Adam Smith’s principles of taxation have served as a highly important influence on the development of economic thinking over the past centuries. Smith’s major contribution to the discussion of taxation is summed up in the phrase “The Invisibility of Taxation.” This principle suggests that any extraordinary or additional tax levy should be made as unobtrusive to the taxpayer as possible. Such a system of taxation should only be imposed on certain goods or activities and in an amount that will not impose an undue burden upon the taxpayer.
The concept of the invisibility of taxation was first outlined by Adam Smith in his famous text An Inquiry into the Nature and Causes of the Wealth of Nations. In this work, Smith expressed his belief that taxes should be regulat[ed] and direct[ed] . . . in such a manner as to increase the revenue of the state, without inflicting unnecessary hardship upon individuals. As such, Smith argued that taxes needed to be made as unobtrusive and limited in scope to those particular goods and activities which are the most productive, most desirable and best suited to fulfill public needs.
In addition, Adam Smith also proposed a graduated system of taxation. This would involve charging lower levels of taxation on goods and services which are of lesser value to the taxpayer. It would also involve higher rates of taxation on goods and services of greater value to the taxpayer. However, regardless of the tax rate, the intent of the graduated system is still to make the burden of taxation as unobtrusive as possible.
Adam Smith also proposed a system of taxation which would allow for some exemptions or deductions. This would be a system in which those goods or activities which are least beneficial to the taxpayer would be exempt from taxation. Likewise, the goods or activities which are most beneficial to the taxpayer would be required to pay the highest rate of tax.
Adam Smiths thinking on taxation also provided a significant contribution to the modern notion of distributive justice. His notion that taxation should be fair and proportionate was highly influential in the development of progressive taxation systems across the world. Under such systems, the total tax burden is shared between individuals in proportion to their income. This ensures that people on low incomes are not unduly burdened with a disproportionate amount of taxation.
In conclusion, Adam Smith’s principles of taxation have in large part been maintained in modern taxation systems. His thinking on taxation is still highly relevant today, and his vision of an equitable, graduated and unobtrusive system of taxation has influenced the systems of taxation found in virtually every country around the world.
