Chapter 2

Federal Government Taxes



Adam Smith's First Edition of Wealth of Nations was published in 1776, the same year we declared our
independence from Great Britian. It consisted of 5 books, but Book 5, Chapter II, Part II deals with taxation. I
found the contents of Prof. Smith's writings on taxation so profound, I re-formatted his original text and quote his
entire opening statements: 

     "THE private revenue of individuals, it has been shown in the first book of this Inquiry, arises
     ultimately from three different sources: Rent, Profit, and Wages. Every tax must finally be paid from
     some one or other of those three different sorts of revenue, or from all of them indifferently. I shall
     endeavour to give the best account I can, 

          first, of those taxes which, it is intended, should fall upon rent; 

          secondly, of those which, it is intended, should fall upon profit; 

          thirdly, of those which, it is intended, should fall upon wages; and, 

          fourthly, of those which, it is intended, should fall indifferently upon all those three
          different sources of private revenue. 

     The particular consideration of each of these four different sorts of taxes will divide the second part
     of the present chapter into four articles, three of which will require several other subdivisions. Many
     of those taxes, it will appear from the following review, are not finally paid from the fund, or source
     of revenue, upon which it was intended they should fall. 

     Before I enter upon the examination of particular taxes, it is necessary to premise the four following
     maxims with regard to taxes in general. 

     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. 

          The expense of government to the individuals of a great nation is like the expense of
          management to the joint tenants of a great estate, who are all obliged to contribute in
          proportion to their respective interests in the estate. In the observation or neglect of this
          maxim consists what is called the equality or inequality of taxation. Every tax, it must be
          observed once for all, which falls finally upon one only of the three sorts of revenue
          above mentioned, is necessarily unequal in so far as it does not affect the other two. In
          the following examination of different taxes I shall seldom take much further notice of
          this sort of inequality, but shall, in most cases, confine my observations to that inequality
          which is occasioned by a particular tax falling unequally even upon that particular sort
          of private revenue which is affected by it. 

     II. The tax which each 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. 

          Where it is otherwise, every person subject to the tax is put more or less in the power of
          the tax-gathered, who can either aggravate the tax upon any obnoxious contributor, or
          extort, by the terror of such aggravation, some present or perquisite to himself. The
          uncertainty of taxation encourages the insolence and favours the corruption of an order
          of men who are naturally unpopular, even where they are neither insolent nor corrupt.
          The certainty of what each individual ought to pay is, in taxation, a matter of so great
          importance that a very considerable degree of inequality, it appears, I believe, from the
          experience of all nations, is not near so great an evil as a very small degree of
          uncertainty. 

     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. 

          A tax upon the rent of land or of houses, payable at the same term at which such rents
          are usually paid, is levied at the time when it is most likely to be convenient for the
          contributor to pay; or, when he is most likely to have wherewithal to pay. Taxes upon
          such consumable goods as are articles of luxury are all finally paid by the consumer, and
          generally in a manner that is very convenient for him. He pays them by little and little, as
          he has occasion to buy the goods. As he is at liberty, too, either to buy, or not to buy, as
          he pleases, it must be his own fault if he ever suffers any considerable inconveniency
          from such taxes. 

     IV. 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. 

          A tax may either take out or keep out of the pockets of the people a great deal more than
          it brings into the public treasury, in the four following ways. 

               First, the levying of it may require a great number of officers, whose salaries
               may eat up the greater part of the produce of the tax, and whose perquisites
               may impose another additional tax upon the people. 

               Secondly, it may obstruct the industry the people, and discourage them from
               applying to certain branches of business which might give maintenance and
               unemployment to great multitudes. While it obliges the people to pay, it may
               thus diminish, or perhaps destroy, some of the funds which might enable
               them more easily to do so. 

               Thirdly, by the forfeitures and other penalties which those unfortunate
               individuals incur who attempt unsuccessfully to evade the tax, it may
               frequently ruin them, and thereby put an end to the benefit which the
               community might have received from the employment of their capitals. An
               injudicious tax offers a great temptation to smuggling. But the penalties of
               smuggling must rise in proportion to the temptation. The law, contrary to all
               the ordinary principles of justice, first creates the temptation, and then
               punishes those who yield to it; and it commonly enhances the punishment,
               too, in proportion to the very circumstance which ought certainly to alleviate
               it, the temptation to commit the crime. 

               Fourthly, by subjecting the people to the frequent visits and the odious
               examination of the tax-gatherers, it may expose them to much unnecessary
               trouble, vexation, and oppression; and though vexation is not, strictly
               speaking, expense, it is certainly equivalent to the expense at which every
               man would be willing to redeem himself from it. It is in some one or other of
               these four different ways that taxes are frequently so much more burdensome
               to the people than they are beneficial to the sovereign. 

     The evident justice and utility of the foregoing maxims have recommended them more or less to the
     attention of all nations. All nations have endeavoured, to the best of their judgment, to render their
     taxes as equal as they could contrive; as certain, as convenient to the contributor, both in the time
     and in the mode of payment, and, in proportion to the revenue which they brought to the prince, as
     little burdensome to the people. The following short review of some of the principal taxes which have
     taken place in different ages and countries will show that the endeavours of all nations have not in
     this respect been equally successful." 

According to Adam Smith, there are "four different sorts of taxes": 

     "Taxes upon Rent. 

          Taxes upon the Rent of Land
          Taxes which are proportioned, not to the Rent, but to the Produce of Land
          Taxes upon the Rent of House. 

     Taxes on Profit, or upon the Revenue arising from Stock 

          Taxes upon as Profit of particular Employments
          Taxes upon the Capital Value of Land, Houses, and Stock 

     Taxes upon the Wages of Labour 

     Taxes which, it is intended, should fall indifferently upon every different Species of Revenue 

          Capitation Taxes
          Taxes upon Consumable Commodities" 
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