Taxes, from Best to Worst

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Adam Smth's "Four Maxims of Taxation" [emphasis added]

I. 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 expence of government to the individuals of a great nation is like the expence of management to the joint tenants of a great estate, who are all obliged to contribute in proportion to their respective interests in the estate. In the observation or neglect of this maxim consists what is called the equality or inequality of taxation....

II. 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. Where it is otherwise, every person subject to the tax is put more or less in the power of the tax-gatherer, who can either aggravate the tax upon any obnoxious contributor, or extort, by the terror of such aggravation, some present or perquisite to himself. The uncertainty of taxation encourages the insolence and favours the corruption of an order of men who are naturally unpopular, even where they are neither insolent nor corrupt. The certainty of what each individual ought to pay is, in taxation, a matter of so great importance that a very considerable degree of inequality, it appears, I believe, from the experience of all nations, is not near so great an evil as a very small degree of uncertainty.

III. 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. A tax upon the rent of land or of houses, payable at the same term at which such rents are usually paid, is levied at the time when it is most likely to be convenient for the contributor to pay; or, when he is most likely to have wherewithal to pay. Taxes upon such consumable goods as are articles of luxury are all finally paid by the consumer, and generally in a manner that is very convenient for him. He pays them by little and little, as he has occasion to buy the goods. As he is at liberty, too, either to buy, or not to buy, as he pleases, it must be his own fault if he ever suffers any considerable inconveniency from such taxes.

IV. 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. A tax may either take out or keep out of the pockets of the people a great deal more than it brings into the public treasury, in the four following ways. First, the levying of it may require a great number of officers, whose salaries may eat up the greater part of the produce of the tax, and whose perquisites may impose another additional tax upon the people. Secondly, it may obstruct the industry the people, and discourage them from applying to certain branches of business which might give maintenance and unemployment to great multitudes. While it obliges the people to pay, it may thus diminish, or perhaps destroy, some of the funds which might enable them more easily to do so. Thirdly, by the forfeitures and other penalties which those unfortunate individuals incur who attempt unsuccessfully to evade the tax, it may frequently ruin them, and thereby put an end to the benefit which the community might have received from the employment of their capitals. An injudicious tax offers a great temptation to smuggling. But the penalties of smuggling must rise in proportion to the temptation. The law, contrary to all the ordinary principles of justice, first creates the temptation, and then punishes those who yield to it; and it commonly enhances the punishment, too, in proportion to the very circumstance which ought certainly to alleviate it, the temptation to commit the crime. Fourthly, by subjecting the people to the frequent visits and the odious examination of the tax-gatherers, it may expose them to much unnecessary trouble, vexation, and oppression; and though vexation is not, strictly speaking, expence, it is certainly equivalent to the expence at which every man would be willing to redeem himself from it. It is in some one or other of these four different ways that taxes are frequently so much more burdensome to the people than they are beneficial to the sovereign.

- Adam Smith, Wealth of Nations, Book v, Chapter 2, Part 2, "Of Taxes" ,/p>

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Taxes, from Best to Worst

Good Taxes

These taxes have generally beneficial effects on the economy, beyond funding government itself. That is, failure to collect these taxes creates problems. In a sense, they are payments for privileges, and not genuinely taxes at all. They are also the only taxes that can be based entirely on public information or collected in exchange for access to public amenities.

Land Value Tax

Land value tax reconciles free-market principles with the concept of the earth as a commons. It is the most progressive tax, because it is the only tax that is not passed on to users. It prevents the monopolization of land, stabilizes real estate prices, promotes economic vitality and efficient land use, and has been recognized for millenia as the most ethical tax. It is easily assessed and based entirely on public information. It also correlates better with benefits received than any other broad-based tax. All government expenditures that are not complete wastes of money increase or maintain land values.

Resource Extraction Royalties

Royalties take for the public a value that is otherwise a windfall for the owner of the mineral rights. Beyond a certain point, they slow the extraction of non-renewable resources and have a preservation effect. They inhibit economic vitality in the short run less than income taxes, and far less than sales taxes and payroll taxes. In the long run, preserving resources benefits economic vitality.

Pollution Charges

Those who pollute are, in effect, using public air and water as storage for their toxins. In doing so, they reduce the enjoyment of the air and water for everyone else. They should pay to do so, for the same reasons that people should pay for the land they hold for themselves.

Monopoly License Fees

In many cases, licensed monopolies are unnecessary, and the license restrictions should be abolished. Where licensed monopolies are necessary, the value of the monopoly premium should be collected by the public, not by the monopolist.

Congestion Charges

Congestion charges are the best way to prevent overuse of public amenities. They differ from user fees in that they are adjusted to prevent overuse, not to pay for the amenities themselves.

