Adam Smith's "The Wealth of Nations" (Part 4/4)

Hey hey everyone, back again. Today we're going to finish off our exploration of Adam Smith's The Wealth of Nations with Book 5 of The Revenue of the Sovereign, or Commonwealth, in which he begins to elaborate on where taxes should come from, who should pay them, and what they should be used for.

Now before jumping into it, if you want to follow me anywhere other than here, you can find me on Instagram at theory underscore and underscore philosophy, or on Twitter at David Guiño. If you're new here, welcome, I'm David, I try to explain philosophical texts and ideas in a way that makes them accessible, so if you're new, like, share, subscribe, comment, I'd love to hear from you, and yeah, if you haven't already done those things, be sure to do them. If you want to help me out monetarily, you can do that via Patreon or PayPal, but obviously no pressure.

And yeah, I don't want to waste any more of your time. With that stuff, let's conclude The Wealth of Nations. So this text, or this book of The Wealth of Nations, Book 5, explores the nature of taxes, and I want to be quite upfront about this, in that Adam Smith is not, in any way, the most methodical writer around, in that he often goes on these long tangents, at which point it's often difficult to find out exactly what point it is he is trying to make, all the while being rather obscure about the point, the original point he's trying to make, of which the digression was meant to serve as a supplement, or a point of clarification.

So he loses what he should be elaborating on, while adding what he doesn't elaborate on enough. It's a very strange mix of the two that makes it hard to follow. But by and large, kind of the big idea he's trying to communicate with this, is that taxes are to be fronted for the purpose of making business and the free market operate more effectively. So its job is essentially, or the job of taxes, is essentially to cover the things that people might not be able to garner a profit or revenue from on its own, yet are necessary in order to allow the free market to operate efficiently.

So one of the ways that this might manifest itself is in the form of a military, which we know today, a military is big business. People make a lot of money off of the military. But historically, in earlier times, that is many centuries, many millennia before Adam Smith was writing The Wealth of Nations, he describes the way in which various nations, various tribes, various groups of people, be they nomadic or sedentary, in those situations, the people, almost all the people, would be equipped to handle a kind of fighting situation if they were to be confronted with certain wild beasts or other humans or anything. Anyone would be prepared to fight.

Now with a society that grows more capitalistic, with the division of labor, suddenly there becomes the potential for certain people to be kind of classified or organized in such a way as to embody the spirit of battle at all times, that is military personnel. And this goes way before capitalism, like we see this with the ancient Greeks and so on and so forth. But for the most part, in the history of civilization that Adam Smith picks out on, the people who would assume these roles of military personnel were citizens, and in the case of ancient Greece or ancient Rome, it was the citizens who would be trained, at least that was part of their citizenship, to be prepared to fight in case that were to happen.

So all people were more or less equipped for that possibility. And by all people, of course, I mean all men, because, well, we know the history of sexism and Western civilization, but in any case, what we are presented with here is a transformation in the situation he is describing where suddenly a military is established where people spend their whole lives, their whole careers, being part of that system. Now that fund has to come from public revenue. It has to come from the public.

The government cannot rely specifically upon the revenue it might generate, like through plundering, because this is obviously a practice that shouldn't be encouraged. You shouldn't say or encourage military action so that military personnel can just steal things from other nations. Adam Smith would be diametrically opposed to that because that doesn't actually participate or encourage industry, it doesn't encourage the mobilization of labor in the most effective ways. So the military must be supplied for by the people.

Now, additionally, it can be supplied for to some extent by the sovereign, by political agents provided that they come from affluent families, but they only have so much money. They can't feed hundreds and hundreds and perhaps thousands and thousands of people and build thousands of armaments and ships and what have you, because in order for those things to happen, what you need to do is take people out of the labor force to train them to be military personnel, to train them to build certain material, like ships, that aren't going to be traded, they aren't going to be sold for profit, they're just going to be used by the state, by the nation.

And so there's almost like a double cost here that occurs where there's the immediate cost of actually supplying the materials, paying the people to work on all these new things, paying people to be in the military and so on, but also now there's the cost that comes out of the system because suddenly there is a depleted workforce, which kind of artificially elevates the price of labor because there's more of a demand for labor in the regular workforce because people have left it, so there are fewer people to take up certain positions, which raises the price of labor almost artificially, while not generally increasing the real revenue of the society.

