcement costs further increase the amount of taxes the government must impose on taxpayers.
Bad incentive effects: “Secondly, it may obstruct the industry the people, and discourage them from applying to certain branches of business which might give maintenance and unemployment to great multitudes. While it obliges the people to pay, it may thus diminish, or perhaps destroy, some of the funds which might enable them more easily to do so.” (ibid.) Simply put, some taxes might discourage people from working, investing, or engaging in other productive economic activities.
Tax evasion: “Thirdly, by the forfeitures and other penalties which those unfortunate individuals incur who attempt unsuccessfully to evade the tax, it may frequently ruin them, and thereby put an end to the benefit which the community might have received from the employment of their capitals. An injudicious tax offers a great temptation to smuggling. But the penalties of smuggling must rise in proportion to the temptation. The law, contrary to all the ordinary principles of justice, first creates the temptation, and then punishes those who yield to it; and it commonly enhances the punishment, too, in proportion to the very circumstance which ought certainly to alleviate it, the temptation to commit the crime.” (ibid.) In plain English: when taxes are too high people will be tempted to join the underground economy or engage in black market activities.
Government overreach and intrusion: “Fourthly, by subjecting the people to the frequent visits and the odious examination of the tax-gatherers, it may expose them to much unnecessary trouble, vexation, and oppression; and though vexation is not, strictly speaking, expence, it is certainly equivalent to the expence at which every man would be willing to redeem himself from it.” (ibid.) Imagine, in other words, if the IRS were run like ICE: imagine heavily-armed and masked IRS agents run amok chasing down tax evaders the same way masked ICE agents pursue criminal aliens.
What would Adam Smith have to say about illegal immigration? Although the Scottish scholar himself does not discuss immigration directly in his magnum opus, one thing I can say for certain is that Smith would not want the IRS to be run like ICE, the government agency in charge of deporting taxpayers! (Again, see Note #1 below.) But that said, Smith’s maxims of taxation pose two open questions: (A) which of Smith’s four criteria is the most important one, and (B) does the U.S. tax system, with its multiple levels of onerous and complex taxation, satisfy Smith’s four maxims?
Nota bene: I will proceed to Article 1 of Part 2 of Chapter 2 of Book V of The Wealth of Nations (V.ii.c) in my next post.
[1] Even illegal aliens — as well as full citizens in the underground economy! — pay some form of taxes, such as sales taxes, tolls, etc. See here and here, for example.
We now turn to Part 1 of Chapter 2 of Book V of The Wealth of Nations. Here, Adam Smith surveys the two major “Sources of Revenue which may peculiarly belong to the Sovereign or Commonwealth” (WN, V.ii.a.1): capital and land. Moreover, in the course of his superlative survey Smith, yet again, makes a number of timeless observations:
1. ADAM SMITH’S EVERGREEN CRITIQUE OF DEMOCRACY
First off, the Scottish scholar compares and contrasts in passing “the orderly, vigilant, and parsimonious administration of such aristocracies as those of Venice and Amsterdam” with “the thoughtless extravagance” of parliamentary democracies like England:
“The orderly, vigilant, and parsimonious administration of such aristocracies as those of Venice and Amsterdam is extremely proper, it appears from experience, for the management of a mercantile project of this kind. But whether such a government as that of England—which, whatever may be its virtues, has never been famous for good œconomy; which, in time of peace, has generally conducted itself with the slothful and negligent profusion that is perhaps natural to monarchies; and in time of war has constantly acted with all the thoughtless extravagance that democracies are apt to fall into—could be safely trusted with the management of such a project, must at least be good deal more doubtful.” (WN, V.ii.a.4)
2. SMITH’S LIMITED DEFENSE OF “MERCANTILE PROJECTS” LIKE THE POST OFFICE
Although Smith is very critical of the mercantile system in general (see especially Chapters 1 to 8 of Book IV of The Wealth of Nations), he is, above all and as we have seen time and time again, a pragmatist, so he is willing to tolerate — and even praise — certain mercantile projects when the benefits of those projects are great enough and benefit the public at large:
“The post office is properly a mercantile project. The government advances the expence of establishing the different offices, and of buying or hiring the necessary horses or carriages, and is repaid with a large profit by the duties upon what is carried. It is perhaps the only mercantile project which has been successfully managed by, I believe, every sort of government. The capital to be advanced is not very considerable. There is no mystery in the business. The returns are not only certain, but immediate.” (WN, V.ii.a.5)
3. “NO TWO CHARACTERS SEEM MORE INCONSISTENT THAN THOSE OF TRADER AND SOVEREIGN” (WN, V.ii.a.7)
Why? Because the government is a monopoly, so it doesn’t have to worry about competition:
“No two characters seem more inconsistent than those of trader and sovereign. If the trading spirit of the English East India Company renders them very bad sovereigns, the spirit of sovereignty seems to have rendered them equally bad traders. While they were traders only they managed their trade successfully, and were able to pay from their profits a moderate dividend to the proprietors of their stock. Since they became sovereigns, with a revenue which, it is said, was originally more than three millions sterling, they have been obliged to beg extraordinary assistance of government in order to avoid immediate bankruptcy. In their former situation, their servants in India considered themselves as the clerks of merchants: in their present situation, those servants consider themselves as the ministers of sovereigns.” (WN, V.ii.a.7)
4. THE OPPORTUNITY COSTS OF PUBLIC OWNERSHIP OF LAND
Last but not least, Adam Smith has this to say regarding government ownership of land:
“The revenue which, in any civilized monarchy, the crown derives from the crown lands, though it appears to cost nothing to individuals, in reality costs more to the society than perhaps any other equal revenue which the crown enjoys. It would, in all cases, be for the interest of the society to replace this revenue to the crown by some other equal revenue, and to divide the lands among the people, which could not well be done better, perhaps, than by exposing them to public sale.” (WN, V.ii.a.19; my emphasis)
But at the same time, the Scottish scholar makes a pragmatic exception for “parks, gardens, public walks, &tc.”:
“Lands for the purposes of pleasure and magnificence—parks, gardens, public walks, &c. possessions which are every where considered as causes of expence, not as sources of revenue—seem to be the only lands which, in a great and civilized monarchy, ought to belong to the crown.” (WN, V.ii.a.20)
On this note, recall Adam Smith’s discussion of “publick diversions” in Paragraph 15 of Article 3 of Part 3 of Chapter 1 of Book V of The Wealth of Nations (WN, V.i.g.15), one of my favorite passages in Smith’s entire magnum opus. For me, Smith’s call for “publick diversions” and his public-spirited defense of communal spaces go hand-in-hand: a great society is one in which the people are able to choose from many different forms of entertainment [1] in many different communal and private spaces.
Nota bene: I will proceed to Part 2 of Chapter 2 of Book V of The Wealth of Nations in my next post.
[1] Alas, as I mentioned in a previous post, a potential blind spot bedevils Smith’s call for “publick diversions”, for Smith says that the market for entertainment should be free so long as the forms of entertainment being offered are “without scandal and indecency.” (WN, V.i.g.15) The blind spot, then, is this: Smith’s anti-scandal caveat appears to necessitate some form of censorship. After all, who decides what is scandalous or indecent?
prior probability 