Three guesses on who said the following.
“A tax upon the necessaries of life operates exactly in the same manner as a direct tax upon the wages of labor. . . . Any rise in the average price of necessaries, unless it is compensated by a proportionate rise in the wages of labor, must necessarily diminish more or less the ability of the poor to bring up numerous families, and consequently to supply the demand for useful labor.”
Was it an academic invited to Prime Minister Shinzo Abe’s great “Let’s hear from the people” show on the advisability of hiking the consumption tax? A representative of the trade unions? A concerned citizen campaigning for the rights of the worker?
None of the above. These are the words of Adam Smith, the 18th century scholar who wrote the tome “An Inquiry into the Nature and Causes of the Wealth of Nations,” more simply known as “The Wealth of Nations.” In writing this huge book, Adam Smith earned himself the title of the founding father of economics.
The grand master of economics has much to say on the subject of taxation.
The section on “Taxes upon Consumable Commodities” begins in a most intriguing fashion.
“The impossibility of taxing the people, in proportion to their revenue . . . seems to have given occasion to the invention of taxes upon consumable commodities. The state, not knowing how to tax, directly and proportionately, the revenue of its subjects, endeavours to tax it indirectly by taxing their expense, which, it is supposed, will in most cases be nearly in proportion to their revenue . . .”
Clearly, Adam Smith regarded taxes on consumption as the last resort of desperate tax collectors who did not know how to do their job properly. A quack doctor’s remedy, in fact. The grand master evidently took a very bleak view of the mental abilities of government officials.
He goes on to say that if you put taxes on shoes and a worker has to go barefoot as a result, no self-respecting employer would hire him. Thus he would become jobless and unable to raise a family. A whole generation of workers would therefore be lost to the economy. That outcome does nobody any good. So the choices become self-evident: Either you forget about putting taxes on shoes, or you raise people’s wages so that they can afford the higher shoe prices that the taxes bring about.
Meanwhile, the master is much more relaxed about taxing luxury goods. He does not see such taxation as endangering the livelihood of workers. On the contrary, he sees such taxes as an inducement to abstinence and sobriety. If people keep off the booze and refrain from self-indulgent eating habits because the items they covet become unaffordable, well and good. People would likely become healthier and more productive members of society. Who can possibly ask for more?
These are all obviously very sensible views. The father of economics clearly knew what he was talking about. 1776, the year in which “The Wealth of Nations” was published, is certainly a very long time ago, but time does not stale the observations of a great and shrewd mind. The prime minister would do well to read up on his classics if he is to make sound policy choices.
The grand master has many useful things to say on other types of taxation, too. For any politician who is seriously committed to creating a fair, equitable and workable tax system, the grand master’s teachings are staple reading. But if the politician is interested only in self-justification and gaining points for the seeming willingness to listen to public opinion, that is entirely another matter.
Noriko Hama is an economist and a professor at Doshisha University Graduate School of Business.