prior probability

Happy Easter Monday! Before we jump into the last chapter of The Wealth of Nations, I have to confess that Adam Smith’s 900-plus-page masterpiece has taken up a lot of my time these past few months. But that is not the only tome that I have been studying during this time! Among other things, I have also been reading the following mix of classic and contemporary works, including The Meditations of Marcus Aurelius (Martin Hammond translation; Penguin classics edition) and The Enchiridion of Epictetus (Elizabeth Carter translation, available here), as well as the following:

1. Tyler Cowen, The Marginal Revolution: Rise and Decline, and the Pending AI Revolution (Mercatus Center, 2026, available here). Cowen surveys the history of the marginal revolution in economics and explains why thinking “at the margin” is the best thing since sliced bread.
2. Zia Haider Rahman, In the Light of What We Know (Farrar, Straus and Giroux, 2014). I discovered this acclaimed work of fiction by chance on my Twitter feed. Spoiler alert or trigger warning (take your pick): the two main protagonists of this novel are erudite but despicable fellows: one is a two-timer who betrays his best friend; the other is a rapist.
3. Jacob “I Just Make Shit Up” Soll, Free Market: The History of an Idea (Basic Books, 2022). I want my money back: the chapter on Adam Smith, for example, contains so many errors of facts and reckless revisionist history that I am pretty sure it was generated — either in part or in its entirety — by an early version of ChatGPT!

My translation of the title of this beautiful Spanish hymn: Everlasting Saviour

“The French system of taxation seems, in every respect, inferior to the British.” (WN, V.ii.k.78)

For part 1, see here. Adam Smith concludes his lengthy survey of “Taxes upon consumable Commodities” in Chapter 2 of Book V of The Wealth of Nations (see especially WN, V.ii.k.70-78) with some final observations about “the French system of taxation”:

“In France, the greater part of the actual revenue of the crown is derived from eight different sources; the taille, the capitation, the two vingtiemes, the gabelles, the aides, the traites, the domaine, and the farm of tobacco.” (WN, V.ii.k.76)

Smith further describes how these eight different sources of tax revenue are levied by two entirely different and non-overlapping set of tax officials:

The five last [i.e. the gabelles, the aides, the traites, the domaine, and the farm of tobacco] are, in the greater part of the provinces, under farm. The three first [i.e. the taille, the capitation, the two vingtiemes] are every where levied by an administration under the immediate inspection and direction of government, and it is universally acknowledged that, in proportion to what they take out of the pockets of the people, they bring more into the treasury of the prince than the other five, of which the administration is much more wasteful and expensive.” (WN, V.ii.k.76)

Before proceeding, some historical background is in order. Specifically, Smith’s phrase “under farm” refers to France’s tax farm system, the Ferme générale, which was a privatized tax collection system in which private investors (tax farmers) paid the crown an up-front sum for the right to collect certain taxes (cf. the five taxes listed by Smith above), profiting from any surplus collected. So, what about taxes of consumption goods — the ostensible subject of this subsection of Smith’s magnum opus? How should these taxes be collected, under farm or by the government?

Today is Good Friday or “Viernes Santo” in Spanish, the most solemn day in the Catholic liturgical year.

As we saw in my previous post (see here), Adam Smith’s comprehensive survey of “Taxes upon Consumable Commodities” in Book V, Chapter 2, Part 2, Article 4 of The Wealth of Nations (WN, V.ii.k) contains a short but insightful analysis of the economics of smuggling, but in addition, in the course of his discussion on smuggling, the Scottish scholar makes another timeless observation about the relative merits of excise taxes versus customs duties. Let me explain:

First off, recall from my previous post Smith’s timeless observation about the direct relationship between the level of taxes on consumption goods and the level of smuggling of those same goods. In short, it is “high taxes” that “encourag[es] smuggling” (V.ii.k.33); the higher those consumption taxes are, the more smuggling will occur. Next, the Scottish scholar identifies two ways of reducing smuggling:

“… it [the smuggling of consumption goods] may perhaps be remedied in two ways; either by diminishing the temptation to smuggle, or by increasing the difficulty of smuggling. The temptation to smuggle can be diminished only by the lowering of the tax, and the difficulty of smuggling can be increased only by establishing that system of administration which is most proper for preventing it.” (V.ii.k.35; my emphasis)

In other words, incentives matter! The government can reduce the level of smuggling by changing the incentive structure of smugglers in one of two ways: either by lowering the taxes on the goods being smuggled in (thus reducing the pecuniary temptation to smuggle in those goods in the first place) or by making it more difficult to evade detection. On this note, Smith explains why “[t]he excise laws … obstruct and embarrass the operations of the smuggler much more effectually than those of the customs.” (V.ii.k.36) Why? For Smith, there are three reasons why excise taxes > customs duties: “simplicity, certainty, and precision.” (cf. V.ii.k.38)