But also, the wages that are given to people in the military, in the construction of various military armaments, has to be high enough in order to encourage them to leave the free market where they could earn potentially more. So it has to be able to compete with the free market, has to be able to compete with the exchange of labor in such a way as to make it lucrative for people to leave that.

Now in order for that to happen, there has to be a great accumulation of wealth, there has to be a great transposition of wealth from the free market, which of course would regulate itself as per Adam Smith's dogma, it would regulate itself almost magically, but in order for the military to occur, what you need to do is extract a great deal of capital from that market and supply it to these other people, to the military.

Now the military is not all bad, in fact it kind of dovetails, or the emergence of the military dovetails with another important idea that Smith kind of alludes to throughout the course of the text, and that is the idea that, and I mentioned this in the last episode, that the more educated people are, the more likely they are to be good, upstanding citizens and good laborers, because they'll understand how the free market works, they'll understand competition, they'll understand humans' propensity for liberty, apparently these are things that are kind of embraced by the free market.

If we accept that, he says that the military serves an instrumental function in providing a sense of security, but also as a kind of domineering agent that keeps people in line, even the most intelligent, which is ultimately going to be better for the, well, who knows if it's actually going to be better, if you can actually quantify this, but it's not going to have the same kind of hindrance, or an extreme hindrance upon the free market as it might appear to do by extracting a bunch of capital from it.

Now it's not only the military's obligation to maintain a degree of law and order, to maintain laws and all that, of course there's going to be some kind of like guards people, there's going to be a judicial system with judges and lawyers and all that. And in a society with a great split, and he's very upfront about this, I'm very unashamedly, unashamedly, unashamed about this, he's very upfront about the fact that in a situation, in a society where there's a great disparagement between the rich and the poor, it becomes all that much more necessary to have a judicial system put in place in order to maintain this distinction, in order to maintain people's contracts, which are often quite predatory and meant to disenfranchise one group of people or one person for the benefit of another.

Now of course this is not something that Adam Smith pays a whole lot of attention to, and it's something he kind of pushes under the rug with a kind of catch-all that people should be educated in literature, they should be literate, they should be able to read and write, but certain problems emerge from this in that you have country folk who do not necessarily have, at least at the time, have the capacity to learn these things. And then in comes an educated townsperson with this fancy contract, and the person can't read the contract, so the fancy townsperson is going to just summarize it for them, but without knowing of course that within the contract means that the country person is essentially going to sell their soul to this townsperson, and what you have here is then someone being beholden to, kind of being rendered subservient, subordinate, to this richer person.

Now it is in the interest of the system to maintain these contracts in order to maintain this exploitation of certain people on the basis of their knowledge, on the basis of their educational background, which is instrumental in maintaining the system that is meant by and large to extract as much from the masses, from the working class, as humanly possible, all the while minimizing what is given back.

Now while I am critical of Smith, as I think pretty much anyone would be, at least anyone with any kind of basic sense of the contemporary economic system, or the present economic system I should say, but in any case he is very much aware that this presents an issue because justice is then not blind, so to speak. Justice is then not neutral. Clearly justice is meant to benefit the rich as opposed to the poor, and this is something we very much see today. Those with more money are more likely to get off, to be found not guilty, or to receive a lighter sentence than someone without a good deal of money. Or in the case of like the United States or Canada, at least the two contexts I can kind of speak to, what often happens is, especially with black, black male youth, is that they'll be arrested for some kind of petty crime and a lawyer will sit them down and say, just take a plea deal, don't take your chances in court because you'll risk taking an even bigger hit. So instead, just take this plea deal, even though probably the person could have gotten off if they had enough money to afford a lawyer that was actually going to represent them correctly.

And so what we have is how that fuels the disproportionate presence of black people within the criminal justice system, at least that's one of the ways in which that comes to occur. So we see this ripple throughout the course of history from the time that Adam Smith is writing this up till today, where the judicial system is meant to uphold not a kind of neutral set of beliefs, but is instead meant to maintain certain interests. And these are interests that are very clearly aligned with certain racial prejudices, gendered prejudices, class prejudices, and so on.

So he says, and he's talking about it in a much more explicit way, almost like in a conspiratorial way, where he says that so long as judges, and lawyers for that matter, are connected to political figures, there's going to be corruption because political figures being quite rich are going to be able to influence the outcomes of various judicial processes. So so far we have military institutions and judicial ones.

Now judicial ones, I haven't really laid out yet what that has to do with taxes, but taxes are meant by and large to cover the costs of those institutions, those judicial institutions, because if it is purely handled by private interest, then we will see a skewing of justice in favor of those with the most money. So this is something that should come out of the public fund that is meant to represent the people and to best maintain a degree of law and order that is as equal as possible.

