Wednesday, September 07, 2005

Flat Tax, Adam Smith and a Critic

“Why flat means unfair” ”A single rate of tax would only help the better off. The real motivation of those who propose it is to cut expenditure and public services”
by David Walker in The Guardian, Tuesday 6 September 2005

David writes:

“the basic case for progressivity remains the one made by that celebrated socialist Adam Smith, who said taxes should be based on equality of sacrifice. The extra income earned by a rich person is simply worth less than the extra pound in a poor household. Which is why a flat tax was, and is now, evidently unfair.”

Ignoring the attempt at satire (assuming it was satire and not sarcasm), he brings in Adam Smith, presumably in a pathetic attempt to embarrass the Adam Smith Institute (who can well look after themselves in these matters) who have recommended at Flat tax.

I suggest we look a little closer at what Smith says.

Smith, writing in 1776 (revised in 1790 just before he died) commented on taxation policies in Europe in the 18th century, a century before the taxation system – and the public sector – took the shape and size they are now. He reported (i.e., did not invent or originate) the four common maxims of taxation (please, not ‘canons’), the evident justice and utility’ of which, ‘have recommended them more or less common to the attention of all nations’ (WN V.ii.b.6: 827).

The first maxim states that: subjects ought to contribute towards the support of the government, ‘as nearly as possible, in proportion to their respective abilities’ (WN.V.ii.b.825).

He also, in the matter of house rents (not income), wrote that a tax on them ‘would in general fall heaviest on the rich [they pay higher rents for more magnificent houses than the poor]; and in this sort of inequality, there would not, perhaps, be any thing very unreasonable. It is not very unreasonable that the rich should contribute to the publick expense, not only in proportion to their revenue, but something more than in that proportion’ (WN V.ii.e.6: 842). This is hardly a rallying cry to ‘soak the rich’! It concerned taxes on house rents where the advantages of being rich were obvious – tax by post codes?

On taxes on the wages of labour, Smith was very clear that as ‘the wages of the inferior classes of workmen’ determined whether whatever passed for subsistence was ‘liberal, moderate, or scanty’, and he favoured no tax on such wages at all (WN V.ii.i.1: 864). The proposals for a Flat Tax exclude all earnings below a high threshold, addressing this part of Smith’s advice. Where it should be set is a matter for debate – the higher the better in my view, and all the thresholds and percentages can be adjusted in the light of experience.

Smith endorsed proportionality, with slight hints that in specific cases it could be ‘more than in proportion’, even targeted on the luxury consumption of the rich if this could be managed with an economy of administration (the 4th maxim [WN V.ii.b.5: 826] as ‘commonly’ practised in the 18th century, but less so now, e.g., some taxes raise little more than they cost to collect, adding in all the unpaid costs of completing the paperwork and wasted on tax avoidance/evasion).

The various formulations to interpret ‘equality of sacrifice’ are too complex to go into here (see Richard Musgrave: The Theory of Public Finance) other than to say it is not obvious which is the one that Smith would have supported (it was J. S. Mill who formulated the concept). To argue that he would have opposed a Flat Tax to address the many problems of today’s tax and public expenditure regimes is simply daft.

On the basis of Smith’s views on the crucial role of what drives some people to extraordinary efforts to ‘better themselves’ by work and enterprise, and in doing so enable thousands of others to do the same, especially the otherwise destitute and poor (are not we all three pay checques from severe poverty?), I conclude we can safely say he would give the proposal a close and unbiased examination. He would not knee-jerk dismiss it in pursuit of some ideological goal, or because he was sympathetic to those who gain from the current tax system, mainly, and almost without exception, those who administer it, those who receive their income from it and those who receive their income from servicing the foregoing.

In this last respect, I note that David Walker is the Editor of the Guardian’s "Public", a monthly aimed at Executives in the Public Sector, of which there are many; a slice of modern life of people who gain a great deal from leaving the system as it is; not exactly a case of David going to barricades for the very poor, is it?


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