5.2 The Sources of Public Revenue

Objections to taxation itself aside, Smith addresses some of the schemes by which taxation is inflicted upon a population:

Taxes on Land

Taxes upon land are differentiated from rent in that a renter pays for the use of land he does not own, whereas the citizen is taxed on land that he owns, generally based on the expanse and valuation of his property.

It's noted that, at certain times in Britain, there has been conflict between the rent collected by landowners and the taxes charged of them for the same land. A landlord could find himself in a position where the taxes on land consumed the majority of the rent paid by tenants, or even in instances where taxes exceeded rent, and the landlord was obliged to pay the difference. (EN: Indeed, the increase of land taxes and control of rent is a highly effective scheme for the state to seize entire estates that has been used in various nations over time.)

Alternately, tax can be charged to landlords as a percentage of rent they receive as income of their own tenants (EN: At which point, it ceases to be a land tax and more resembles an income tax.) While this alleviates the problem of landlords being bankrupted by taxes that exceed rents, it results in taxes being assessed disproportionately among a landlord who charges high rents, one who charges lower rents, and yet a third landowner who uses his own land, and introduces many opportunities to avoid paying one's full measure of taxes.

Taxes on Houses

When taxation is placed upon houses, as opposed to land, the difference is that the taxation is not directly connected to any act of production: then house is merely the dwelling of its inhabitants and generally is not used in the production of goods. However, it is done based on the estimation that the tax on the house will be paid from the wealth of inhabitants.

The tax levied on a house is based on the value of the structure itself (the cost to build it), generally with the notion that the more valuable a person's home, the greater their personal wealth or income. Aside of the value of the structure, the land upon which it rests may be taken into consideration - an entire property being of greater value if it is attached to a larger plot of land - as are the values of other structures on the property.

There follows some consideration of specific details, such as an instance in which a person builds a house on land that belongs to another party (rent may be divided among them) or how to handle taxes on a property where it is rented (the determination of whether tenant or landlord is charged the tax fluctuates but is ultimately irrelevant because the renter either pays taxes directly or indirectly, in a situation where the tax is collected from the landlord who accounts for it in charging a higher rent).

The main drawback to house-taxes are that the house is not necessarily an accurate indication of income. A person who had great income and built a stately home may lose that income, yet still live in the home, and be expected to pay taxes as if he still had the income. Likewise, a person who inherits a house may not have income proportionate to the value of the house. As a result, the victims of misfortune and fortune alike may stand to lose their homes for their inability to pay taxes based on the value of their houses.

Another unfortunate situation is the landlord who has unoccupied rental units, who is expected to pay the taxes on vacant properties while being unable to obtain rent from a tenant. However, at various times, unoccupied properties have been exempted from taxes.

Another drawback is the necessity of the state to maintain a large number of low officials (again, a situation that lends itself easily to corruption) to assess the value of each time, with the added indignity of having to open one's home to a government official for inspection. Various methods have been attempted to make the inspection process more efficient - counting the number of chimneys or windows - but these only led to adjustment sin construction techniques to reduce the number of "taxable" features.

The chief objection of house taxes is in their placement of a heavier burden of taxation on the poor when compared to the rich. While it is generally true that people with more money have larger homes, it is not proportional: the home of a person with triple the income of another might only be 1.5 times as large, hence real estate taxes were visited disproportionately in terms of the share of income collected.

Taxes on Production, Revenue, or Profit

An example of tax on production is tithing, a practice in which the state would claim one part in ten of any crop grown. However, the application of production taxes can be applied in a broader sense to any productive act - in that a portion of any manufactured good may be seized by the state.

The addition of money grants further convenience, in the state's ability to demand cash payment, and save itself the necessary of brokering or bartering seized goods to obtain the specific items it needs. However, this introduces the difficulty of assessing taxes, as goods must be counted, graded, and valued by the state to accurately gauge the amount of taxes owed - and a large number of low-ranking officials

Historically, taxes on production have varied between ten percent (a "title") and twenty percent of goods produced, and have been practiced in various ages and in countries.