Now whether or not that is in fact possible is certainly something I would problematize a bit and question, but in any case, Adam Smith, to give him the benefit of the doubt, has his heart in the right place in recognizing that justice can very easily be seduced to favor one side or another.

Now besides the military and these judicial or judicial institutions, he considers as well what he calls in this text public works. So these are like public offices, for example, for commerce, like trade unions or whatever, and then as well he has like public offices for education, like schools. So starting with public commercial works, like trade unions or whatever, whatever example you might want to throw in there, he considers as well the possibility of roads, bridges, canals, things that by and large fall under the jurisdiction of the state to manage.

Now he doesn't give us a very clear answer in how something like a road or a canal or a bridge should be maintained because he oscillates between two possibilities. So the first possibility is that the government handles everything in terms of possible transportation, like with roads and bridges and stuff, making sure that they're in proper working order. And he says that that is going to run into some issues because people in political office don't necessarily know what the market needs. So there might be some roads, some bridges, some canals, whatever, that get neglected because they don't know that there's the potential for new lucrative business through this one place versus others.

And what will happen instead is a benefiting of those public offices over those of the market where, let's say near the state capital where all the politicians are, there will be a massive improvement in not agriculture, in architecture, in the maintenance of roads and buildings and whatnot, even though that doesn't actually benefit the market, but just because the people who are controlling the money happen to be in proximity to that, which is of course an issue.

Now he presents an alternative in which roads and canals and bridges and stuff are privately owned and paid for by like a toll. So it is then in the interest of the person that, or the people that have ownership over the road to maintain its integrity or else people won't use it. Now this runs into various issues as well because often there aren't, there isn't more than one route to take. So in some mountainous regions, for example, or some heavily wooded regions or whatever, there's only really one way oftentimes to travel. There's not many different routes going from or coming to a city. And so it is in the interest then of the state to maintain that, that road or that canal or whatever, so that it doesn't fall into disrepair.

Because if it was purely up to one person owning it, then we enter into the possibility of it being a monopoly so they can charge whatever they want because they know that people will need to come through in and out of there without having any other possible alternative, which is going to artificially inflate the price in a way that is totally unfair. And so Smith is by no means clear about how it should actually be conducted, how these taxes should be put in place to maintain these public works in the form of roads or bridges or whatever. But we can only imagine that he suggests there to be some kind of balance between both public revenue being supported or being put forward for it and private revenue so that people are still incentivized to maintain the integrity of these roads, all the while keeping a kind of baseline for their operation so that there isn't a sudden kind of, in case there's like an accident and suddenly the road can't be used and there's no funds to repair it, there should be some kind of baseline that is always there just in case of an issue.

Now those are pretty general kinds of public works that most people will probably use. But he also presents the possibility of a public work coming in the form of like a magistrate, someone who might oversee trade in different parts of the world, someone who kind of operates on behalf of the state, not on behalf of a specific organization or a specific corporation, but someone who is there to maintain the state's interest all the while conducting trade. Or besides that, the state might have an interest to maintain sort of like guards for overseas trade in order to protect people from or trades people from pirates, from possible looters or whatever. And in very much the same way, he is wary of these things being solely provided for by the government because they do not best know how to actually put this money to use. And so what will happen is it will be mismanaged and it won't be properly allocated. So in that way, it would be in the interest of private enterprise to maintain their own security because that's a way by which they can maintain their profits. And they will best know how to handle that.

Now one of the issues that will certainly arise with that is that it will kind of accrue a sort of monopoly. So let's say in a time of war, when the threat of smuggling or looting or like pirates is especially high, then it will only be possible for those industries, for those corporations that have already amassed a certain amount of capital, that have hit a certain baseline to maintain a certain degree of security, they will be the only competitors within that market within a nation. And so that will then drown out the possibility of competition and further maintain a certain monopoly over the system. Now this is not something that Smith in any way addresses, but it seems like a pretty prescient issue. And it's one that I think very much is a consequence of this frame of mind, this very pro-free market frame of mind, at least with the idea that it will all just magically work itself out. We have to really question how that will happen. And of course, a common thread throughout this whole book is that it is the government's fault if a monopoly forms. Monopolies only happen by government intervention, because the government is putting too many regulations on companies, hindering the potential for small countries to be competitive. And then what happens is that the bigger companies are able to establish monopolies. That's a pretty common theme throughout the course of this book.

