Adam Smith and the Canons of Taxation

Adam Smith and the Canons of Taxation

The ideas of Adam Smith upon the questions of taxation and the function of the state were a natural outgrowth of the doc­trines advanced by the Kameralists on the one hand and the Physiocrats on the other. Smith contended that revenue to sup­port the functions of the state could be secured from two sources: revenues from property or other interests owned by the state, or from taxation. He advocated and ardently supported the second. The canons of taxation which he proposed emphasize much the same ideas as appeared in Justi's discussion of taxation, but they are usually credited to Adam Smith. They often appear as quota­tions in any discussion of taxes, and even in the light of changed conditions they appear practical and reasonable. The canons follow.

"(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, (ii) The tax which the individual is bound to pay ought to be certain and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor and to every other person, (iii) 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. (iv) Every tax ought to be so contrived as to take out of the pockets as little as possible, over and above that which it brings into the public treasury of the state." Briefly stated, any tax should con­form to the standards of justice, certainty, convenience, and economy. However, Smith did not follow through consistently. In discussing the sources of the taxation he acknowledged the fact that all taxes must be derived from income, that is, from rent, profits, or wages; but he pointed out that collections from wages and profits were difficult, or could be shifted to the consumer, or adversely affected industry and trade, the source of wealth. Con­sequently, he adopted the Physiocratic idea that taxes upon rent satisfied his criteria of a good tax better than taxes upon other sources. Even in the land tax, Smith modified his principles, for he contended that taxes on lands cultivated by their owners should be lower than taxes on land owned by absentee landlords. This discrimination may be quite justified as a matter of social policy but it hardly fits well with Smith's defense of the principles of laissez-faire.

Just as popular, and perhaps more influential in determining the economic thought of his successors, was Smith's discussion of the functions of the state. Living at a time when the growth of trade was beginning to press upon the arbitrary regulations introduced in an age of Mercantilism, Smith led the revolt against these restrictions. Here again there is ample evidence of Smith's partial dependence upon Physiocratic ideas, for his concepts of free trade and natural law are very similar to those of the French school. If trade could be left to follow its own direction, freed from government regulation and motivated by the self-interest of individual business men, the natural laws of business enter­prise would exercise proper control, steer it into the most produc­tive channels, and result in the welfare of all individuals. Since national wealth was simply the sum of all individual wealth, the state needed to take no special measures in its own behalf. What then were the functions of the state under this system of laissez-faire or natural liberty? First, there was the duty to protect society from the violence and invasion of other states. Second, the state should protect "every member of society from the injustice or oppression of every other member of it," and to establish an exact administration of justice. Third, it should assume responsibility for "erecting and maintaining certain public works and certain public institutions, which it can never be for the interest of any individual, or small number of individuals, to erect and main­tain." Such public works and institutions, Smith believed, in­volved three different classifications: public works assisting trade and commerce such as canals, harbors, and defenses in unsettled countries, and embassies in foreign countries; schools for the education of youth; and support for the church. The school and the church should be self-supporting in so far as possible; if private interest could not keep these alive then public action should not be forbidden. As was indicated before, Smith did not believe in laissez-faire in an absolute sense. There were grounds for government intervention in regulating foreign commerce to protect certain home industries and as retaliation on countries which insisted on high protective tariffs on English goods. Bank­ing might be regulated to insure safety of deposits, and interest rates might well be determined by law. Except for these minor considerations, the role of the state was confined to non-economic matters on the assumption that the dabbling of legislators in affairs of business was unnecessary and dangerous.