LAWCOMM | 403 | Tax Law | lecture notes |  But the possibility of a ﬂat

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

But the possibility of a ﬂat tax presents two basic problems



First, its supporters, although somemes loud, have always been outnumbered by

those who favour at least some degree of progressiveness



Secondly, the possibility of a ﬂat tax presents a technical problem: that it is very

diﬃcult to extract any tax at all out of poor people. For that reason, a ﬂat tax, if it

were to be feasible at all, would have to be charged at a very low rate. That, in turn,

would entail substanal cuts in government spending



Many advocates of ﬂat taxes are indeed in favour of cuts in government spending;

but the two issues – that is, the level of government spending and the structure of

the tax system – are disnct



Alternavely, it would be possible to have a ﬂat tax charged at a higher rate, if small incomes

were exempted altogether



But a ﬂat tax that exempted small incomes would be, in its eﬀect, progressive. That

is, people with larger incomes would pay a larger percentage of their income in tax

than people with smaller incomes. For that reason, many supporters of ﬂat taxes

insist that the tax should be charged at the ﬂat rate on all income, from the ﬁrst

dollar



From this perspecve, a ﬂat tax that exempted small incomes would largely or even

enrely miss the point



As for regressive taxes, almost everyone seems to agree that they are unfair



Nonetheless, regressive taxes are in fact common. The tax on cigarees, for example, is

steeply regressive. That is, the poor smoker typically pays a larger part of his income in

cigaree tax than the rich smoker. Petrol tax is also probably regressive. It is possible, too,

that general consumpon taxes, such as GST, are likewise regressive (but see above)



Smith’s analysis seems to incorporate two basic ideas, both of which have subsequently been extremely inﬂuenal and

evolved into:

Sacriﬁce theory (Smith did not invent this term)



This is the theory that the tax system ought to require everyone to make an equal sacriﬁce. In

principle, that might sound like a good idea



The problem is that it is unclear what “sacriﬁce” means and how you might measure it. For instance,

most people seem to think that equality of sacriﬁce requires people with large incomes to make a

larger contribuon than people with small incomes; but how much larger?

Beneﬁt theory (Smith did not invent this term)



This is the theory that the tax system ought to require people to contribute to the state in proporon

to the beneﬁt they receive from it



Again, that might sound like a good idea, but it is problemac in its implementaon in that it is

unclear how you might measure beneﬁt derived from public spending



For instance, the cost of policing poor neighbourhoods might be more (due to higher crime

rates) than the cost of policing rich neighbourhoods, which would seem to constute an

argument for regressive taxaon. Conversely, a rich person might be prepared to pay more

than a poor one not to be mugged – but how much more?



Another example is that one of the funcons of the state exercised via the police (who are

paid for by taxaon) is the protecon of property – you beneﬁt from taxes to the extent that

the state protects your property, so the beneﬁt you derive should be proporonal to the

value of the property

Thus the appeal of both sacriﬁce theory and beneﬁt theory turns out to be rather superﬁcial. The literature on

sacriﬁce theory and beneﬁt theory is substanal but ulmately inconclusive.

See generally Walter Blum and

Harry Kalven,

The Uneasy Case for Progressive Taxaon

(University of Chicago Press, 1953).



As for Smith himself, he seems, in his discussion of equity, to favour proporonal taxaon. But later in his book he says

this: “It is not very unreasonable that the rich should contribute to the public expense, not only in proporon to their

revenue, but something more than in proporon.” So here he seems to be favouring progressive taxaon. Thus it is not

really clear whether Smith favoured proporonal or progressive taxaon. But at the me he was wring the concepts of

proporonal and progressive taxaon did not exist, so it is hardly surprising that his analysis is a bit vague.

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