Course Hero. "The Wealth of Nations Study Guide." Course Hero. 28 Sep. 2017. Web. 22 July 2018. <https://www.coursehero.com/lit/The-Wealth-of-Nations/>.
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(Course Hero, 2017)
Course Hero. "The Wealth of Nations Study Guide." September 28, 2017. Accessed July 22, 2018. https://www.coursehero.com/lit/The-Wealth-of-Nations/.
Course Hero, "The Wealth of Nations Study Guide," September 28, 2017, accessed July 22, 2018, https://www.coursehero.com/lit/The-Wealth-of-Nations/.
In the previous chapter, Smith described the various sorts of public expenditures. Running a country, he pointed out, is expensive, and while some costs can reasonably be offset by tolls and fees, others cannot. To balance the budget, the sovereign must either levy taxes or rent out state-owned lands. The latter, he admits, seems like an appealing way to raise money, but it is ultimately counterproductive, since the crown lands are poorly administered and economically unproductive compared to privately owned lands. The sovereign would make more money, he suggests, by simply selling the lands off, which would yield mortgage revenue in the short term and lead to a wealthier tax base in the long run.
On the topic of taxes, Smith has much more to say. He first lays out four basic principles of taxation. Taxes should be levied in proportion to the wealth or income of the subjects. They should be "certain and not arbitrary," meaning the taxpayer knows in advance how much will be demanded. They should be levied at a "convenient" time—at the time of year when the taxpayer is most likely to have funds to pay. Finally, they should be "so contrived as both to take out and to keep out of the pockets of the people as little as possible." In other words, taxes should be collected with as little waste or overhead as possible.
In the remainder of the chapter, Smith breaks down the various taxes levied in England and other countries. Three sections deal with taxes on the specific income types discussed in Book 1: taxes on rent, on profit, and on wages. In a fourth section, Smith considers those taxes—such as income tax and sales tax—that "fall indifferently," rather than being tied to one of the three income types. Much of the discussion here is descriptive, with Smith merely reporting rather than judging the various systems. He does, however, point out that some systems are more invasive and therefore oppressive than others. The hearth tax, for example, required a tax official to visit each home and count its fireplaces, a practice that rendered the tax "odious" to the people. Similarly, a tax on the wages of labor is "absurd and destructive" since it disproportionately affects the working poor. Taxes on the price of luxury goods are less oppressive, but they are also harder to collect, since they encourage smuggling. Ultimately, Smith declines to declare any one tax system the best. All have their flaws, even if some are clearly more flawed than others.
Like the previous chapter, Smith's advice here is largely noncommittal, although his Enlightenment emphasis on liberty, fairness, and transparency shines through in various ways—such as his insistence on not overtaxing the poor. More interesting, perhaps, is the huge variety of tax schemes Smith manages to unearth in his survey of English and European internal revenue policy. Some of the creatures in this "tax zoo" are still familiar in modern times. A "tax on wages," for example, is now generally known as a payroll tax, and a "tax on profit" is usually called a capital gains tax.
Other tax schemes in Smith's lineup, however, might benefit from a quick explanation. The window tax, described in the section on rent taxes, is perhaps the oddest of the bunch—a type of property tax whose rate is tied to the number of windows in a house. Introduced at the end of the 17th century, the tax was progressive in structure. No tax was levied on the first few windows, but as the window count went up, so did the tax. In the early Victorian period, the tax came to be seen as retrograde and oppressive, with some property owners bricking up their windows to avoid payment. Later on Smith refers to a capitation tax, which in its broadest sense is just a direct tax levied on individuals, regardless of income. Smith, however, likely had in mind the French version of this tax, which originated about the same time as the window tax, and lasted until the French Revolution in 1789. Although the French capitation did not differentiate based on income, it did distinguish taxpayers by social class. The crown prince and his relatives paid more than a thousand times the rate charged to day laborers.