It was the North American libertarian philosopher Robert Nozick who famously argued that redistributive taxation is morally equivalent to forced labour in Anarchy, State, and Utopia (1974), his book-length response to John Rawls’s Theory of Justice. In Book V, Chapter 2, Part 2, Article 3 of The Wealth of Nations (available here; scroll down to Article III), Adam Smith goes even farther than Nozick: he concludes that “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.