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?