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by Nadia Weiner, Director of the Adam Smith Club of Sydney,
Although Adam Smith is often quoted, the so-called "Father of
Economics" has rarely been read, either by his detractors or his
admirers. Consequently he is often misunderstood.
Smith, who made such a strong stand against the protectionist
mercantile system of trade of his day, devoted over ONE THIRD of
his masterpiece An Inquiry into the Nature and Causes of the Wealth
of Nations, to discussing the subject of government revenue and the
methods by which it may be best collected, including new taxes.
This is not generally known.
When examining the different forms of taxation, Smith adheres to
four maxims which a good tax should conform to:
1. "The subject 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
Bearing all these things in mind, there are two types of taxation
which obtain Smith's recommendations: a tax on luxury consumables
and a tax on ground-rents (the annual value of holding a piece of
2. "The tax each individual is bound to pay ought to be certain,
and not arbitrary. The time of payment, the manner of payment,
and the quantity to be paid, ought all to be clear and plain to the
contributor, and to ever 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
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."
On the subject of luxury consumables, he is adamant about the
definiton of 'luxury' and of 'necessary.' By his definition, a
'necessary' may vary from place to place and from time to time. At
the time of his writing, linen shirts, leather shoes and a minimum
of food and shelter were definitely to be regarded as essential to
a minumum decent standard of living. Taxes on salt, soap, etc., he
harshly criticized as inequitably taking from the poorest elements
of society. Taxes on luxuries, which were to include tobacco, he
considered excellent in that no one is obliged to contribute to the
tax: "Taxes upon luxuries have no tendency to raise the price of
any other commodities except that of the commodities taxed ...
Taxes upon luxuries are finally paid by the consumers of the
commodities taxed, without any retribution."
More deserving of priase is the tax on ground-rents: "Both ground-
rents and the ordinary rent of land are a species of revenue which
the owner, in many cases, enjoys without any care or attention of
his own. 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
Excise, customs, taxes on profits, were, according to Smith, either
expensive to collect, as in the case of excise, or disincentives to
produce, as in the tax on profits. He reserves harsh words for
taxes which occasion the invasion of privacy, and on the subject of
excise he says: "To subject every private family to the odious
visits and examination of the tax-gatherers ... would be altogether
inconsistent with liberty."
The harshest condemnation of all, however, was for taxes upon
labour: "In all cases, a direct tax upon the wages of labour must,
in the long run, occasion both a greater reduction in the rent of
land, and a greater rise in the price of manufactured goods, than
would have followed from a proper assessment of a sum equal to the
produce of the tax, [levied] partly upon the rent of land, and
partly upon consumable comodities."