Is Adam Smith really it?

{mosimage}Whenever anyone talks about the design of a good tax system, it seems it’s only a minute or two before Adam Smith pops up in conversation. Which isn’t bad going for a man who wrote his last major book in 1776 and who bemused everyone by getting his image on the current £20 note.

What’s the reason? It’s simple. In that book, whose short title was The Wealth of Nations  he suggested there were four principles on which a tax system should be based. These might be summarised, using pretty much his own words, as

1. 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.

2. The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person.

3. Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it.

4. Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state.

These have been summarised using the following four words:

1. Equity

2. Certainty

3. Convenience, and

4. Efficiency.

It’s these maxims, as Smith called them, that are still discussed. But are they really the best, or most appropriate basis for a modern tax system? Are the ideas of a man writing before Jane Austen hit the shelves, for a community where slavery was still acceptable, and for a commercial world where canal building was becoming all the rage, the basis on which we want to plan a modern tax system?  Do his words even mean the same thing now as they did when he wrote them?

I’m not sure. I’d like to think that society has moved on a bit since 1776 and that maybe our perceptions on tax might have as well, to match the very different world we live in. I say so not least because these maxims seem to relate only to the role of government in the tax equation. I happen to think it’s a two sided issue. In addition, Smith’s maxims do not recognise the obligation of the State to the citizen with regard to the provision of public goods, and relate primarily to the practice of taxation rather than the principles that underpin it.

Finding an alternative set of principles is not that easy though, I’ll admit, and I’m not for one minute suggesting that  I have cracked this problem.  All I’m going to put forward is an alternative which might, I hope, more accurately reflect the relationships that do really exist in any tax system.

My inspiration is the UN’s Universal Declaration of Human Rights. My cause is not initially helped by the fact that they make no reference to taxation, although Article 29 implies that there is a universal duty of the citizen to the community of which they are a part, which could be interpreted to include an obligation to pay democratically agreed taxes levied upon them. However, I suggest the following principles relating to taxation can be derived from the relevant articles (whose numbers I show in brackets) of the Universal Declaration of Human Rights:

1. A State has a duty to protect its citizens; (3)

2. A State has a duty to provide public goods for its citizens; (22, 23, 25, 26, 27)

3. A State may not discriminate in the provision of protection or goods for its citizens; (1, 2, 3, 7, 8, 10, 21)

4. The extent of the provision to be supplied by a State shall (subject to achievement of those rights inherent in the Universal Declaration) be determined by democratically elected governments; (21)

5. The right of a State to determine its will shall not be constrained  by the actions of another State; (28, 29)

6. A State has the right to levy taxation; (implicit in the obligations imposed in Articles 3, 22, 23, 25, 26, 27 and 28 which could not be achieved if this were not true)

7. Any charge to tax must respect the right to hold private property; (17)

8. The charge to tax must not be arbitrary; (17)

9. Taxation must be imposed by law; (12)

10. All citizens of a State shall be subject to the same taxation laws; (1, 2, 7)

11. Each citizen has the duty to pay the tax due by them; (the corollary of 21 and implicit in 29)

12. The citizen shall have the right to appeal against any charge to tax; (8, 10)

13. The State may only oblige a citizen to disclose that data required by law when requesting information for the purposes of assessing their liability to tax; (12)

14. A citizen shall have the right to leave the State and its protection and shall as such deny themselves the right to its provision but be relieved of the obligation to contribute to its upkeep. (13, 28, 29).

These don’t have the brevity of Smith’s maxims, I grant. But they touch on issues that he never dreamed of, and which are of some significance in the modern world of taxation.

Is this a basis for assessing tax proposals? Precisely because they are based on principles that were not determined for tax alone, and precisely because they are principle rather than practice based they relate to fundamental issues. Doesn’t that make them more useful than lists based solely on the sentiment of a point in time? Or are they too the product of a post World War 2 dream?

But if so, what would be better?

Article Added Friday, 22 August 2008

Your attention is drawn to the disclaimer on this site, which applies to the content in this section.