But of course we see monopolies form in even the most free market conditions, because that's just the nature of the accumulation of capital. It will just come to a point when you have so much disposable income, or whatever income it would be called if it's used by a company, to then buy up any possible competitors the moment it happens. But in any case, that's just my thing.

Then he goes on a particularly long tangent, thinking about the nature of trade, which doesn't seem to have anything to do with taxes. And I was incredibly confused when I was reading this, because I'd gone and read some other articles because I was just so confused as to why he was going on this big tangent about joint stock companies, which might be better considered today as like corporate stock companies or just basically stock companies that deal with the trading. And he goes on this big tangent about how these stock companies are essentially doomed to fail because they primarily deal with risky trades overseas and in places of the world that are difficult to communicate with and so on. And he's like, these are going out the door. They aren't going to last. They aren't actually all that productive in terms of an actual economy's growth, even though they form part of a kind of holistic economy or a kind of holistic ecosystem with other sorts of industry. In any case, he was convinced that they were going to disappear.

And so I went and looked up these other articles, and a lot of them shared my confusion about why Adam Smith was even talking about this. But they were all quite clear in that Adam Smith was dead wrong about this and that these industries seemed to grow the most. Or maybe not the most, but they definitely did not go away. But the idea that Smith had was that joint stock companies were only going to be effective in very safe circumstances and very insular circumstances like with insurance or in supplying water because, you know, those things are people are always going to need those things. But, of course, people are clever and they find ways to make money from the most ridiculous ventures and they make a lot of money doing it.

So in any case, after this very long tangent he goes on, he then begins to consider or look at the ways that education should be properly managed and whether or not it should be regulated. And he says, no, it shouldn't be regulated and it should be treated as part of the free market. And the reason that he says that is because he doesn't want teachers to be paid by the state because that would secure them an income, which they could then be totally satisfied with. They have job security, which are going to make them worse teachers, apparently, which is a totally incorrect idea. It's one that has been proven wrong time and time again. For people to have steady, secure salaries does not make them any more, to use one of his words, licentious or lazy.

But in any case, this is the idea he gives us, and it's one that certainly ripples to this day, one that constantly rears its head whenever teachers are saying that they're being not properly compensated by the state, and rightly so. And people always bring up this argument about how they're being ungrateful or how more money is just going to make them worse teachers. And it's a very absurd line of argumentation. But in any case, it's one that we are confronted with and we can find its roots here. It probably goes much before Adam Smith, but at least there's a trace of it here.

Now, he says that if education was done correctly in a free market kind of way, it would force teachers to work as best as they can in order to encourage students to come, because students are going to be the ones paying these teachers out of pocket. And so he provides the kind of arbitrary age of 13 to be the point at which students no longer have to go to school, where if teachers were doing a good job, students would want to stay in school themselves, but they shouldn't be forced to, because then that stops them from just earning money as laborers or what have you.

Now, you might say, oh, well, 13. So he does suggest that, to some extent, there should be mandatory schooling. And he does. He does. He thinks that it is important for the people to have a basic, kind of base understanding of some things in the world.

And these are the capacities to read, write, and count. That is, reading, writing, and math are the things that he thinks everyone should have a kind of basic knowledge of, which would mean then, by having mandatory schooling, that there would have to be a kind of mandatory funding of those teachers to keep those positions available. Because if we just let the free market run by itself, and we let everyone kind of operate of their own volition, then school wouldn't exist, because no kid wants to go to school. So there must be the imposition of schooling upon students of a certain age up till a certain age.

Now, he adds to this that it would be nice, at least in the course of one's time at school, if they would learn various things like logic, ontology, pneumatology, moral philosophy, physics. That would all be great. But he doesn't say it's absolutely mandatory, given the difficulty of those topics and the many years of study it takes to actually learn them. So he concedes, given the fact that there should be some mandatory schooling, that therefore there should be some mandatory payment of the teachers. There should be some kind of government fund or public fund that is given to teachers. But it should only make up a certain portion of what the teacher makes, and the rest of it should come from students, or from the parents of students, who can pay the teacher as a way to say, I agree that you're doing a good job. I'm going to keep sending my child to you for doing a good job.

