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Written by Dr Eamonn Butler
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Thursday, 06 October 2005 |
In The Wealth of Nations, Adam Smith spelled out the principles of taxation.
People should contribute in proportion to their abilities.
How, when, and what is due should be clear.
Payment should be convenient.
The number of collectors and inspections should be minimized, and taxes should not discourage enterprise.
In the 250-odd years since then, we have found out a lot more about
taxation, and there is some pretty good analysis of it which allows us
to add a few more things on to Smith's list.
First, all tax is damaging. In terms of economic efficiency, it is best
if the damage is spread evenly across commodities, because then it is
spread thinner. Taxes should not favour some things and penalize others.
Second, taxes should be spread across time. We should not tax hard
today so as to generate lighter taxes tomorrow, nor – as is more
likely, knowing politicians – over-spend today and send the tax bill to
some future generation.
Third, taxes should be spread across people. They should not gang up on
the working population. When work is taxed, people work less. They take
fewer risks, because the risk/reward balance deteriorates – which means
less innovation for the society. And they learn less, because we learn
by doing things, so society's knowledge advances more slowly too.
All this to me suggests that we should move to an expenditure tax, or
to a lot more emphasis on an expenditure tax than on income and capital
gains taxes. And that it should not be riddled with exemptions for
politically 'good' things like new building work, children's clothes or
even books and newspapers. And that we should prune public expenditures
and keep the rate low. If we taxed everything at 10% – the biblical
tithe – my guess is that we would raise just as much revenue as we do
with the damaging and dispiriting taxes that we have today.
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