Adam Smith, the Adam Smith Institute, and flat taxes
However by employing Smith’s name, the Adam Smith Institute implies that the founder of modern economics advocated their tax policies, thereby providing them with an authoritative intellectual legitimacy they may not in fact possess.
The right-wing think tank the Adam Smith Institute (ASI) is in favour of the UK adopting a “flat tax”: see its report, A flat tax for the UK – A Practical Reality. Such a move would be revolutionary. It would overturn a decades-long consensus that higher earners are subjected to higher tax rates than those who earn less.
Flat tax is an example of a 'proportionate' tax: all taxpayers incur the same rate, regardless of income. So, if the rate were 22% (as the ASI suggest) everyone would pay that much, regardless of whether they make £15,000 or £10billion. This is usually attended, however, with the important caveat that a personal tax-free allowance is given to everybody. The ASI advocates a threshold of £12,000 (a bit less than twice the existing personal allowance), below which no tax is paid. Above that everyone incurs the same rate.
This can be compared with “progressive” taxation: as income rises above certain thresholds, the rate at which it is taxed increases. The UK currently has a “progressive” taxation system, so for example once somebody earns more than £37,400, every pound over that threshold is taxed at 40%, but nobody pays tax on the first £6,475 they earn.
Yet if he were alive today, which system would Adam Smith himself have favoured?
Smith’s seminal Wealth of Nations contains a sustained discussion of taxation. But it does not address income tax, because it didn’t exist in his lifetime. Smith does, however, talk about other taxes, and examining what he says is revealing.
Particularly instructive is Smith’s discussion on the maxim of 'equality', and his thoughts on taxing house rents:
“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.”
These passages seem to put Smith in the progressive tax camp: he clearly believes that the rich ought to pay more than the poor. Yet things aren’t so simple. Such passages only show that Smith thought the rich should pay more tax in absolute terms, not that they should incur higher rates. These lines are compatible with flat tax.
But there is more:
“A tax upon house-rents, therefore, would in general fall heaviest upon the rich; and in this sort of inequality there would not, perhaps, be any thing very unreasonable. It is not very unreasonable that the rich should contribute to the public expence, not only in proportion to their revenue, but something more than in proportion.”
This passage is important. Smith’s sentiment is being applied not just to house rents, but to contributions towards the “public expence” generally. It is a statement that the rich ought to contribute “something more than in proportion”. It could be equally well expressed by saying that the rich should incur higher rates of taxation, not just pay a bigger total. And this seems straightforwardly incompatible with a flat tax regime, where all contribute to the public purse in equal proportion (albeit minus an initial tax-free allowance). It looks like Adam Smith wouldn’t have supported a flat tax for the UK: he wanted the rich to pay “something more than in proportion”.
Moving the UK to a flat-tax regime would be revolutionary. It would overturn the consensus that the better-off contribute, as Smith wrote, “something more than in proportion”. We must ask tough questions of a think tank which uses Smith’s name to promote radical changes to our society and economy that he himself probably wouldn’t have supported.