According to Smith, excise taxes are more simple, certain, and precise than customs duties because excise taxes are imposed on all designated goods produced or sold domestically, while customs duties are levied only on goods crossing international borders (imports or exports, or both). In other words, trying to figure out which goods are meant for export and which goods are imports is more costly and cumbersome than trying to figure out which goods were produced or sold in the home market. (In addition, custom duties are easier to evade than excise taxes are because custom duties are collected only at designated border checkpoints, which smugglers can find ways of bypassing, while excise taxes are collected at the point of production, distribution, or sale, depending on how the excise tax is designed.)

More importantly, Adam Smith then concludes his discussion of smuggling with the following general observations:

“… if every duty was occasionally either heightened or lowered according as it was most likely, either the one way or the other, to afford the greatest revenue to the state, taxation being always employed as an instrument of revenue and never of monopoly, it seems not improbable that a revenue at least equal to the present net revenue of the customs might be drawn from duties upon the importation of only a few sorts of goods of the most general use and consumption, and that the duties of customs might thus be brought to the same degree of simplicity, certainty, and precision as those of excise.” (V.ii.k.38; my emphasis)

In plain English, in the above passage Smith is making the following points:

1. The purpose of taxation is to raise revenue, not to favor one lobby group over another (e.g. farmers, homeowners, etc.), a lesson that, alas, has clearly been lost on us today.
2. Sometimes the government can collect more tax revenue by lowering tax rates. (See also Part C of my previous post.)
3. Excise taxes (e.g. sales taxes) are more simple, certain, and precise than customs duties.

To recap, simpler tax systems are better because they are more certain and more precise than complex tax systems are. Nota bene: I will conclude my survey of Article 4 of Part 2, Ch. 2, Book V of Smith’s magnum opus in my next post.

We now turn to the last major subsection of Book V, Chapter 2 of The Wealth of Nations: “Taxes upon Consumable Commodities” (WN, V.ii.k). Here, Adam Smith makes a number of timeless points, all of which are still relevant today:

A. NEEDS VERSUS WANTS: SMITH’S BROAD DEFINITION OF ‘NECESSARIES’

First off, Smith not only identifies two major types of consumer goods — “necessaries” and “luxuries” — he also explains in Paragraph 3 of this subsection why needs should be defined broadly:

“By necessaries I understand not only the commodities which are indispensably necessary for the support of life, but whatever the custom of the country renders it indecent for creditable people, even of the lowest order, to be without. A linen shirt, for example, is, strictly speaking, not a necessary of life. The Greeks and Romans lived, I suppose, very comfortably though they had no linen. But in the present times, through the greater part of Europe, a creditable day-labourer would be ashamed to appear in public without a linen shirt, the want of which would be supposed to denote that disgraceful degree of poverty which, it is presumed, nobody can well fall into without extreme bad conduct. Custom, in the same manner, has rendered leather shoes a necessary of life in England. The poorest creditable person of either sex would be ashamed to appear in public without them…. Under necessaries, therefore, I comprehend not only those things which nature, but those things which the established rules of decency have rendered necessary to the lowest rank of people. All other things I call luxuries ….” (WN, V.ii.k.3; my emphasis)

B. THE ECONOMICS OF TAXES ON CONSUMER GOODS DEPENDS ON WHAT TYPE OF GOODS ARE BEING TAXED: NECESSARIES OR LUXURIES

Why does Smith draw this distinction between necessary goods and luxury goods? Because for Smith the economics of a sales tax depends on the type of good being taxed. According to the Scottish scholar, the ultimate effect of a tax on necessary goods is to “diminish the extent of their sale and consumption.” (WN, V.ii.k.9) Why? Because a tax on necessary goods produces the following three-step chain reaction:

1. Initiation phase (step one): A tax on necessary goods will increase the prices of those good by at least the amount of the tax, if not more (see WN, V.ii.k.4)
2. Propagation phase (step two): This overall increase in the prices of necessary goods will then have the macro effect of increasing the cost of labour because workers will need to be paid more in order to afford those necessary goods (ibid.)
3. Termination phase (step three): An increase in the cost of labour will, in turn, further increase the cost of consumer goods (WN, V.ii.k.5)

A sales tax on luxury goods, by contrast, will not increase the cost of labour: “It is otherwise with taxes upon what I call luxuries, even upon those of the poor. The rise in the price of the taxed commodities will not necessarily occasion any rise in the wages of labour.” (WN, V.ii.k.6) To recap:

