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4. Binary Intervention: Taxation > 7. Canons of "Justice" in Taxation

B. Costs of Collection, Convenience, and Certainty

Even the simplest maxims must not be taken for granted. Two centuries ago, Adam Smith laid down four canons of justice in taxation that economists have parroted ever since.60 One of them deals with the distribution of the burden of taxation, and this will be treated in detail below. Perhaps the most “obvious” was Smith's injunction that costs of collection be kept to a “minimum” and that taxes be levied with this principle in mind.

An obvious and harmless maxim? Certainly not; this “canon of justice” is not obvious at all. For the bureaucrat employed in tax collection will tend to favor a tax with high administrative costs, thereby necessitating more extensive bureaucratic employment. Why should we call the bureaucrat obviously wrong? The answer is that he is not, and that to call him “wrong” it is necessary to engage in an ethical analysis that no economist has bothered to undertake.

A further point: if the tax is unjust on other grounds, it may be more just to have high administrative costs, for then there will be less chance that the tax will be fully collected. If it is easy to collect the tax, then the tax may do more damage to the economic system and cause more distortion of the market economy.

The same point might be made about another of Smith's canons: that a tax should be levied so that payment is convenient. Here again, this maxim seems obvious, and there is certainly much truth in it. But someone may urge that a tax should be made inconvenient to induce people to rebel and force a lowering of the level of taxation. Indeed, this used to be one of the prime arguments of “conservatives” for an income tax as opposed to an indirect tax. The validity of this argument is beside the point; the point is that it is not self-evidently wrong, and therefore this canon is no more simple and obvious than the others.

Smith's final canon of just taxation is that the tax be certain and not arbitrary, so that the taxpayer knows what he will pay. Here again, further analysis demonstrates that this is by no means obvious. Some may argue that uncertainty benefits the taxpayer, for it makes the requirement more flexible and permits bribery of the tax collector. This benefits the taxpayer to the extent that the price of the bribe is less than the tax that he would otherwise have to pay. Furthermore, there is no way of establishing long-range certainty, for the tax rates may be changed by the government at any time. In the long run, certainty of taxation is an impossible goal.

A similar argument may be levelled against the view that taxes “should” be difficult to evade. If a tax is onerous and unjust, evasion might be highly beneficial to the economy, and moral to boot.

Thus, none of these supposedly self-evident canons of taxation is a canon at all. From some ethical points of view they are correct, from others they are incorrect. Economics cannot decide between them.

  • 60. Adam Smith, The Wealth of Nations (New York: Modern Library, 1937), pp. 777–79. See also Hunter and Allen, Principles of Public Finance, pp. 137–40.