Perhaps the only positive thing Smith has to say about this method of taxation is that it does not discourage production: the producer will profit more or less according to his production in equal measure to the taxes he pays, provided the percentage is fixed at a specific rate for any level of production.

Taxes on revenues and profits are discussed separately, but they seem to be of the same nature. Revenue is derived from production, but covers only that amount of product that is sold - such that taxes are not paid on inventory until it is sold, and any product produced for one's own consumption is not taxable. The tax on profits is likewise a revenue tax, discounted for any expenses undertaken to produce revenue.

(EN: I expect that the details of what is taxed and what is exempt balance against a rate of taxation. That is, the smaller the proportion of goods that is subjected to tax, the higher the percentage of taxes - such that in the end, the government gets the gross amount of revenue it requires, and argument over how to apply the tax is largely incidental.)

Taxes on Wealth

Taxes on wealth are similar to taxes on houses, except that instead of being related to real estate alone, these taxes are assessed based on all materials a person claims as his own possession. This may include the values of an array of things: his real estate, material possessions, financial assets, etc. (EN: and as above, the lesser the amount of things taxed, the higher the rate.)

Smith notes that it is difficult to assess wealth with much accuracy. A person who wishes to protect their wealth from taxation has many options for concealing it, especially in a setting such as Europe with many small, independent nations in such proximity: a person could move funds and goods to a location where they pay the least taxes, or shift them temporarily to hide them from assessment. (EN: Swiss banking is explicitly mentioned as being used for this purpose.) Most things, besides real estate and those things tied to it (such as crops in the field or cattle in a stable) can be concealed with relative ease.

However, examples are given of instances in which such a tax was generally believed to be paid with great fidelity - generally, towns and small republics, where a person's reputation is well known, and where taxation is extremely modest and there is positive public sentiment about government.

Taxes on Sales

Another approach to taxation is to levy a tax that must be paid upon the sale of merchandise. This may be seen as analogous to a tax on revenue, paid by the buyer instead of the seller, but it is often applied to very specific items that have high value, high necessity, and can easily be monitored.

It is common, for example, to impose taxation on the sale of ales and liquors, tobacco, sugar, and other luxury goods as it is perceived that a person who can afford such items can also afford to pay taxes. However, taxes have been placed on common items as well, such as wheat or cotton though these taxes are generally assessed of a buyer who will make use of them for production - the weaver and the baker pay taxes for materials used to make bread or cloth. The cost is borne by the consumer, albeit indirectly.

Some consideration is given to the taxes on commodities in the feudal era, where a lord may not have had sufficient private forces to compel payment of taxes by his vassals, but had sufficient force to threaten the peasants into paying taxes - to demand payment of a farmer or shepherd and, if refused, to seize a portion of his crop or flock. (EN: But this would be closer to a tax on wealth or property than on sales.)

Taxes upon the Capital Value of Land, Houses, and Stock

Any payment demanded by the state of its citizens is in fact a tax, though it may be called by another name. For example, a fee charged for the registration of a deed of ownership of the cost of a license to sell or transport goods is a form of taxation. Called by any name, and regardless of the ostensible reason for which it must be paid, the nature and effect of taxation remains the same.

Where rent is charged and paid for the lease of land, it is by virtue of its productive use. In determining the amount of rent to demand or offer, the landlord and tenant must each estimate the amount the can be produced from the cultivation of the land, in excess of the amount that would be needed for the sustenance of those who labor upon it, to determine what rent may feasibly be paid.

If such consideration is taken into account when determining the taxation of land, it is entirely incidental. In some instances, the tax upon land used as a means to withdraw some portion of the revenue generated by the use of that land. In other instances, taxes may be implemented with the ultimate motive to seize the property or take from the owner some part of his wealth to ransom his own lands from seizure. In still others, taxes are placed on the value of land with indifference to the consequences.

A periodic tax may be placed upon land for the mere privilege of owning it, indifferent to the owners' use of it or any profit derived from it, which is justified as a contribution to the expenses of state in defending the territory of its citizens. Where land is rented, this amount is figured into the landlord's demand for rent of land, though he likely would have paid the same amount even if the land was untenanted.

