NCPA - National Center for Policy Analysis

Adam Smith On Taxes

January 24, 2001

Contrary to the distortions of a liberal California professor, who recently claimed the great economist Adam Smith would oppose George W. Bush's tax cut were he alive today, Adam Smith expressed concern in all his writings on taxation about the disincentive effects of high tax rates. He believed government should collect what it needed for its legitimate, limited functions, with as little cost to the economy as possible.

  • In his 4th maxim of taxation, Smith warned high taxes "may obstruct the industry of the people, and discourage them from applying to certain branches of business which might give maintenance and employment to great multitudes."
  • Later on in "The Wealth of Nations," Smith said, "High taxes, sometimes by diminishing the consumption of the taxed commodities, and sometimes by encouraging smuggling, frequently afford a smaller revenue to government than what might be drawn from more moderate taxes."
  • And, "A tax which tended to drive away stock (capital) from any particular country, would so far tend to dry up every source of revenue, both to the sovereign and to the society."
  • Smith was very much opposed to what we call the capital gains tax, writing that "All taxes upon the transference of property of every kind, so far as they diminish the capital value of that property, tend to diminish the funds destined for the maintenance of productive labor."
  • Likewise, he called the estate tax "cruel and oppressive."

Smith's views on taxation were consistent with his economic philosophy, which strongly favored private property and free markets:

"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things. "

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, January 24, 2001.


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