On the Canons of Taxation and the Taxation of Cannon
Can there be principles of fairness for something inherently unfair?
JUNE 12, 2012 by SANDY IKEDA
Filed Under : Taxation, Rule of Law
To prepare for a lecture I’m giving on taxation later this month, I’ve been reviewing Adam Smith’s well-known “canons of taxation” along with Murray Rothbard’s critique of them. Without taking sides or trying to go into the complexities of either position, I think it’s a worthwhile exercise to try to explain their fundamental points of disagreement.
It may be nitpicking, but for what it’s worth Smith in Book V, Chapter 2 of The Wealth of Nations does not use the word “canons” but instead refers to four “maxims of taxation in general.” According to my Concise Oxford Dictionary a canon is a “Church decree” whereas a maxim is “a general truth drawn from science or experience . . . a rule of conduct.” So Smith is not exactly laying down the law from high authority, but is rather articulating rules of proper governance based on experience.
Adam Smith’s Four “Canons”
Anyway, the four maxims are as follows:
Equity: “The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.”
Certainty: “The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person.”
Convenience: “Every tax ought to be levied at the time, or in the manner in which it is most likely to be convenient for the contributor to pay it.”
Economy: “Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible, over and above what it brings into the publick treasure of the state.”
The maxims appear to derive directly from the concept of the rule of law, which according to F.A. Hayek “means that government in all its actions is bound by rules fixed and announced beforehand–rules which make it possible to foresee with fair certainty how the authority will use its coercive powers in given circumstances and to plan one’s individual affairs on the basis of this knowledge” (The Road to Serfdom, 112).
Rothbard’s critique of Smith’s maxims, then, is also a critique of the rule of law.
While Smith’s position issues from the rule of law, Rothbard’s emanates from two considerations. The first is the so-called nonaggression principle:
The fundamental axiom of libertarian theory is that no one may threaten or commit violence (“aggress”) against another man’s person or property. . . . In short, no violence may be employed against a non-aggressor.
The second comes from a basic understanding of the nature and significance of market prices. Let me begin with that.
by tracing the ordered pattern of the voluntary exchange process, has made it clear that the only possible objective criterion for the just price is the market price. For the market price is, at every moment, determined by the voluntary, mutually agreed upon actions of all the participants in the market. (Power and Market, 135; emphasis original)
He thus concludes that the only sensible meaning of the “just price” of a good is the price that emerges from a free market.
Let me use an example to show how this ties into Smith’s maxims of taxation. Instead of taxes to fund the government, let’s look at the funding of something else–artillery.
Canons of Cannon
What should be the price of a cannon–the kind that fires projectiles–and how should it be levied? If cannon are bought and sold on the free market the answers to these questions would be answered straightforwardly by the market process. As Rothbard explains, competition among buyers and among sellers help to determine the price of cannon, one that reflects the preferences of all concerned, perhaps not perfectly but better than any alternative economic system. Only those who are able and willing to buy will do so from those able and willing to sell. That is “fair.”
What if there is no free market in cannon? Moreover, most people wouldn’t buy a cannon. But suppose the government mandates that every household have one (presumably while it retains a monopoly on ammunition) and that it will impose a tax, in the absence of a market price, to support its provision.
There are a host of questions that arise at this point but among them are the following: (1) Who should have to pay for the cannon? Only those making more than $75,000 a year? Should it depend on how much benefit a household gets from it? (2) How should the government charge for the cannon? According to use? A flat tax? (3) Under what circumstances should people have to pay for their cannon? Any time, on demand? At the end of the calendar year? (4) And how much over cost should the government charge? No more than to support government operations? More?
Now, based on the rule of law, is the libertarian response something like (1) there should be equity in cannon taxes; (2) the requirement to acquire and pay for cannon should be certain; (3) the payment should be as convenient as practicable; and (4) the government should not charge more than the cost of cannon production? All these responses (and others) may sound reasonable, given the highly unreasonable requirement (to most of us, anyway) to buy a cannon. In the absence of a market, however, they are all from the economic point of view completely arbitrary.
When the provision and consumption of cannon lie outside the market process, Rothbard argues that economics would have no principled way to answer the questions. Any consistent set of maxims would then have to belong to some kind of ethical system outside economics.
Canons of a Good Beating
Another way of seeing Rothbard’s critique is from the viewpoint of the nonaggression principle. Taxation from that perspective is tantamount to giving a beating.
What then are the canons of giving a good beating? Here are some possibilities: Everyone, regardless of race, sex, and religious affiliation, should be beaten equally. Beatings should be certain, say, every week. People should be beaten in their home to minimize inconvenience. Government should not spend too much on beating equipment–a simple 32 oz. aluminum baseball bat would do nicely.
I’ve often referred to the rule of law as a pillar of a free society and will continue to do so because it gives us some chance of limiting government power. I think this discussion shows, however, that the rule of law by itself is not sufficient to protect individual liberty, so it must be combined with other principles, such as private property and free association.
But that is not the same as saying that the rule of law is useless. Whether law is administered via government or through some form of voluntary agreement, something like the rule of law would probably serve as a useful as a guide to “good governance.”