“Taxes upon luxuries have no tendency to raise the price of any other commodities except that of the commodities taxed. Taxes upon necessaries, by raising the wages of labour, necessarily tend to raise the price of all manufactures, and consequently to diminish the extent of their sale and consumption.” (WN, V.ii.k.9)

C. HIGH TAXES WILL GENERATE LESS TAX REVENUE

Last (for now), but not least, Smith explains why high taxes on consumer goods — regardless whether such goods are classified as necessaries or luxuries — can be counter-productive in one of two ways:

“High taxes, sometimes by diminishing the consumption of the taxed commodities, and sometimes by encouraging smuggling, frequently afford a smaller revenue to government than what might be drawn from more moderate taxes.” (WN, V.ii.k.33)

In order words, demand curves slope downward: there is an inverse relationship between a good’s price and the quantity demanded, so the higher the tax on good X, the lower the demand for X. In addition, high taxes on consumer goods create perverse incentive effects: they stimulate smugglers to find new and creative ways to evade the tax in the first place — and the higher the tax, the more lucrative this black-market incentive is!

D. ADAM SMITH’S BOTTOM LINE: TAX LUXURIES, NOT NECESSARIES

After his discussion of smuggling — of which I will have more to say in my next post — Smith concludes: “It must always be remembered, however, that it is the luxurious and not the necessary expence of the inferior ranks of people that ought ever to be taxed.” (WN, V.ii.k.44; my emphasis) Nota bene: I will discuss Adam Smith’s expert analysis of the economics of smuggling in greater detail in my next post.

🤡 Happy April Fools Day! 👹 Today, I will discuss Adam Smith’s timeless answer to the following April-fools-like question: should the government impose a Bernie Sanders-style wealth tax on billionaires?

To see Smith’s answer to this query, we must turn our attention to Book V, Chapter 2, Part 2, Article 4 of The Wealth of Nations (available here; scroll down to “Article IV”), the fourth and final subsection of this monumental chapter, where the Scottish scholar surveys two types of taxes: “Capitation Taxes” (V.ii.j) and “Taxes upon Consumable Commodities” (V.ii.k). In today’s post, we will explore “capitation taxes”. What are they, and what does Adam Smith have to say about them?

In brief, a capitation tax is a direct “head tax” levied on each individual taxpayer, and such a tax can take one of two forms: it can either be fixed and uniform — i.e. every taxpayer owes the same amount of tax regardless of his level of income or overall wealth — or it can vary depending on a person’s wealth or social status. Either way, however, Adam Smith is highly critical of capitation taxes:

“Capitation taxes, if it is attempted to proportion them to the fortune or revenue of each contributor, become altogether arbitrary….

“Capitation taxes, if they are proportioned not to the supposed fortune, but to the rank of each contributor, become altogether unequal, the degrees of fortune being frequently unequal in the same degree of rank.

“Such taxes, therefore, if it is attempted to render them equal, become altogether arbitrary and uncertain, and if it is attempted to render them certain and not arbitrary, become altogether unequal. Let the tax be light or heavy, uncertainty is always a great grievance.” (WN, V.ii.j.2-4; my emphasis)

It’s fairly easy to see why a uniform or fixed capitation tax would be unfair and unequal in practice: people — even people in the same social class — are born with different talents and dispositions and are engaged in different activities and these diverse activities generate different levels of income. As a result, some people may not have the ability to pay a capitation tax, especially if the tax is set too high. But what about “variable” capitation taxes, i.e. a wealth tax that varies depending on the amount of a person’s overall wealth? Why, in short, would Adam Smith object to a wealth tax, even one that is “light” or modest? Simply put, because wealth taxes are uncertain and arbitrary:

“The state of a man’s fortune varies from day to day, and without an inquisition more intolerable than any tax, and renewed at least once every year, can only be guessed at. His assessment, therefore, must in most cases depend upon the good or bad humour of his assessors, and must, therefore, be altogether arbitrary and uncertain.” (WN, V.ii.j.2)

In other words, wealth taxes are a recipe for disaster. For starters, how would the government even begin to measure a person’s wealth? Depending on the composition of a person’s portfolio of economic assets (real property, stocks, bonds, etc.), one’s overall level of wealth is in constant flux — changing day by day, even hour by hour! This inherent uncertainty, in turn, would give tax officials way too much discretion — discretion that will ultimately end up being abused! Sorry Sam (Samuel Fleischacker), but Smith is not a “progressive” when it comes to wealth taxes.

Nota bene: We will proceed to taxes on consumption goods and conclude our survey of Chapter 2 of Book V of Smith’s magnum opus in my next two posts.

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.