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12 - Adam Smith and the Search for an Ideal Tax System

Published online by Cambridge University Press:  13 January 2010

Isaac William Martin
Affiliation:
University of California, San Diego
Ajay K. Mehrotra
Affiliation:
Indiana University, Bloomington
Monica Prasad
Affiliation:
Northwestern University, Illinois
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Summary

In this chapter I use Adam Smith's 1776 treatise, An Inquiry into the Nature and Causes of the Wealth of Nations, to show how the present U.S. tax system has strayed from capitalist ideals at the same time that we imagine ourselves the model capitalist state. I use Adam Smith (who some call the first sociologist) because of Smith's status as the father of capitalism and modern economics as well as for the interplay in Smith's work between the empirical and the philosophical.

I conclude that Smith's ideal tax system consists of two complementary taxes: a flat rate consumption tax with a refundable credit large enough to support what we now call the living wage, combined with a flat rate wealth tax. By investigating the specific conditions that Smith faced, I conclude that his ideal was impossible during his lifetime because of the structural, institutional, and cultural conditions present in eighteenth-century Britain. Based on his writings, I show that Smith himself understood that his larger concepts were not attainable given the administrative restrictions of his era (Salomon 1945). However, Smith also believed that ideas can speak across time and culture. In this chapter, I explore both Smith's ideal and the ways in which he tempered that ideal because he was aware of, and worked with, the limitations of his own time. The dual tax I derive from Smith's writings is very different from our present experience.

Type
Chapter
Information
The New Fiscal Sociology
Taxation in Comparative and Historical Perspective
, pp. 201 - 215
Publisher: Cambridge University Press
Print publication year: 2009

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