It is also common to place a tax on the sale of land upon the seller, whose proceeds of sale are a considerable sum of ready cash that incites the avarice of the state. While such funds are collected from the seller, they are ultimately paid by the buyer, as the seller will in negotiations consider this net proceeds from the sale.

Taxes are levied on the improvement of land: where any house is built, a tax is collected (often in the form of a permit to build) to collect a share of the profits of the builder, but this is likewise an increase in the cost of the buyer as the cost of taxation is figured into the price of lanor.

Estate taxes are also used to seize the property of the dead unless it is ransomed by those who have inherited it. While taxes can be placed on the inheritance of other items, such as movable property or money, they are difficult to enforce because such transfers can take place without the awareness of the state - but because land is defined and held by a deed, the state is aware of any act of transference, which makes it a certain and easy target for such taxation.

It is plainly cruel and oppressive to aggravate the loss inflicted upon a family by the death of its master by using this event as an excuse to seize their property as well, and it should be beneath the dignity of state to act as a scavenger upon the corpses of its citizens, but such is the behavior of certain states.

The earliest incidence of estate taxes can be found in ancient Rome, under the rule of Augustus: the Vicesima Hereditatum demanded payment of the twentieth penny (five percent) of all inheritances to the state. Under feudal law, a vassal was required to pay a fine of ten percent of his wealth to alienate from a lord without consent, and this was applied when death was the means of such departure. In the present day, the Dutch implement a tax on inheritance, but reduce the amount of tax demanded when the property of a husband is passed to his wife, or vice versa, or when property is inherited by direct descendants (children) as opposed to more distant relations or non-relatives.

As an alternative to taxes on land, some nations implement a tax or duty on the transfer of goods - this more directly consumes the product of land without detracting from the value of the land or laying an arbitrary fee on the possession of unproductive lands. Such duties are imposed by Britain in the form of stamp taxes, in which any good intended for trade rather than consumption must be licensed for sale by means of paying a tax (the stamp may imply a mark on the goods themselves, or a seal affixed to the bill of sale). The duty varies according to the good in question and the distance at which it is traded - luxury goods paying a higher tax than common consumables, and goods for foreign trade paying a higher duty than domestic trade.

In Smith's time, stamp-duties were a recent invention, conceived less than a century prior to his writing, but had become virtually universal in all of Europe. "There is no art which one government sooner learns of another than that of draining money from the pockets of the people." Such taxes may be collected of the seller, but he considers it an expense of operation just as any other, and it is ultimately recovered in the price he charges to the buyer.

In all instances, taxes may be proportioned to the value of the property transferred, collecting an unequal amount but an equal share of revenue from each citizen. When they are not so proportioned, they are charged in equal amount, but those whose properties are less valuable contribute a greater share of the revenue, making the tax more burdensome to the poor than to the wealthy.

Taxes upon the Wages of Labor

The wages paid to workers are determined by two factors: the market for labor and the price of provisions. Employers strive to pay as little as possible for labor, and workers strive to get as much as they can, and the market for labor determines the price an employer must offer. This is, however, bounded by a minimum wage workers can accept, which is determined by the cost of provisions needed for their sustenance.

Placing a tax on the wages of labor can only cause the amount employers must offer, regardless of whether the tax is levied on the employer or the employee - the real income of any work to the laborer being the amount he receives for his work.

Additionally, a tax on labor increases the cost of goods in a market. Where an employer must pay an additional measure for labor, he will pass along that additional cost in pricing his own goods. Ultimately, the payment of taxes in wages falls upon the consumer.

This also figures into the needs of the worker in accepting a wage: the amount he must demand must consider not only the decrease of his income due to the direct payment of tax, but the increase in spending due to the ultimate effect. As such, a tax of ten percent on labor may raise the price of goods by five percent (the actual amount will vary according to the portion of the cost of production that is spent on labor), and the worker must then demand fifteen percent more pay to have sufficient income to meet his needs.

