"The necessaries of life occasion the great expense of the poor. They find it difficult to get food, and the greater part of their little revenue is spent in getting it. The luxuries and vanities of life occasion the principal expense of the rich . . . . It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion."
"It must always be remembered, however, that it is the luxuries, and not the necessary expense of the inferior ranks of people, that ought ever to be taxed."
It is morally right to tax the wealthy more than the working class. How does that sound to the 'taxation is theft' crowd?
But this is not to say he favored all taxes. But he did think there were some taxes that were actually good. One was the aforementioned luxury tax. Another was a tax on 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, 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.
When he uses "rent" in this context, it is the value that land contains. (derived, for the most part, from location, location, location). Most property taxes in the US are based on the total value of the property, composed of land and "improvements," improvements being structures, plants and other things.
There is a certain amount of rent (ie property value) that comes from the work of the owner: construction, maintenance, services. Smith believed that they were entitled to the fruits of their labor.
However, they are not entitled for that for which they did not create: it was created by others. Land in a major metopolitan area is not worth more than some rural backwater because someone is a brilliant investor, it is worth more because of the things that exist in that are. Access to markets, labor, public transit or roads are all paid for by the people as a whole. Why should one person take the fruits of the community's labor?
Secondly, land is a subject which cannot be removed; whereas stock [capital] easily may. The proprietor of land is necessarily a citizen of the particular country in which his estate lies. The proprietor of stock is properly a citizen of the world, and is not necessarily attached to any particular country."
This is another important point. Capital flight is a problem in developing countries, and some people claim that it is a problem for high tax states in the US, such as California (although I do not believe there is empirical evidence supporting that). Regardless, that problem is solved by this tax.
"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 ..."
"a tax upon the rent of land cannot raise rents, because the neat produce which remains, after replacing the stock of the farmer, together with his reasonable profit, cannot be greater after the tax than before it..."
The supply of land is inelastic (unchangeable), so the price is set solely by demand. Any tax would not reduce the supply, raise the price or create any deadweight loss.
A tax upon ground-rents would not raise the rent 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. . . . In every country, the greatest number of rich competitors is in the capital, and it is there accordingly that the highest ground-rents are always to be found. As the wealth of those competitors would in no respect be increased by a tax upon ground-rents, they would not probably be disposed to pay more for the use of the ground. Whether the tax was to be advanced by the inhabitant or by the owner of the ground, would be of little importance. The more the inhabitant was obliged to pay for the tax, the less he would incline to pay for the ground; so that the final payment of the tax would fall altogether upon the owner of the ground-rent.
Again, the price of land would not increase. The owner is currently charging as much as the market will bear for his land, either through the sale price or charging rent. He will not be able to charge anymore than that because the price is dependent on demand, not on supply.
In other words, a theoretical 100% tax on land would end up making the sale cost of land zero. The value of the land, which will still exist and is derived from the community, goes back to the community.
Of course in practice, the supply of land is not necessarily fixed. Different zoning laws change the maximum output possible on the land, and thus the value. But I have not heard any economist claim that this tax is worse than any other tax.
Most homeowners would not pay a large amount, because a larger proportion of the value of their property comes from the improvements on it compared to commercial real estate, whose value is substantially larger.
"For example, 10% of land owners (all corporations) in Baltimore, Maryland own 58% of the taxable land value"
As an aside, there was even more stuff that has been ignored about Smith regarding government expenditures. I am not as knowledgeable about this aspect of Smith so I will leave it to this site:
For a very small expence the public can facilitate, can encourage, and can even impose upon almost the whole body of the people the necessity of acquiring those most essential parts of education."
19th century economist Henry George is the most famous proponent of this type of reform, which he called the single tax.
There is a lot more information on him here: The Progress Report
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