History of Economics Playground

UK Budget Appeals to Adam Smith's Approach to Taxes... Sort of

Yesterday the Chancellor of the Exchequer (or UK 'finance minister') gave his annual budget speech where UK fiscal policy is set for the coming years. In announcing his tax changes he name-dropped Adam Smith as the inspiration for his objectives on tax:

Two hundred years ago, Adam Smith set out the four principles of good taxation - and they remain good principles today. Taxes should be simple, predictable, support work, and they should be fair. The rich should pay the most, and the poor least.  George Osbourne, 21 March 2011

There has been a longer debate about whether Smith was in favour of progressive taxation or whether he simply intended a flat tax, where the rich by definition pay more than the poor. But putting that aside, I wanted to see if those four tax principles were Smith's principles: Simple, predictable, support work and fair. Grabbing my trusty Wealth of Nations there is a whole section on taxes [Book V. ii. b] where Smith opens by saying that "it is necessary to premise the four following maxims with regard to taxes in general" [V.ii.b.2] - so far so good:

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" [V.ii.b.3]. Well... this sounds like fair, but recall the controversy about what this actually means. Admittedly it does sound a lot like  'from each according to his...' - but let's not go down that path.  

2. "The tax which each individual is bound to pay ought to be certain, and not arbitrary" [V.ii.b.4] - this has partly to do with knowing how much you are expected to pay so you are not "in the power of the tax-gatherer" and partly to do with avoiding corruption and tax avoidance. So this is probably where predictable or at a stretch simple comes from.

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" [V.ii.b.4]. A practical approach to taxation, but it doesn't really fit into any of the above neatly, although there is a case for simple and perhaps  the UK system of charging income tax automatically on wages, supports work. But I think both are tangential. This is really a matter of making taxes convenient to pay.

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 publick treasury of the state" [V.ii.b.6]. Not sure where this fits in to the Chancellor's overall scheme, as this is a long paragraph arguing that taxes should not be levied where it is too hard to collect or the incentive to smuggle is too high - so it should be administratively simple.

Given that, Adam Smith's four principles could be summarised as fair, predictable, convenient to pay and administratively simple - not quite what Osbourne had, but perhaps closer to what he did? 

Comments

0

Adam Smith very explicitly stated that ground rents (what we now call land value or site value tax) were the best form of taxation, and he dedicated an entire chapter in *Wealth of Nations* to show that ground rents were unearned windfalls to landlords. David Ricardo developed "The Law of Rent" to show that unused land had to be taxed as well, to prevent the landlords from passing the tax onto tenants. Taxing the value of land keeps land affordable by keeping speculators out of the market.

In the United States, we have found that the cities that have curtailed real estate taxes had the worst housing bubbles, followed by the greatest foreclosure epidemics, in the nation. See:

http://savingcommunities.org/issues/taxes/property/affordabilityrank.html

0

"The annual produce of the land and labour of the society, the real wealth and revenue of the great body of the people, might be the same after such a tax as before. Ground-rents and the ordinary rent of land are, therefore, perhaps, the species of revenue which can best bear to have a peculiar tax imposed upon them."

Adam Smith - Wealth of Nations (1776), Book V, Chap. 2, Art.1

A Land Value Tax was recommended by Smith himself.

I propose it as the best (or least bad) tax both as to economic efficiency and justice.

0

None of the above commentators have referenced a base value system against which they can validate their claims.

I could with equal validity assert that the best taxation system is one in which all taxpayers are executed and their assets taken by force.

This is not the quality of debate I expect on INET.

0

FS, a welcome comment. "Feet to the fire." Insist upon it. Or what is New Economic Thinking for?

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