Thursday, November 08, 2007

Adam Smith's Support for Progressive Taxation

Marc Lee writes in The Progressive Economics Forum (here) on progressive taxation and quotes Adam Smith’s Wealth Of Nations:

Some of the knee-jerk commentary in response to my paper has been about what an ideal, or fair, tax system should really look like. These people question progressive taxation. To them, I quote Adam Smith from The Wealth of Nations (from Wikipedia):

“The necessaries of life occasion the great expense of the poor. They find it difficult to get food, and the greater part of their little revenue is spent in getting it. The luxuries and vanities of life occasion the principal expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess. A tax upon house-rents, therefore, would in general fall heaviest upon the rich; and in this sort of inequality there would not, perhaps, be anything very unreasonable. It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion

The quotation is extracted from WN V.iie.6: p 842, where Adam Smith discusses taxes in the 18th century British economy.

I have no particular comments on progressive taxation, especially in relation to 21st century debates given the massive, completely different taxation regimes in Britain, the US and other rich developed countries, and the size of the government budget (from about 5 per cent of GDP to upwards of 30 to 50 percent across these economies).

The case for progression is sound; the rates at which progression is set is open to debate and is a matter for democratically elected governments. The modern case for a flat tax is compelling too, where it may have been unsound in 1776, given the absence of income tax on wages, the absence of council ataxes, valued added taxes, myriad ‘stealth taxes’, and the complexity of tax regimes and, above all their costs.

Selective quotations, out of context (and, if I may so, when not referenced by their authors, are unhelpful to readers, other than scholars familiar with his works) can lead to pointless debates about Adam Smith’s legacy, considering the importance of context when quoting from Wealth Of Nations.


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