But this only feeds into the illusion that people are always looking out after their best interest, because by and large, people don't know what they necessarily want. And it seems totally strange that Adam Smith is like, yeah, they'll just go for the cheapest price with the best product. Well, how do people actually assess that? How do people actually say, oh yeah, this is a good teacher? Because a teacher might be really great, and by virtue of them being really great, have a whole lot of knowledge about something, and are prepared to completely shut down any incorrect student. Then the student goes home, and the parents are like, oh, this teacher sucks, they're failing you. And in which case they might say, screw this, I'm pulling my kid out of this school and finding a better one.

And then they could pay more to get a worse teacher, who gives the kid good grades. And then it's a vicious cycle, there's no proper way to do this. But Adam Smith has this endless faith in people to know exactly what they need at any time. He doesn't at all consider the possibility of coercion, of psychological manipulation, not that those were necessarily things he would have been aware of at the time. But today, especially with advertising that plays into certain, dare I say, primordial instincts in a way that manipulates people so that they don't necessarily have a choice in what they buy in the market as being for what is best for them, but rather what is best for the corporation that has access to new knowledge about how best to manipulate people.

So a high education or an educated population is ultimately going to work in the interest of the market, because if you have an educated population that knows what they're doing beyond just the kind of menial tasks they do in the division of labor, like the person who just makes shoelaces or whatever, then that is going to encourage more people to participate in ingenuity. So you're going to have more people that are prepared to say, hmm, I could probably do this better by, you know, doing this thing or adding this component to a machine. That will make it more efficient and it'll make it so that I don't have to work as hard. And so if you have that, what you have is both the alleviation of burden upon the educated or the more educated person, but also a benefit to the market itself because it has grown more efficient.

Whereas if you had people without any kind of basic knowledge about reading or writing, arithmetic, anything like that, then you're going to reduce the propensity of those people to look upon their situation and say, how can I make this better? How can I make the situation I'm in better? Of course, one of the backfires here is that if you have an educated population, you're probably also going to have a population that is not going to stand for the kind of exploitation that Adam Smith is so very eloquently defending and putting up on the silver platter.

But in any case, now he extends this idea about education and how educators should be paid to religious institutions as well. And the reason that he focuses on religious institutions is for him being of this kind of liberal mindset at the time, he was by and large not a huge fan of religion. He was very much thinking about religion as being a kind of way to dull the people, even though he, as far as I know, was religious himself. He wanted it, or at least religion, to enter into the free market economy as well, where people would only go to the best pastors, would go to the best priests or whatever for their sermons. And what that would allow for is an explosion of possible sects of different kind of branches of the church. And that would make it so that no single branch of the church had too much power, which could then influence political decisions, which could then encourage wars or anything like that. He wanted there to be many different branches of any given religion in order to kind of diffuse or to dilute the possibility of its overcoming the broader economic system.

Now in order to curb the monopolization of religion or religion growing too strong, he encourages a kind of basic baseline understanding, as far as education goes, in science and philosophy, so that people have a better idea or the capacity to question what they're being taught in religion. But he also says, and this is quite interesting, he says that he wants to encourage public diversions like painting, poetry, music, and dancing, which are ways in which to encourage, at least as far as I understand it, community without it being, or the idea of community being monopolized by religion, which is something we very much see today, where community is something that religion claims to be the kind of benefactor of. It supplies us with community, at least these are how many of these churches kind of sell themselves in new age churches and all that.

And he says that these strategies are better than imposing force because force will only encourage a kind of reactionary movement of people feeling threatened because their religion is being attacked or whatever. Now of course Smith wasn't totally aware of the ways that religion and the free market go hand in hand and would go hand in hand in the 20th century, so a couple of centuries after he was writing this and how could he have known? And I'm just taking from Deleuze and Guattari here without going into detail about that so you don't need to go read them. But they make it very clear that religion serves as a kind of instrumental function in grounding a system that has grown more and more, to use their language, deterritorialized. It has kind of uprooted everything with this free market ideology, if I can use that word, kind of free market ideology, yet it needs to have some kind of roots somewhere. And religion serves that function in giving people a kind of grounding, a kind of point of departure from which they can properly engage in their own lives without being totally detached from everything.

Now in terms of taxes, the last thing that he discusses, and this is kind of funny, he says that part of taxes should be spent to maintain sovereign's dignity. Because for him it would be no use for a sovereign to be a sovereign if they didn't have the wealth that put them above everybody else.

