Taxes, from Best to Worst
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 respectivelyenjoy 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.
Taxes, from Best to Worst
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 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.
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.
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
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 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.
These taxes have good and bad elements, but should be resorted
to only when the above options are not available.
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.
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.
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.
The difference between user fees and congetion charges are
that user fees attempt to defray some or all of the use.
Income taxes generally are less progressive and more economically destructive than wealth taxes. All are bad, but some are tolerable.
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.
Income taxes generally are less progressive and more
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
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
that tend to slow the economy, lower wages, and drive up rents and
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
These taxes are so regressive and destructive that every
effort should be made to eliminate them.
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
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
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
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.
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.
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.
The idea that each person (or each working person) should pay
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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