{"id":96047,"date":"2023-03-08T22:03:00","date_gmt":"2023-03-09T02:03:00","guid":{"rendered":"https:\/\/www.shortform.com\/blog\/?p=96047"},"modified":"2023-03-21T12:08:59","modified_gmt":"2023-03-21T16:08:59","slug":"adam-smiths-principles-of-taxation","status":"publish","type":"post","link":"https:\/\/www.shortform.com\/blog\/adam-smiths-principles-of-taxation\/","title":{"rendered":"Adam Smith&#8217;s Principles of Taxation: Tackling a Necessary Evil"},"content":{"rendered":"\n<p>How is ethical taxation achieved? How can taxes be less disruptive to the economy?<\/p>\n\n\n\n<p>In <em>The Wealth of Nations<\/em>, Adam Smith shares his general principles for how taxes ought to be collected and assessed. He also analyzes specific forms of taxation in light of his principles and explains how each tax is problematic in its own way.<\/p>\n\n\n\n<p>Let&#8217;s review Adam Smith&#8217;s principles of taxation and his analysis of three common tax policies.<\/p>\n\n\n\n<!--more-->\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-adam-smith-s-principles-of-taxation\">Adam Smith&#8217;s Principles of Taxation<\/h2>\n\n\n\n<p>Smith views taxes largely as a necessary evil. He remarks that all taxation takes value out of the hands of private investors, whose self-interest encourages them to invest it in the industries that contribute most effectively to national growth. However, he recognizes that it may be impossible to fund important public works without taxes. Therefore, much of his discussion of tax policy is directed toward finding the <em>least disruptive <\/em>system of taxation.<\/p>\n\n\n\n<p>Adam Smith&#8217;s principles of taxation aren\u2019t exact tax policies but rather ideals to guide legislators in deciding policy:<\/p>\n\n\n\n<ol class=\"wp-block-list\"><li><strong>Taxation is proportionate to income.<\/strong><strong> <\/strong>Smith states that everyone in society ought to pay an equal percentage of their <em>total income.<\/em>&nbsp;<\/li><li><strong>Taxes ought to be predictable.<\/strong><strong> <\/strong>No one should be surprised by how much they\u2019re taxed or when.&nbsp;<\/li><li><strong>Taxes ought to be collected at convenient times.<\/strong><strong> <\/strong>Tax policy should consider the most convenient times of year for people to pay.<\/li><li><strong>Levying and collecting taxes ought to be cost-efficient.<\/strong><strong> <\/strong>Governments need to consider the cost of tallying and collecting taxes when designing tax policies.&nbsp;<\/li><\/ol>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><strong>Smith\u2019s Principles Remain Influential<\/strong><br><br>Smith scholars maintain that <a href=\"https:\/\/www.libertarianism.org\/publications\/essays\/what-can-adam-smith-teach-us-about-tax-policy#.thoos8:5CBX\" target=\"_blank\" rel=\"noreferrer noopener\">these four principles continue to provide a foundation for debates about ethical taxation today<\/a>.<br><br>His first principle of proportionality undergirds the principles of &#8220;payability&#8221; and &#8220;benefit&#8221; which are still considered in modern tax debates. The principle of &#8220;payability&#8221; insists that taxes should be levied on those who can afford to pay them. The principle of &#8220;benefit&#8221; maintains that those who benefit most from public infrastructure ought to pay more in proportion to their benefit. For example, someone with a lot of private property will benefit more from the property protections.<br><br>Smith&#8217;s ideas about the transparency and predictability of taxes continue to guide debates about specific tax codes that are unclear or applied retroactively. His third principle about tax collection at convenient times has largely been adopted by industrial nations that consistently collect taxes at the same time every year.<br><br>Lastly, Smith&#8217;s principle about limiting the cost of tax collection agencies continues to inspire debate. Some maintain that <a href=\"https:\/\/www.economist.com\/special-report\/2005\/04\/14\/the-burden-of-complexity#:~:text=but%20the%20chances%20of%20being%20audited,assume.%20Jeffrey%20Owens%20and%20Stuart\" target=\"_blank\" rel=\"noreferrer noopener\">simplifying tax codes would cut down on the costs of tax collection<\/a>. Others counter that calls for simplification miss the point that many of the extra features in the tax code are designed for <a href=\"https:\/\/www.brookings.edu\/testimonies\/tax-simplification-issues-and-options\/\" target=\"_blank\" rel=\"noreferrer noopener\">other important goals of taxation policy: preventing evasion, keeping taxes equitable, balancing economic tradeoffs, and so on<\/a>.<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-the-difficulty-of-fairly-levying-taxes\">The Difficulty of Fairly Levying Taxes<\/h3>\n\n\n\n<p>Smith analyzes three common tax policies: taxing land, taxing profits, and taxing wages. In his analysis of tax policies, Smith acknowledges that, even though taxes are necessary, each method of taxation has its shortcomings.