Adam Smith tax principles

January 27, 2017
What Can Adam Smith Teach Us

By Jared Rhoads

Federal tax returns are due soon, once again leaving some of us wondering where our money goes and what we get for it. Last year, federal tax revenue plunged 34 percent to $138 billion. With fewer people working and uncertainty surrounding the uptake of deductions, the IRS does not know what to expect this year. (On another front, at least the agency did promise to improve its toll-free telephone taxpayer support service.)

Perhaps the government could learn something from Adam Smith. In Chapter II of Book V of The Wealth of Nations (published in 1776), Smith proposed four principles of proper taxation. The section is titled, “Of the Sources of the General or Public Revenue of the Society.” His points are not flawless, but there is nevertheless a lot to agree with. From Smith:

1. The subjects of every state ought to contribute towards the support of the government, as nearly as possible … in proportion to the revenue which they respectively enjoy under the protection of the state.

2. 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-gatherer, who can either aggravate the tax upon any obnoxious contributor, or extort, by the terror of such aggravation, some present or perquisite to himself.

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.

4. Every tax ought to be so contrived as both to take out and 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.

If the government were to heed these principles, much would be improved. But we need to keep focused on the deeper financial problem, which is runaway government spending. Without a reduction in spending, the publicly-held portion of the national debt will double over the next 10 years. Entitlement programs such as Medicare, Medicaid, and Social Security are already running dry and threatening us with financial ruin.

If we have the moral courage to speak out against unfair taxation, then let us go one step further and demand smaller government, limited government: a government focused on protecting rights, not redistributing wealth.

Jared Rhoads is the director of The Lucidicus Project, an educational initiative to help medical students learn about the moral and economic case for capitalism.

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