A Georgist Perspective on Adam Smith

Nicolaus Tideman

[Reprinted from a Land-Theory online discussion, April 1997,
with comment by Mason Gaffney]

Bryan Kavanaugh asked:

Is it just a Georgist myth that Smith was quite in the thrall of thePhysiocrats in France, or is there evidence to this effect?

Mase Gaffney comments:

Nic's chapter cited here is probably the best treatment of Smith you'll ever find. I've added some notes, and a quibble at the end.

Nicolaus Tiderman

I had occasion to discuss Smith's view of land taxes in "Land and Taxation." I said: “Adam Smith (The Wealth of Nations. New York: Random House, 1937 [first published in 1776], pp. 777-78) offers four maxims of taxation that were widely accepted and quoted by subsequent classical writers:

I. The subjects of every state ought to contribute towards the support of the state, as nearly as possible, in proportion to their respective abilities; that is in proportion to the revenue they enjoy under the protection of the state. The expense of government to the individuals of a great nation, is like the expense of management to the joint tenants of a great estate, who are all obliged to contribute in proportion to their respective interests in the estate. In the observation or neglect of this maxim consists, what is called the equality or inequality of taxation. Every tax, it must be observed once for all, which falls finally upon one only of the three sorts of revenue above mentioned [rent, profit and wages], is necessarily unequal, in so far as it does not affect the other two. In the following examination of different taxes I shall seldom take much further notice of this sort of inequality, but shall, in most cases, confine my observations to that inequality which is occasioned by a particular tax falling unequally even upon that particular sort of private revenue which is affected by it.

II. The tax which each individual is bound to pay ought to be certain, and not arbitrary. . .

III. 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. . . .

IV. 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 public treasure of the state. ...

Note that while the first clause of Smith's first maxim sounds like what a modern writer would call an ability-to-pay principle, the second clause and second sentence indicate that he might equally well be thinking of a benefits-received principle. It is reasonable to conclude that Smith did not distinguish between an ability-to-pay principle and a benefits-received principle, or consider the possibility that they might conflict. The remarks at the end of the first maxim suggest that Smith may not have considered it improper to have a tax that fell on one factor and not others.

Smith discusses separately taxes on "the rent of land," by which he means the rent of agricultural land, and taxes on "ground-rents," by which he means the rent of land under buildings.

Mason Gaffney comments:

Both Quesnay before him, and Ricardo after him, seem to have identified rent more with farmland. Interesting that Smith was free of this partial approach. I suspect that Ricardo was, too, in his own thinking, and used farm rents to frame his law of rent simply as an example, not with any notion that farm rents are the only land rents. He was also influenced by the fact that Britain, unlike other nations, followed a policy of high food prices. Captious critics seized on this, however, to avoid coming to grips with Ricardo's general principle of rent.

Nicholaus Tideman

In his discussion of taxes on the rent of land, Smith notes that such a tax can be levied either according to a schedule that is fixed once and then left unaltered, or according to a schedule that is updated regularly. The land tax in England was levied in Smith's time according to a schedule that had been established about a century earlier, in the reign of William and Mary.

Mase Gaffney comments:

This tax was important in its day. It financed the wars of Marlborough (Churchill's ancestor) against Louis XIV and let England, with its smaller population, prevail against larger France. The Battle of Blenheim (1704) was the capstone of England's success, and was made possible by England's superior finances. Parliament could now borrow against land tax revenues, and set up the Bank of England (1694) to make the loans and thus "monetize" the land revenues (cf. Al Date's monetary proposals). Amsterdam, London and Vienna had good credit ratings; Paris and Madrid had the worst, and simply could not sustain Louis's armies long enough to fulfill his imperialistic ambitions. Louis's General Vauban was probably a better military leader than Marlborough, but lacked the sinews of war, even though France was richer than England. Understandably, Vauban proposed a land tax for France - but was libeled and sacked for it.

The English land tax, unlike the French *dixieme*, was imposed on the nobility as well as the 3rd Estate. The English land tax was more urban than rural, but did not exempt the nobility. The concept of "total war" lay far in the future, but it was a lot more total for England and the U.P., whose very survival was at stake. With this tax in place, England also achieved union with Scotland (1707), under Queen Anne (1702-15 or so), last of the Stuarts.

Looking backwards, these wars may seem like foolishness, and in a sense all wars are. However, at the time stopping Louis XIV had the same urgency that stopping Hitler had more recently. Under Wm. and Mary, and later Queen Anne, England frustrated Louis's ambitions to absorb the United Provinces and the Rhineland, and to merge dynastically with Spain, leading to the successful Peace of Utrecht (1713). Indeed, the tax was needed simply to free England's rulers from financial dependence on France, for Louis XIV controlled Charles II and James II quite directly by paying them. Patriotic pride finally rose up against this practice, but the price was to tax themselves.