So part of the tax funds should be spent in such a way as to maintain the sovereign's affluence over everybody else, which is a totally ridiculous thing, but in any case he gives, that's what he says. Now as I kind of hinted at earlier, this tax money can come from one of two possible places. It can come either from the sovereign themselves, if they happen to come from a wealthy family or be among wealthy families, or it can come from the general revenue of society. So money of the sovereign, or money that comes from the sovereign, mostly consists of either stock or land. So in terms of stock, it can be put to work to make profit, or it can be lent out to make interest. So let's say a country has some kind of surplus of money, they could lend it out at interest to people within that country or to a neighboring country or whatever. And let's say the state owns a great deal of land, which it probably does in a lot of cases, the state owns a lot of land, it could then be the landlord to various possible farmers, to laborers, that will then work upon that land and give part of their money in the form of rent back to the state instead of giving it to a landlord.

Now the issue with that for Smith is that as opposed to a landlord who's profiting directly from the land that they own, that they have someone, you know, someone wants to work on it, they're going to work on it, earn a profit, and the more profit they make, the more rent the landlord is going to get. In the case of the government owning these things, what is going to happen, at least for Smith, is that the government is not going to be able to keep track of everything just because it has way too much land and it's not going to have the same kind of profit motive to maintain that land in the way that a landlord would. And we'll get into this a little bit more in a bit, but in order to maintain or to keep track of everything, it would take so much tax money just to put up the kind of, you know, administrative architecture to maintain all of these different sources of revenue for the state if they are handled by, you know, so many different people.

Now in addition to that, or the other possibility, is that money comes from the people in the form of taxes. So these can either be applied against someone's rent, that is the rent that they're making, somebody's profit, somebody's wages, or a mix of all three, or you know, rent and profit or profit and wages, whatever. Now before kind of digging into each one of these possibilities, that is taxes coming out of rent, profit, wages, or some mix of the three, he says that taxes should follow four fundamental axioms to be properly received so that they are done correctly. And number one, they should rise in proportion to a person's wealth, which is an interesting case, and it's something that we are seeing very much a reactionary move to today and there has been for a long time in these calls for kind of flat rate tax that I don't think anyone, any economist today legitimately puts forward. But in any case, he says that taxes should rise in proportion to a person's wealth. He says that they should be easy to calculate and that they should be minimized, that is what they cost, because if you have taxes, what you're going to have is an administration that is going to have to collect those taxes. That means then that money is going to be paid to them. So he says that taxes should be mostly used to actually benefit the people who are paying them, not for the administration or not for the politicians that are collecting them. And then finally, the taxes should only be due when it is most convenient for the taxpayer, when they actually have money to pay for it, that is. Otherwise it will put them in a situation that they can't afford.

So let me just repeat those very quickly in order to keep you on track here. They should rise in proportion to a person's wealth. They should be easy and clear to calculate.

They should minimize what they cost while maximizing what they give back to the person paying. And fourthly and finally, they should only be expected when it is most convenient for the taxpayer.

Now in terms of the actual application of all of this, the easiest way to understand this, at least for me, is Adam Smith is advocating for a type of taxation that rises with a person's wealth as they earn more, they're going to pay more, but not in like direct proportion so that it de-incentivizes them to keep working or to keep earning a profit. Because if they know that if they make an extra $5,000 a year, for example, but 80% of that is going to be taxed, then they're going to have no interest in actually doing that because it's not going to yield them all that much. At least that's the idea.

Now I've also heard arguments today about how more taxes actually encourages industry, which might seem totally counterintuitive. But if you have an industry in which there are landowners, you have capitalists that own the means of production, that own some kind of corporation, if you have a situation in which taxes are introduced, these people are going to want to maintain, they're going to want to maintain their standard of living. And so what that will mean is that they are going to be more efficient with the money they have left in order to ramp up their, to augment, to elevate their business so that they could still maintain the same kind of profit margins, they can still accrue the same kind of revenue in order to maintain their standard of living.

But of course, because we live in the free market where people can do whatever they want, they just put their company overseas in a place where they can get a tax break, and then they don't have to pay taxes at all. Or in the case of Amazon, not only did they not pay taxes for many years in the past, they have since started to pay some taxes, they were actually getting refunds on the taxes they didn't pay, amounting to hundreds of millions of dollars. But in any case, that's the situation we're in.

