4 principles on what taxes should and shouldn’t be, what From Adam Smith’s Wealth of Nations:
Before I enter upon the examination of particular taxes, it is necessary to premise the four following maxims with regard to taxes in general.
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 expense of government to the individuals of a great nation is like the expense 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. Every tax, it must be observed once for all, which falls finally upon one only of the three sorts of revenue above mentioned, is necessarily unequal in so far as it does not affect the other two. In the following examination of different taxes I shall seldom take much further notice of this sort of inequality, but shall, in most cases, confine my observations to that inequality which is occasioned by a particular tax falling unequally even upon that particular sort of private revenue which is affected by it.
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-gathered, 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, expense, it is certainly equivalent to the expense 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.
Let me try to simplify these ideas into 4 short bullet points:
- People should be taxed proportionate to their earnings. This is not supporting a progressive tax, but a flat tax — this means “20% of your income”, as opposed to “$3000 per year regardless of income”.
- Taxes should be applied fairly to everyone. The IRS shouldn’t be able to tax certain people differently than others, simply because it likes someone more than someone else.
- It should be convenient to pay taxes.
- Taxes should have low administration costs.
Where does the US stand today
I think in our current system we accomplish #1 admirably (in fact going beyond Smith’s suggestion with progressive rates). I also think we accomplish #2 quite well — the tax law may be complex, and loopholes may make it unfair overall, but at least it’s applied in the same way to everyone.
I think we fail miserably at #3 and #4, though. As far as convenience goes — sales taxes are convenient. We pay them when we buy stuff (Smith even mentions this type of tax specifically), they’re easy to pay, we just add on the amount and the computers take care of it. Income taxes, however, are a huge nightmare for everyone. They take hours of filling out forms. Most people are so inconvenienced, they are willing to hire someone else to do it for them. This is a clear violation of Smith’s maxim #3.
I also think we’re completely off the mark with maxim #4. The IRS employs in the neighborhood of 100k people. Even bigger than that is the number of people required to prepare income tax reports, and tax planning. There is clearly a huge cost requirement just in collecting taxes. These are costs that the public pays, but sees no benefit from.
There are a few ideas out there for how to fix some of these things; for example, eliminating income taxes completely would ameliorate problem #2 (income taxes have got to be the largest general tax pain for the typical American), and would also greatly benefit #4 as well. Not sayin’ it would be fair or work for other reasons, just sayin’ it helps on Smith’s Maxims.