We now turn to book 5, chapter 2, part 3, article 4, which deals with taxes on
commodities.
Again, we're in chapter 2, and now in chapter 2, we're still in part 2 of taxes,
but we move to article 4 on taxes, which, it is intended, should fall indifferently
upon every different species of revenue.
Smith first considers what he calls capitation taxes. Today, we call them
head taxes, or sometimes poll taxes, and that's a fixed amount of money you
pay to the tax authority. Smith argues that this is simply too risky, you're
supposed to pay a fixed sum, yet in a given year, your income may be very
high or very small, and Smith sees this as inefficient and burdensome.
Smith now moves to taxes on commodities, and he immediately draws a critical
distinction between necessities and luxuries.
Smith argues that taxes on necessities will operate just like taxes on labor.
If you tax necessities, foodstuffs, for instance, cost more money, the
employer now has to advance the workers more so the workers can afford to buy
food, that means labor costs go up, prices to consumers go up, this is the case we
already considered last video, for Smith it's the same as simply levying a tax on
wages, that raises costs, it's passed along to consumers, Smith overall is not
a fan of taxes on necessities.
By the way, during Smith's time, as he notes, the main taxes on necessities in
Great Britain were levied on salt, leather, soap, and candles.
Smith was much more favorably inclined to taxes on luxuries. And it can be said
that taxes on luxuries and taxes on land were the two forms of taxation which
Smith found least bad. If you tax luxuries, luxuries, yes it is true, the
prices of those luxuries will go up. But in turn, wages do not have to go up,
because workers don't have to buy the luxuries, so you end up with a new
situation, with simply higher prices of luxuries, and essentially the same wages
as you had before.
By the way, when it comes to taxes on luxuries, three examples, which Smith
gives repeatedly, are taxes on beer, malt, and ale.
So then, who pays, or who bears the burden when luxuries are taxed? Well, it's quite
straightforward for Smith. The burden is born by those who buy luxuries, and who
have to pay the higher prices resulting from the tax. This tends to be relatively
wealthy people, and also in Smith's view, the payment is somewhat voluntary,
because necessities are something you have to buy, but luxuries are something
you want to buy, or don't have to buy, and if you're paying the tax, it's because you
can afford to, or because you have chosen something, which you don't actually need
to stay alive. Smith thought this was simply more fair.
There's one interesting passage where Smith notes that taxes actually can be too
high, not only in terms of discouraging productive efficiency, but also in terms
of collecting less revenue, and he's showing here an early understanding of
what later came to be called the laugher curve, and I quote, "A greater revenue
than what is at present drawn from all the heavy taxes upon malt, beer, and ale,
might be raised, it has frequently been said, by a much lighter tax on malt."
With a lighter tax of course, there will be more production, and there will be
less corruption, and there will be more reporting of production, and possibly
overall, a greater payment of total tax revenue.
Toward the end of article 4, Smith returns to criticizing the mercantile system, a
favorite target of his, and he argues that if you try too much to tax trade, well,
you get a lot of smuggling, and a lot of corruption, and that tends to reduce the
duties which are brought in. He also argues that when you tax trade under
the mercantile philosophy, taxation tends to become an instrument of monopoly,
rather than a tool for raising revenue.
By the way, if you'd like more perspective on this particular part of
Nations
in particular, with the time Smith himself spent working in the customs house.