Now additionally, the problem with a flat tax rate for even Smith is that it's going to disproportionately make it more difficult for new competitors to enter into the economy. So for example, let's say there was a 25% tax rate. To the person making $200,000 a year, they lose 50 grand to taxes. They're left with $150,000 left over. To the person making $40,000 a year, they're going to lose $10,000, leaving them with $30,000 at the end of the day. Now the difference between $30,000 and $40,000 for someone to enter into a competitive business is a huge difference compared to $150,000 and $200,000. That is because 75% is not the same between someone making $40,000 and someone making $200,000. And so that person who makes less is going to be $10,000 less competitive against someone who's making way more money. And that $10,000 can go a long way. It could be the difference between buying a state-of-the-art new machine that's going to increase their profit margins, is going to make them more competitive.

And so what we see here with a flat tax rate, and this is what Adam Smith is writing against, is a disproportionate kind of attack upon new competitors, upon those making less money, which isn't fair.

So one of the ways that he proposes that this is assessed, that is how you actually determine how much someone should be taxed in terms of their wealth, is by putting forward rent or land or house taxes. Because a house, the size of someone's house, is a pretty good indication of their wealth. And this is at the time that he was writing this. But that would then be a good way to determine how much money somebody has, how wealthy someone is, and therefore how much they should be taxed. But again, he says that this shouldn't be increased in direct proportion to someone's wealth because then it will de-incentivize them to keep encouraging their own industry.

So then he considers the possibility of rent from profit, or sorry, taxes from profit and stock. And the difficulty of this though, is that it's difficult to assess how much wealth someone necessarily has in terms of their profit and stock, because they might be making a lot of profit, but how much of that has to be paid back to wages, to stock, to the basic upkeep of various machines and so on, and at the end of the day they might not be left with that much money because they're employing a lot of people or whatever, they don't actually earn that much at the end of the day. Additionally, if you were to just measure someone's wealth and then how much they should be taxed upon their profits, it's very easy to get lost in the kind of totality of possible transactions. So someone might be making their money by trading with a neighboring country, in which case it's difficult to assess how much they might have made, maybe they kept some of that money there, it's very easy to conceal, to hide how much money they necessarily have, they could be trading in the form of kind of bartering, trading deals, trading land that is difficult to assess, and so it's for this reason that he prefers something like a land tax or a house tax, because you can't move those things, and they are a direct representation of someone's wealth in a place, you can't move your land, and so it is a good indicator of how much of that person's wealth, because of how much land they have, should go to the country in which that land sits or belongs.

Not to mention, well, he then considers the possibility of taxing trade, so if there's certain products imported, when you tax trade, he says that, or he fears, that ultimately that is going to result in more of a cost for the consumer, because the person making the trade is going to want to offset the cost of the tax, so they're going to raise the price of the product in the market, so as to be better, in order to maintain their profit margin, which is just going to affect the consumer in the end.

Then he considers the possibility of taxes on wages, and if a tax is imposed on wages, then wages would have to go up to properly compensate the worker, because if workers are making what they need to survive, which is obviously a problem, and one that this system gravitates towards, in that it tries to reduce prices to the workers that have relatively less power than the capitalists, than the owners of the means of production, it is going to reduce those prices, those wages, and then, which is in itself a problem, but then if the government comes along and says, okay, we are going to then impose a tax upon what you make, which is already at the bare minimum, as per the capitalist creed, then therefore you are going to be even more screwed, and the capitalists then, because they're already paying the people the minimum that they need in order to maintain their subsistence, in order to maintain themselves and their families, so that they can come back to work the next day, in order to offset the new tax, are going to have to pay their employees more, and the only way they can do that is if they suddenly raise the prices of the products they sell, or the services they provide, which then ends up costing the consumer more anyways.

Then there's the possibility of just taxing consumable goods, which he sees some benefit to, in some cases. So in the case of certain necessities, and the way he considers necessities is actually kind of interesting, he says that even clothing, being a necessity, or a certain kind of clothing, that is if you belong to a certain class, or you have a certain way of life, you have to fit in it by dressing a certain way.

So he assigns clothing to be a kind of necessary part of day-to-day life for people, and so if taxes were imposed upon that, then it would just screw over the masses, and wouldn't actually give back, because then I guess the profit makers, the capitalists, the producers would need to elevate their prices, you know, in order to cover the cost that it then incurs upon the consumer, because it costs them more, and then they have less money to feed their families, because they're paying more for the things they need, and then they have to take more in the form of wages, and so on. But he says that higher taxes upon consumable goods can be quite beneficial when it comes to luxury items, like tobacco, or some fancy linen, or whatever, because it's only those people who are already affluent, who have money, that can then, that pay that. And in a funny way, he says that high taxes encourage more fraud and smuggling, because they are going to be a thing people are going to try and transgress, people are going to try and get around these new taxes, which is just a funny thing to say, because, I mean, how far can this argument go then? It's like, well, just give everyone everything, because otherwise they're going to get it anyway, so screw it, like, it doesn't do anything, which is obviously an issue.

