LAWCOMM | 403 | Tax Law | lecture notes | CERTAINTY  Smith’s second cri

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CERTAINTY



Smith’s second criterion was

certainty

; that is, the extent of each taxpayer’s liability should be determined on some

principled basis, not arbitrarily

“The uncertainty of taxaon encourages the insolence and favours the corrupon of an order of men [i.e. tax

collectors] who are naturally unpopular, even when they are neither insolent nor corrupt.”

“The certainty of what each individual ought to pay is … a maer of so great importance that a very

considerable degree of inequality … is not near so great an evil as a very small degree of uncertainty.” – we all

will be prepared to put up with a fair degree of inequality in taxaon so long as the burden is reasonably

certain and not arbitrary



It seems obvious that taxaon should not be arbitrary

Indeed, this seems so obvious that to modern readers Smith’s emphasis on certainty somemes seems

excessive and strange. The explanaon is that, at the me he was wring (1776), taxaon was oﬅen arbitrary.

That was a serious problem, oﬅen exacerbated by corrupon

Nowadays, in the developed democracies, taxes are almost always collected in accordance with the rule of law

and there is only a very low level of corrupon. Consequently, the degree of certainty is very high, so certainty

can prey much be taken for granted. There are of course many diﬃcult cases, but the fact remains that

arbitrary taxaon is seldom a problem in the developed democracies.

CONVENIENCE



Smith’s third canon was

convenience

. “Every tax ought to be levied at the me, or in the manner, in which it is most

likely to be convenient for the contributor to pay it.”

For example, a sales tax is generally paid at the same me as you buy the goods in respect of which it is

charged. This, too, obviously has much to commend it.

Another example is that in New Zealand, the PAYE system means that employers are legally obliged to

withhold the part of the salary that must be paid as tax – therefore, it is extremely convenient for the taxpayer

to pay the tax because they don’t have to do anything

EFFICIENCY



Smith’s fourth canon was

eﬃciency

. “Every tax ought to be so contrived as to take out of the pockets of the people as

lile as possible, over and above that which it brings into the public treasury.”



It is always the case that the cost to taxpayers collecvely is greater than the amount of money available to the

government to spend as a result of taxaon

It is nowadays generally thought that there are three main reasons why taxes typically take more from the

people than they bring to the state



First, there is the

cost of

administraon

– that is, the cost to the government of hiring people to

collect the tax (IRD and Customs Department)



Secondly, there is the

cost of

compliance

– that is, the cost to taxpayers in complying to taxaon and

in addion to the tax paid (e.g. cost of maintaining records, ﬁlling out forms, hiring accountants etc.)



And, thirdly, there is the

deterrent

eﬀect or

deadweight cost

of taxaon. That is, the tax might deter

ﬁrms from undertaking ventures from which society as a whole might beneﬁt – or they might carry

out their venture in some other country with lighter taxes

The ﬁrst of these costs – administraon – is usually easy to quanfy. The cost of compliance, too, can usually

be determined with reasonable precision. The deadweight cost of taxaon, however, is diﬃcult to measure –

for how can you determine what might have happened, but didn’t?



It is common for economists to think that the way to reduce deadweight loss is to simply cut taxes –

but this is not necessarily the case



Smith says that we should have a market and leave the allocaon of economic resources to the

market as much as possible and the state should intervene only in cases of market failure



Most people nowadays agree that the state should do more than what Smith suggests (e.g.

subsidising educaon and health costs, which are not necessarily areas of market failure)



If we cut taxes, this might reduce deadweight cost, but it might shrink the economy



If taxes were reduced to zero (as an extreme example), this might reduce deadweight cost to

zero, but it will reduce the economy to a fairly basic state – this is because in order for there

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