Adam Smith and Alexander Hamilton on income and sales taxes.

Back in the 1700s, income taxes were rare, yet more countries were adopting such revenue generating schemes. Adam Smith minced no words in attacking such “absurd and destructive” taxes. In a section of The Wealth of Nations titled “Taxes upon the Wages of Labour,” Adam Smith wonders why countries institute such income taxes:

Absurd and destructive as such taxes are, however, they take place in many countries.

Just a decade later, the Founding Fathers recognized that limits needed to be placed on government. One such limit would be to make it more difficult for government to raise our taxes. In Federalist #21, Alexander Hamilton argued that a consumption tax would effectively limit the size of government:

It is a signal advantage of taxes on articles of consumption, that they contain in their own nature a security against excess. They prescribe their own limit; which cannot be exceeded without defeating the end proposed, that is, an extension of the revenue. When applied to this object, the saying is as just as it is witty, that, “in political arithmetic, two and two do not always make four.” If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds. This forms a complete barrier against any material oppression of the citizens by taxes of this class, and is itself a natural limitation of the power of imposing them.

We have seen how the income tax has accomplished the growth of government that duties were unable to do previously. I return to this chart of the size of government excluding defense dating back to 1910. Remember, the income tax amendment to the Constitution was ratified in 1913.

Click on image to zoom in:


Seeing the growth of government since the income tax appeared a century ago, Smith and Hamilton were correct in their assessments. Based on the above quotes and their other writings, Adam Smith and Alexander Hamilton would support a switch to a consumption tax, more commonly called a sales tax today or the proposed Fair Tax.

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4 responses to “Adam Smith and Alexander Hamilton on income and sales taxes.

  1. If I can find it I have an amazing document you need to see…….on where the tax started………..I will see if I can find it and bring it on next Monday……

  2. The problem is that any move towards a consumption tax will be additive to rather than instead of an income tax.

    I predict we will get a VAT with no corresponding change in the income tax.

  3. The 99% would never agree to a “Fair Tax”, just for the fact that consumption taxes can be very easily manipulated. This manipulation has been seen lately with the AMT and the 1% controlling 40% of the nations wealth. Besides, the majority of taxes go towards the Pentagon. Why isn’t that graph represented in this article?

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