The Public Humanist

Taxes, the Social Contract, and Adam Smith

Some people may be surprised that many citizens share Hayley Wood’s characterization of taxes as her favorite social contract. Even though the anti-tax crowd in the United States gets a lot of media play, many Americans understand that a social contract contains both rights and responsibilities. The Massachusetts Constitution is no exception.

The Massachusetts Constitution clearly states the right to tax as Hayley Wood shows in her recent blog. That Constitution also states clearly the benefits citizens receive:

“Article VII. Government is instituted for the common good; for the protection, safety, prosperity and happiness of the people”….

“Article X. Each individual of the society has a right to be protected by it in the enjoyment of his life, liberty and property, according to standing laws. He is obliged, consequently, to contribute his share of the expense of this protection; … .”

Note the reciprocal responsibility to share the cost.

Some people may also be surprised by the things Adam Smith, “the father of capitalism,” wrote about taxes. He wrote that they are a badge of liberty (poll-taxes on slaves are an exception).

French, anonymous, 1789, from Musee Carnavalet, Paris

French, anonymous, 1789, from Musee Carnavalet, Paris. The First and Second Estates (nobles and clergy) ride on the back of the Third, the peasants.

Smith’s four principles of taxation clearly state that taxes are part of a social contract. His first principle, that taxes should be based on ability to pay and based on the revenue one receives under protection of the state, has progressive taxation implications that few people associate with Smith. In addition, he clearly emphasized progressive taxes in his arguments for higher house-rent tax rates for the wealthy stating that it was not unreasonable that the rich contribute to public expense something more than in proportion to their income. He made the same point about tolls on roads and about luxuries like silver and gold (which he called “superfluities”). The other principles specify that taxes should not be arbitrary, should be convenient to pay, and should be as low as possible.

But was Smith being fair arguing for higher tax rates for the rich? Let’s look at his first principal again: pay based on what you are able to pay and based on what you receive in government services. Progressive taxation is fair because the wealthy benefit disproportionately from the government. Here are a few such services.

 

  • Administration of justice
  • Education
  • Statutes of incorporation
  • Defense and police functions that protect people and businesses at home and abroad
  • Consular services by the Department of State that support American businesses involved in international trade
  • Money and banking
  • Patent protection
  • Massive land grants to early railroad builders
  • Support for innovation, such as the role of the federal government in developing passenger jet airplanes
  • Medical and scientific research support
  • Tax benefits for 401(k) plans that go disproportionately to the wealthy
  • Infrastructure

Most of these services benefit everyone but the wealthy benefit more.

We can also look at this from another angle. If we starve the beast by keeping taxes so low that government operates ineffectively, we also make it more difficult for businesses to operate efficiently. When bridges collapse, that affects the bottom line of corporations that need to move raw materials and finished products into or out of that area. When Boston’s public transportation virtually collapsed because of record-setting winter snowfall, business suffered. Did the blizzards cost $1 billion? or more? And how much of that cost was because of the terrible performance by public transportation? Government failure years ago to provide the MBTA with resources adequate to fulfill its role imposed significant costs on businesses this winter.

In addition to his advocacy of progressive taxes, Smith opposed regressive taxation. He argued that taxes on necessities should be avoided because the poor find it difficult to get food, and so much of their income is spent on food.

The argument of this essay assumes that tax revenue is not wasted. It assumes that the government is a careful steward of both revenue and expenditures. It also assumes that, if we claim to be a capitalist market informed by the wisdom of the “father of capitalism,” that we should heed his difficult lessons along with the more palatable ideas of the market economy. Ironically, if we were to accept the bitter with the sweet, our economy would be stronger and that would benefit everyone.

Do not tell me this essay advocates class warfare against the wealthy. Smith argued for fair treatment for all classes. This essay is also an argument for fairness. And it is an argument for a fair social contract not just for our generation, but for generations yet to be born. We have no right to impose immense government debts on future generations. To achieve a fair social contract, we need more government services; that will require higher taxes. We can do that and still be a capitalist society, consistent with the thought of Adam Smith.

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