Taxes on labor consume only a certain portion of production - and discourage production if they are an undue burden. Should taxes raise the amount that must be paid for labor to the point they consume more than the employer can pay and turn a profit on his goods, the employer is discouraged from hiring labor. Should taxes consumer more of his wages than a laborer can pay and still have enough income to provide for his needs, he is discouraged from working for others (but instead, can seek to independently produce for his own consumption, which is not subject to taxation.)

While tax on labor is "absurd and destructive," it is used as a means of gaining revenue for the government in many countries. In some instances, an employer is taxed for his use of labor, in other instances it is collected from the employee, and in the worst of cases labor is taxed on both ends - but ultimately, the effects are the same, no matter how it is collected: it increases wages and he cost of goods, decreases the profitability of labor for employer and worker alike, and decreases the prosperity of anyone who must trade for goods.

Capitation Taxes

Capitation taxes are an amount collected from each individual (literally, on the head of each individual) who merely resides within a state. It is a convenient tax to collect: the state need to estimate the value of land or goods, merely demand it of each citizen the collector confronts, and the citizen is unable to hide his person.

Such taxes are not necessarily linked to the wealth a person may posses or the quantity of revenue he produces - it is a tax for the privilege of his mere existence, justified by the state as his share of the expenses of the state: a man who is rich and a man who is poor, one who has reaped great profit and one who has suffered a great loss, can be said to benefit equally from services of their government, and a capitation tax collects from them in equal measure.

However, equality in amount is disparity in share: a fixed tax upon the head of each citizen is more burdensome to the poor, who have and produce less, than it is to the productive and the wealthy. In some instances, the tax may be collected differently among the different classes or professions of men (a lower tax to a farm laborer to a merchant),but even this gives grievance to those of a given class or rank who are less wealthy or successful in trade than their peers.

There is some discussion of the variability of capitation taxes, the uncertainty of which has aggravated the grievance. The example is given of France, whose capitation taxes have not been heavy, but the uncertainty of the amount causes great anxiety - though the grievance may be exacerbated by the fact that the superior ranks of citizens (nobility, officers, etc.) are charged a fixed tax whereas the lesser orders do not know the amount they must pay until it is demanded of them.

The effect of a capitation tax is the equivalent to that which has already been discussed in terms of other taxes, as each citizen required to pay the tax must consider how he will raise the funds to pay it. To the landowner, it must be raised from the rent of his land; to the farmer, from the surplus of his crops; to the manufacturer or merchant, from the sale of product; and for the laborer, from the wages he is paid. Ultimately, all result in the increased price of goods in the market.

Taxes upon Consumable Commodities

It is exceedingly difficult for the state to levy a tax based on the net revenue of productive activity - it requires the constant monitoring of output and consideration of the costs of production to levy a tax on the producer of goods. However, it is a much simpler matter to tax the proceeds of sale of goods to consumers, by monitoring the activity in trading centers or the movement of goods intended for sale, and levy a tax upon the consumption.

As with other forms of taxation, consumption taxes increase the price of goods in the market, the tax being levied at or around the time of sale. As such, the are an expense to the merchant, influencing the price he seeks to collect for his wares and the price he will pay for them, which ripples outward to decrease the revenue the producer may obtain from the sale of his goods to merchants and the amount of goods that can be enjoyed by those who must purchase them from their own means. Or in sum, taxation decreases the prosperity of the people to fatten the coffers of the state.

A distinction is generally drawn between necessities and luxury items, wit the latter being taxed more heavily than the former. However, this distinction is arbitrary an inconstant. Most clothing is, strictly speaking, not necessary for the support of life except in colder climates. Though the established custom and laws of decency forbid people from going naked, which has rendered clothing to be considered a necessity. In some cultures and nations, beer and ale are considered to be basic foodstuffs, hence necessities, whereas in England, they are considered luxuries, even to the point of discouraging their consumption. But to some degree, every culture has certain items - food and drink, clothing and shelter - that it considers to be necessary rather than luxury items.

