The more liberal economists have tried to strictly demarcate functions which government should and should not perform. By ruling out various kinds of government intervention, the thrust, other things being equal, is to reduce total government taxation and spending. But they have offered us very few guidelines beyond that. If, for example, as in the case of Smith, the government is supposed to supply public works, how many should it provide and how much should be spent? There have been almost no preferred criteria, then, for total spending or for overall levels of taxation.
There has been more discussion of the distribution of taxation. That is, given, from some arbitrary external dictate, that the total level of taxation should be a certain amount, T, there has been considerable discussion of how T should be distributed. In short, the two main problems of taxation are: how much should be levied, and who should pay? and there has been considerably more thought devoted to the latter question.
But none of this has been very satisfactory. Again, the basic point of view seems to be that of a highwayman or slavemaster, interested in extracting the maximum from his charges while keeping their complaints as minimal as possible. In the discussion in eighteenth century France, there were two favourite tax proposals: proportional income or property taxation, or, as in the case of Marshall Vauban and later the physiocrats, a single tax on land, revenue to a fixed and visible source of income that seems fixed, unchanging, and therefore easy for the state to get at.
Adam Smith's discussion of taxation in the Wealth of Nations became, like the rest of his work, a classic setting the central focus for economic thought from that point on. And, like the rest of the work, it was a confused mixture of the banal and the fallacious. Thus, Smith set forth four ‘canons’ of ‘evident justice and utility’ in taxation, which were to become famous from then on. Of the four, three are banal: that the tax payment be made as convenient as possible for the payer: that the cost of collection be kept to a minimum since the state does not even benefit from these levies on the taxpayer: and that the tax be certain rather than arbitrary.
The substantive canon was Smith's first in the list: that tax be proportional to incomes. Thus:
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 a great estate, who are all obliged in proportion to respective interests to the estate.
In the first place, this passage is hopelessly confused in presenting as if they were identical two very different criteria for justice or propriety in taxation: the ‘ability-to-pay’ and the ‘benefit’ principles. Smith maintains that people's ability to pay taxes is proportionate to income: and that benefits derived from the state are proportional in the same way. Yet he offers no justification for either of these dubious propositions.
On ability it is by no means clear that people's ability to pay – however that be defined – is proportionate to income. What, for example, of the influence of a person's relative wealth (as contrasted to income), his medical or other expenses, etc.? And one thing is certain; Adam Smith presented no arguments for this bald assertion.
The idea that one's benefit derived from the state is proportional to one's income is even shakier. How precisely do the wealthy, by virtue of that wealth, benefit proportionately from the state as compared to the poor? That would only be true if the government were responsible for the wealth, by means of a subsidy, monopoly grant, or some form of special privilege. If not from special privilege, then how do the rich benefit proportionately to their income? Surely not from redistributive measures, by which the state takes money from the wealthy and gives it to bureaucrats or the poor; in that case, it is the latter group who benefit and the rich who suffer from this redistribution. So who then should pay for such benefits? The bureaucrats and the poor? And benefits from police protection or the public schools? But surely the wealthy could far more afford to pay for private provision of these services, and therefore the rich benefit less than the middle class or certainly than the poor from such expenditures.
Neither would it save the theory to say that since A, for example, makes five times as much money as B, that A therefore benefits five times as much from ‘society’ and therefore should pay five times the taxes. The fact that A makes five times as much as B shows that A‘s services are individually worth five times as much as B to his fellows on the market. Therefore, since A and B in truth benefit similarly from the existence of society, the reverse argument would be far more plausible: that the differential between A's and B's incomes is due to A's superior productivity, and that ‘society’, if indeed it can be held to be responsible for anything specific at all, can be held responsible for their equal core incomes, below that differential. The implication of that point would be that both persons, and therefore all persons, should pay an equal tax, that is, a tax equal in absolute numbers.
Finally, whatever society's claim to part of people's incomes may be, society – the division of labour, the body of knowledge and culture, etc. – is in no sense the state. The state contributes no division of labour to the production process, and does not transmit knowledge or carry civilization forward. Therefore, whatever each of us may owe to ‘society’, the state can hardly claim, any more than any other group in society, to be surrogate for all social relations in the country.