Bad but Tolerable Taxes

These taxes have good and bad elements, but should be resorted to only when the above options are not available.

Real Property Taxes

The property tax is really two taxes. The portion that falls on improvements is destructive, but the portion that falls on land value is so vitally important that, where a land tax option is not available, it is the best general-revenue tax. It is far more progressive than people realize, because it falls substantially on corporate-owned and absentee-owned property. It is not passed on to tenants, because it is more burdensome to landlords without tenants than to those with tenants. It is the best of the bad taxes.

General Wealth Taxes

Wealth taxes go beyond property taxes to fall on additional forms of wealth and on instruments that claim wealth. They are more progressive than income taxes, but less progressive and more economically destructive than the taxes listed above.

Inheritance or Estate Taxes

Estate taxes are general wealth taxes levied at the time of transfer from the (usually deceased) owner to beneficiaries. While they have the same general effects as wealth taxes, they also have an unnecessarily disruptive effect of a high rate levied at a single point, as opposed to a lower rate levied annually.


Inflation is a transfer payment from the holders of money and financial obligations to the indebted. If all debts were legitimate, inflation would rank much further down the list. If there were a way to separate legitimate debt from the results of banking privilege, it would rank much higher.

User Fees

The difference between user fees and congetion charges are that user fees attempt to defray some or all of the use.

Income Taxes

Income taxes generally are less progressive and more economically destructive than wealth taxes. All are bad, but some are tolerable.

Asset Gains Taxes

Asset gains tax rates should be at least as high as taxes on ordinary income. These are often called "capital gains" taxes, but genuine capital doesn't gain; what gains is the capitalized value of privilege. Low rates on asset gains do not promote genuine investment in productivity the way accelerated depreciation of genuine capital does.

Corporate Income Taxes

Income taxes generally are less progressive and more economically destructive than wealth taxes. They tax the right people the wrong way, and end up falling on poorer people indirectly. However, corporate privilege is very real, and there is no injustice in making the recipients of privilege pay for the privilege. Those who complain of "double taxation" should note that it is not strictly necessary for a business to incorporate. Clearly, the advantages of incorporation outweigh the costs of corporate income taxes, or else people would simply form unincorporated partnerships.

Graduated Income Taxes

A sharply graduated income tax falls on the right people the wrong way. That is, it falls on people who should be paying the good taxes above, but give them perverse incentives that tend to slow the economy, lower wages, and drive up rents and other prices. They reduce the funds with which rich people can monopolize land and bid up other privileges, but they also give rich people an incentive to apply what funds they have to assets that produce no income, and consequently create no wealth and provide no jobs.

Intolerably Bad Taxes

These taxes are so regressive and destructive that every effort should be made to eliminate them.

Flat Income Taxes

Flat income taxes fall just as hard on dollars needed to pay for food, clothing and shelter as on dollars used to bid up the value of privileges.

Sales, VAT and Gross Revenue Taxes

These taxes fall mostly on middle-income and low-inome people, who spend their entire paychecks, while more affluent people have the option of investing their income, sales-tax free. Exempting food and clothing makes these taxes less regressive at the very bottom, but such exemptions only single out middle-income people more. They are still regressive when middle income people are compared with affluent people.  Sales taxes also destroy commerce, and they give established businesses an artificial competitive advantage over start-ups.

"Sin" Taxes

Taxes on tobacco, alchohol, gambling, etc., mostly fall on people who are sinning against themselves, while the "good" taxes tend to fall on those sinning against society. While one could justify a tax on tobacco to fund lung cancer treatment or lung cancer research, using such taxes for general revenue is just taking advantage of the unfortunate. It is not even clear that these taxes discourage self-destructive behavior.

Tariffs and Excise Taxes

These taxes tend to benefit favored interest groups rather than benefit the public interest. A $1,000 tax on a foreign car allows the maker of an American car to charge $1,000 more. The better way to protect American jobs is to replace income taxes (particularly on workers) with the good taxes listed at the top of this page.

Earned Income and Payroll Taxes

These are the worst possible income taxes, collecting nothing from the return to privilege and everything from hard earned labor. They are usually levied at the state and local level because it is more difficult for ordinary workers to move to avoid taxes.

Deed Transfer Taxes

There is a mistaken belief that deed transfer taxes inhibit land speculation. However, the most destructive element of land speculation is in holding land out of use. Deed transfer taxes fall on those who let go of land so it can be used. Especially where there are adequate land value or real property taxes, deed transfer taxes slow the transfer of land from non-users to users.

Per Capita Taxes

The idea that each person (or each working person) should pay a fixed amount of taxes without regard to wealth or income is obscene. Yet some localities levy taxes like this because poor people can't leave or work less to pay less.

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