The solution should be, there should be more stringent regulations put in place to stop people from committing fraud, which is just rampant, obviously, even until today, or smuggling, or sending their monies to the Cayman Islands, Cayman, Cayman, I think that's it, to some kind of overseas bank, somewhere where they can get big tax breaks, there should be restrictions put on that, because even if you had low taxes, a billionaire is going to say, you know what, I really don't want to pay 20% taxes, which would be laughably low, they should be paying much more than that, but they'd say, why am I, if I make a billion dollars a year, why am I going to pay 200 million dollars in taxes, when I can just go overseas, put my money in the bank there, and pay like 10%, 10% in taxes, and lose only 100 million, like, why would I not do that? And the same can apply even if the tax rate was as laughably low as 10%, someone, greed will obviously dictate that they're going to just go overseas, and just dump their money in a bank, take it out of the economy from which it was earned, which was just going to make it more difficult for everyone else, at least as per the whole trickle down idea, and so the cycle will continue.

So it's just kind of, it's kind of cute that Smith thinks that higher taxes is going to encourage more fraud, but anyways. So the other big consequences of taxes upon consumable goods is that it's going to cost a lot for administration, that is actually calculating what taxes should be, how to properly collect them, you know, it takes a whole enterprise just to do that alone. It's going to discourage consumption, because people are going to have to pay more, and they're going to say, oh, well, maybe I don't need that thing, which is going to discourage production, which is going to bring down industry altogether. Another negative consequence is that it's going to encourage, as I've already said, smuggling and fraud, and fourthly, taxes require routines, various kind of surveillance mechanisms, which he believes to be an encroachment, which he believes to be a violation on people's natural liberties, if you put upon these kind of surveillance mechanisms against people's consumptive habits.

And then to kind of conclude the book, he considers the situations in which a country might need to incur a debt.

So they might need to go into debt, like in time of war, they might need to borrow money, and they might borrow from a neighboring country, but they might also borrow from rich people within their country, like manufacturers or merchants who have a lot of money, who can then give a big sum of money to the state immediately, so that they can cover the costs of a war, but then the negative effect of that will be that the government will then be beholden to these people that lent them the money.

Or another issue is that if a sovereign doesn't have the means to pay back the money, they probably have control over the production of money, and so they might clip the money, they might reduce the value of the money so that they could pay it back, but it's only a nominal, you're only paying back the nominal value, you aren't paying back the real value, and so on and so forth, and that creates various issues.

So to conclude the book then, and it kind of ends abruptly, he says that taxes need to be properly calculated in order to encourage more industry, and so that the money taxed actually goes for the benefit of the people and their participation within industry. Now of course he's not considering things like healthcare, he's not considering things in all that much detail like schooling or education, especially today when we have such specialized fields of knowledge that were just not the case at the time, and so there are so many issues with this.

But his kind of last point is that if a nation is spread too thin, if it has established so many different colonies across the world, it is going to be shooting itself in the foot because it doesn't have the means to properly defend, to properly cover, to take care of all these different colonies, and that's just going to cost more people money in the form of taxes, in the form of lending to the government, and so that's going to be detrimental to the nation's growth.

And that's more or less it, I mean I skipped a lot, and what I say when I skipped a lot is that whenever he puts forward a point, and I've covered all of his big points here, whenever he puts forward a point then he'll go on this long tangent giving the history of a certain thing in relation to George I and the money clipping of William and whatever, and the different relationships between the production of corn in Scotland versus England. They're interesting things, but they aren't all that relevant because none of that applies today. Really what I wanted to get at were the big points that he made and how they fare to today, and I'm going to, in a couple weeks, because I'm going to take a little break from political economy from this kind of economic stuff, but in a couple of weeks I'm going to start on David Ricardo's approach that comes at odds or has some issues with what Smith gives us, and then after that I'm going to move into Marx, and that'll round off a kind of political economy section of this channel.

Now if you made it this far, wow, I'm very impressed you made it through all these episodes. If I excluded anything or mischaracterized anything, I'd love to hear about it. Let me know, and yeah, if you found it useful, like, share, subscribe. If you're listening on Apple Podcasts, leave five stars, that would help me out a lot. Thanks for watching, keep a review, and yeah, catch you next time. Take care.