Adam Smith on Taxes

Rick Bolton writes (10 October) in the Chillicothe Gazette.com (HERE) an opinion piece headed: 'Wall Street CEOs should be held accountable for their actions'; a reasonable proposition in the current crisis.

However, if we are going to punish the guilty we should include among them those legislators responsible for the policies of increasing public debt to pursue their visions for what a modern country should encourage and who legislated to make such policies a reality. Sub-prime mortgages were also a form of social-engineering with what are called 'toxic consequences', unforseen, or ignored, by their proponents, which overly smart money traders hyjacked to make 'loads of money'.

Rick Bolton asserts that: ‘Even Adam Smith, author of "Wealth of Nations," the capitalist bible, favored a progressive tax structure. Smith believed those who benefit the most from the market should pay a higher rate in taxes.’

Comment

Ignore the nonsense about Wealth Of Nations being ‘the capitalist bible’…

The actual statement by Adam Smith is slightly different:

“I. 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.” (WN V.ii.b.3: p 825)

Yes, he confirms that the richer should pay higher taxes, but this is not quite the same as ‘those who benefit the most from the market’ should pay more; all people in society benefit from ‘markets’.

Taxes in Smith’s mind were for the funding of civil government, and partly because the tax base was much narrower in his day than it is now – many poor people could not contribute much at all (income tax had not yet been invented). He envisaged luxury goods, packages, houses, and rents being subject to tax and discusses in detail the tax practices of the UK, which soon shows how different the tax regimes have become in the intervening two centuries.

He clearly believed that certain people were more ‘able’ to contribute because they received higher revenue, which they respectively enjoy under the protection of the state.’

It wasn’t just because they received more revenue; it was because they enjoyed their revenues because the agencies of the state secured and protected their property rights. Without ‘justice’, society must in a moment crumble into atoms’ (Moral Sentiments, II.ii.3.3: p 86). The beneficiaries of state expenditures should in equity contribute to the revenue raised necessary for the government to function.

At the time Smith wrote Wealth Of Nations he was not just asserting taxation policy for market economies; most European economies were significantly, if not predominantly, agricultural societies with smaller commercial markets and government publicly-funded sectors.

It was also a fact that the maxims outlined by Adam Smith were not ‘his’ maxims; he reported on existing practices ‘recommended… more or less to the attention of all nations’ (WN V.ii.b.7: p 827).