Monday, July 19, 2010

Adam Smith on taxes

From Wealth of Nations, Book V, Chapter II, Part II:
"Before I enter upon the examination of particular taxes, it is necessary to premise the four following maxims with regard to taxes in general.
  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 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."
I was thinking about these four maxims with respect to our income taxes. Aside from the fact that Adam Smith says taxing the wages of labor is a terrible idea, I also think our system fails miserably on the first and second of these maxims. I imagine this is fairly detrimental to our economy. That is, the tax code is so horrendously convoluted, that it is not only extremely unequal due to various loopholes, but it is far from clear how much will be owed from year to year.

One thing I will say, however, from reading this monumental treatise on economics: taxation is anything but simple. At various times I have been ideologically attracted to things like the "flat tax" or the "fair tax," but Smith's treatise has made me realize that taxation is a subtle and difficult project. Politics has probably given us very nearly the worst possible system of taxation for a country to still be as prosperous as ours; yet even if we had expert economists determining a system of taxation, I doubt it would be easy to come up with.

Still, Adam Smith is full of insights like this one, which I think libertarians and conservatives probably tout a little too much:
"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."
And of course, I think we can all agree with this:
"There is no art which one government sooner learns of another, than that of draining money from the pockets of the people."

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