A tax upon necessities operates exactly in the same manner as a tax on the wages of labor. As noted previously, the interest of the laborer in seeking employment is to trade his labor for goods, and to increase the cost of goods is no different to decreasing the amount of his compensation in assessing what he can obtain for his service. In the negotiation of wages, a laborer can forego the amount necessary to obtain the level of luxury items he would prefer to enjoy, but he cannot sacrifice the amount necessary to obtain the level of necessities he requires for sustenance of life.

However, the notion that a tax on luxuries does no harm, and the supposition that a higher price of luxuries will merely decrease the consumption of such goods, has not been evidenced in practice. It is commonly observed that the poor "continue to indulge themselves of the use of [luxuries] without regarding the distress this indulgence might bring upon their families." Even those members of the poor who have the sobriety and good judgment to sacrifice luxuries they cannot afford are deeply resentful of the necessity of doing so, as the poorest levels of society cherish the few luxuries they can obtain. The taxation of tea, sugar, and tobacco cause them grave discontent and resentment. (EN: The riot later known as the "Boston Tea Party" occurred about three years before the original edition of this book.)

There is also the separate issue of the taxes paid on goods used in manufacture, which becomes a tax on the goods to the consumer who pays for them - e.g., the tax on the leather sold to the shoemaker becomes an expense and is reflected in the increased price of shoes. For goods that are manufactured through several stages of production, the taxation is compounded - in a pamphlet written by Sir Matthew Decker, some goods were listed in which taxes had been assessed four or five times, greatly increasing the cost of finished goods.

The method of taxing commodities varies: they may be collected in a lump sum (which is advocated by some writers of Smith's time, but for which Smith points out some of the obvious flaws - the difficulty of assessing consumption, the hardship of having to make a single large payment) or upon their sale or transfer, and they may be collected of the consumer, manufacturer, or merchant. For some commodities, the tax is collected all at once, but for others, it may be collected repeatedly over the years. One example of the latter is the tax that is collected annually of coaches, which may last ten or twelve years if they are properly maintained.

Taxes on Merchants

It is more common for taxes to be visited upon merchants than on any other class, although as previously discussed, any tax placed upon merchants is ultimately borne by the customers who buy their wares.

There is a cultural prejudice against the merchant profession that can be traced back to the feudal era, in which merchants were "townsmen" who were regarded by both nobility and peasantry with suspicion and distrust, as their profits were viewed with envy and considered to be extracted from the productive work of other men. Perhaps the only person more despised than a merchant in a nearby town is the merchant of a foreign land, who are generally distrusted as outsiders to a society, and are considered to be carrying away the wealth of the domestic population.

Moreover, it was found to be a matter of good politics for nobility to levy taxes upon the merchant class: when the price of goods increased to accommodate the expense of taxes, the peasants rallied against the greed of the merchants, not that of their lord, who was more rightfully to blame for the hardship inflicted upon them.

Smith reiterates some of the means by which taxes are levied upon merchants, many of which were previously discussed. There may be a general tax on all trade, taxes specific to certain goods, and additional taxes for the export or import of goods.

There is some extended discussion of excise taxes, levied against specific goods to discourage their use - most commonly is the tax in England on "spirituous liquors" on account of their "supposed tendency to ruin the health and corrupt the morals of the common people," ad the sense that taxation is used to increase the price and thus discourage consumption of them. History has shown that the level of taxation does little to discourage their use, much to increase the profits of those who sell them, and much to encourage their illegal manufacture and sale.

Taxes on transportation are likewise considered to be levied almost exclusively on the merchant class, as no other portion of the subjects of a nation are generally involved in the regular movement of goods over roads and waterways. Such taxes may be imposed on the crossing of certain roads (tolls) or may be levied on the vehicles of transportation (wagons and barges).

Unvarnished Robbery

When a state in need of revenue has exhausted all the justifiable means of collecting taxes, or when it feels secure enough in the oppression of its people to see no need to justify its actions, it simply takes what it desires from its citizens.

This is generally the last recourse of a state, but one to which governments have resorted throughout history. The consequences are such that there arises great public calamity, up to and including insurrection, or mass emigration.

The penultimate recourse, proceeding in some cases the unvarnished robbery of the citizens, is for the government of one state to borrow of a neighboring state, a topic to be considered at length in the following chapter.