<\/p>\n\n\n\n<p><strong>1. <\/strong><strong>Taxes on land: <\/strong>Taxing the rent of land provides a challenge for proportionality and cost efficiency. If you simply tax landlords by the area of land, the tax will fall unevenly because not all land is equally productive. Those making less income off their land will then carry a disproportionately high tax burden compared to those making a lot. However, if you tax landlords by the income they make from their rent, this requires more tax agents to collect that information, making it more expensive.<\/p>\n\n\n\n<p>(Shortform note: In 18th-century Britain, much of the government&#8217;s revenue was derived from land taxes. This was largely because it was easier to know how much land someone owned than how much money they made. However, rather than charging landlords on the rent they collected, the British government <a href=\"https:\/\/www.parliament.uk\/about\/living-heritage\/transformingsociety\/private-lives\/taxation\/overview\/taxes18thcentury\/\" target=\"_blank\" rel=\"noreferrer noopener\">opted to charge each landowner based on a <em>valuation<\/em> of how much they thought the land was worth<\/a>. This would at least theoretically account for differences in rents without having to actually calculate how much rent someone collected. While this still required a tax collector to assess the value of someone&#8217;s land, this valuation would likely fluctuate less than the actual rents collected.)<\/p>\n\n\n\n<p><strong>2. <\/strong><strong>Taxes on profit<\/strong><strong>: <\/strong>Taxing the profits of businesses and merchants may seem like a good way to tax people evenly based on their income. However, Smith argues that these businesses will raise the prices of their goods to recoup their losses. Therefore, a tax on profits is actually a sales tax on consumers. This makes it harder to tax proportionally, as profits won&#8217;t <em>really <\/em>be taxed.<\/p>\n\n\n\n<p>Smith also states that taxing profit requires a lot of surveillance and tax agents because you need to know how much profit everyone makes. This makes it harder to be cost-efficient. Furthermore, he asserts that merchants and money-lenders have an easier time hiding their assets than landlords and can therefore evade paying their full share.<\/p>\n\n\n\n<p><strong>3. <\/strong><strong>Taxing wages: <\/strong>Much like the tax on profits, Smith contends that a tax on workers\u2019 wages is also a sales tax on consumers. Taxing wages will drive up <a href=\"https:\/\/www.shortform.com\/blog\/the-cost-of-labor\/\">labor costs<\/a> for employers. These employers will then try to recoup their costs by raising the price of their goods, thus passing the tax on to their customers. This again makes it difficult to tax everyone&#8217;s incomes proportionately through a tax on wages.<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><strong>Passing Tax Burden onto Consumers<\/strong><br><br>Much of Smith&#8217;s analysis of tax policy highlights the ability of businesses to pass tax burdens onto their consumers. However, modern economists suggest that <a href=\"https:\/\/www.cs.cmu.edu\/~ref\/econ101e.html\" target=\"_blank\" rel=\"noreferrer noopener\">this ability is mediated by the elasticity or inelasticity of demand<\/a>.<br><br><a href=\"https:\/\/www.extension.iastate.edu\/agdm\/wholefarm\/pdf\/c5-207.pdf\" target=\"_blank\" rel=\"noreferrer noopener\">Elastic demand changes in response to changes in price<\/a>. For example, if someone selling Halloween costumes raises their prices too high, customers looking to dress up will make their own costumes instead of buying them. Therefore, it&#8217;s harder for companies to pass the costs onto consumers.<br><br>Inelastic demand occurs when people&#8217;s willingness to purchase something doesn&#8217;t respond to changes in price. For example, someone needs a certain medication in order to stay alive. They will pay nearly any cost to get it. Therefore, a tax on medications could be endlessly passed onto consumers.&nbsp;<\/td><\/tr><\/tbody><\/table><\/figure>\n","protected":false},"excerpt":{"rendered":"<p>How is ethical taxation achieved? How can taxes be less disruptive to the economy? In The Wealth of Nations, Adam Smith shares his general principles for how taxes ought to be collected and assessed. He also analyzes specific forms of taxation in light of his principles and explains how each tax is problematic in its own way. Let&#8217;s review Adam Smith&#8217;s principles of taxation and his analysis of three common tax policies.<\/p>\n","protected":false},"author":9,"featured_media":11211,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[81,31,275],"tags":[942],"class_list":["post-96047","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-economics","category-money","category-politics","tag-the-wealth-of-nations","","tg-column-two"],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v24.3 (Yoast SEO v24.3) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Adam Smith&#039;s Principles of Taxation: Tackling a Necessary Evil - Shortform Books<\/title>\n<meta name=\"description\" content=\"Adam Smith&#039;s principles of taxation are directed at finding the least disruptive system of taxation. 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