There was a reaction, and some fear of Marlborough's military ambitions. Bolingbroke led a movement to clip his wings. Prime Minister Robert Walpole, 1720-41, ("Every man has his price") then led a long campaign to wind down the tax, greatly weakening Britain's position vis-a-vis France, which recovered under Fleury and went back to its ways of bullying its neighbors and bribing their leaders, leading to more wars later.

Georgist thumbnail histories of English taxation usually overlook the land tax of Wm. and Mary, picturing a steady fall of land revenues from the days of the Domesday Book. Wm. was Dutch, of course, and it is also a fair guess that he was familiar with land taxation from his homeland. The United Provinces were forged in a long struggle for survival, first against Spain, then against Louis XIV. It's under survival threats that landowners are most easily persuaded to be taxed.

Nicholaus Tideman

This schedule, the product of a notional rental value of the land and a tax rate, was known to bear only a cursory relation to the true rental value of land even when it was initiated and had become even more outdated in the intervening century. Smith notes the efficiency of such a tax, saying (1937, p. 780), "As it has no tendency to diminish the quantity, it can have none to raise the price of that produce. It does not obstruct the industry of the people."

Smith says that, since rents had risen almost everywhere in the intervening century, the invariance of taxes had generally operated to the benefit of landowners. But the opposite could also have happened.

Furthermore, the system had only been workable because there had been no great change in either the value of silver or the silver content of money. Smith then takes up the case of a tax on rent that varies with every variation in rent, mentioning that the Physiocrats regarded such a tax as the most equitable of all taxes. Smith comments favorably on the practice of the Venetians of requiring all leases to be registered publicly and using these values as the basis of taxation, with "equitable estimations" and a 20% discount for land that is cultivated by those who own it. He notes that such a system can discourage owners of land from improving their land. To overcome this difficulty, he recommends that owners who are contemplating improvements be allowed to have their taxes fixed at pre-improvement levels for periods long enough to recover their investments.

Mason Gaffney comments:

This is a great idea we might reinstitute today! Venice, like the United Provinces, exerted influence far out of proportion to its numbers because of its superior internal organization, which included effective land taxation.

Nicolaus Tideman

Smith notes that some jurisdictions relied on systems of assessment that had reputations for being very accurate. But he doubts that governments would undertake the effort needed to keep assessments accurate, and therefore he regards systems based on recorded leases to be better. Smith also discusses taxes proportional to what land produces, noting that these can be quite disproportional to rent and that they discourage both the improvement of land and its cultivation.

Smith's discussion of taxes on ground-rents occurs within his discussion of taxes on houses. He notes that a tax on houses is a combination of a tax on buildings, which he says is passed on to the occupiers of buildings, and a tax on ground-rent, which is paid by the owner of the land. (Smith's assertion that a tax on buildings is paid entirely by the occupiers of buildings is true only if there is a perfectly elastic supply of capital.)

Mason Gaffney comments:

Mase here again, quibbling. That is one necessary condition, but not a sufficient one. There would also have to be an elastic land supply, which of course there is not. Therefore, a building tax is likely to be largely shifted to landowners, and lower land prices.

Nicolaus Tideman

Smith regards ground-rent as a highly suitable base for taxation (1937, pp. 795-96): Ground-rents are a still more proper subject of taxation than the rent of houses. A tax upon ground-rents would not raise the rents of houses. It would fall altogether upon the owner of the ground-rent, who acts always as a monopolist, and exacts the greatest rent which can be got for the use of his ground. . . . Both ground-rents and the ordinary rent of land are a species of revenue which the owner, in many cases, enjoys without any care or attention of his own. Though a part of this revenue should be taken from him in order to defray the expenses of the state, no discouragement will thereby be given to any sort of industry. The annual produce of the land and labour of the society, the real wealth and revenue of the great body of the people, might be the same after such a tax as before. Ground-rents, and the ordinary rent of land, are, therefore, perhaps, the species of revenue which can best bear to have a peculiar tax imposed upon them.

Ground-rents seem, in this respect, a more proper subject of peculiar taxation than even the ordinary rent of land. The ordinary rent of land is, in many cases, owing partly at least to the attention and good management of the landlord. A very heavy tax might discourage too much of this attention and good management. Ground-rents, so far as they exceed the ordinary rent of land, are altogether owing to the good government of the sovereign, which, by protecting the industry either of the whole people, or of the inhabitants of some particular place, enables them to pay so much more than its real value for the ground which they build their houses upon; or to make to its owner so much more than compensation for the loss which he might sustain by this use of it. Nothing can be more reasonable than that a fund which owes its existence to the good government of the state, should be taxed peculiarly, or should contribute something more than the greater part of other funds, towards the support of that government.

The remarks at the end of this passage indicate that Smith favored a tax on ground-rents as an expression of a benefits-received principle.