Efficient Public Revenue
As has been shown, most taxes have a significant administrative and "deadweight" burden. They weaken trade, lead to lower production, act as a disincentive to labour and to capital investment. The absence of site rental or land tax further compounds these problems.
Not all taxes are equal in these effects. Some are relatively better at others in the efficiency and fairness of their collection. Adam Smith devoted over a third of his "An Inquiry into the Nature and Causes of the Wealth of Nations", to matters concerning public revenue collection.
When examining the different forms of taxation, Smith establishes four principles of efficiency which are still used today.
"The subject 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 tax each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, and the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person."
"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."
"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."
Smith noted there were really only two types of taxation that were suitable according to these principles: a transaction tax on luxury consumables and a tax on ground-rents (the annual value of holding a piece of land).
Smith strongly distinguished between luxuries and necessities, but noted specific items were relative to place and time but also in accord to universal human needs (e.g., food, housing, clothing, medical necessities etc). Taxes on luxuries, which were to include tobacco, he considered excellent in that no one is obliged to contribute to the tax:
"Taxes upon luxuries have no tendency to raise the price of any other commodities except that of the commodities taxed... Taxes upon luxuries are finally paid by the consumers of the commodities taxed, without any retribution."
Even more so than luxury taxes, Smith positively applauded the employment of ground rental:
"Both ground-rents and the ordinary rent of land are a species of revenue which the owner, in many cases, enjoys without any care or attention of his own. The annual produce of the land and labour of the society, the real wealth and revenue of the great body of the people, might be the same after such a tax as before. Ground-rents, and the ordinary rent of land are, therefore, perhaps the species of revenue which can best bear to have a peculiar tax imposed upon them."
All other taxes were, according to Smith, either expensive to collect, as in the case of excise, or disincentives to produce, as in the tax on profits. He was particularly angered at taxes which required the invasion of privacy...
"To subject every private family to the odious visits and examination of the tax-gatherers... would be altogether inconsistent with liberty."
... but most of all, to taxes upon labour.
"In all cases, a direct tax upon the wages of labour must, in the long run, occasion both a greater reduction in the rent of land, and a greater rise in the price of manufactured goods, than would have followed from a proper assessment of a sum equal to the produce of the tax, [levied] partly upon the rent of land, and partly upon consumable commodities."
