Adam Smith’s Principles of a Proper Tax System

(Note: Readers may find this commentary from April 21, 2004, of value in light of this year's tax deadline.)

Adam Smith was the first person to describe all the elements that establish a modern free market system. An 18th Century Scottish philosopher, his landmark "An Inquiry into the Nature and Causes of the Wealth of Nations" was published in 1776, the same year that the Declaration of Independence was signed.

In a chapter entitled "Of the Sources of the General or Public Revenue of the Society," Smith outlines a number of principles that should guide any system of taxation. What follows is a brief description of several of these, placed in the context of our 21st century American system.

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  • Every person should pay in proportion to the revenue that he or she enjoys as a result of the protection government provides. This means neither a "head tax" nor a graduated tax, but a flat tax.

  • Taxes should be predictable, not arbitrary. Each person should know with certainty exactly how much he or she will pay given a certain level of revenue. There should be no preferences, abatements, exceptions or biases for or against selected taxpayers, occupations or revenue sources.

  • Taxes should be convenient to pay.

  • The tax should not be expensive to administer.

  • The system should not create huge incentives to avoid paying, such as excessive rates or burdensome compliance costs.

  • The tax should not skew or destroy incentives to work and invest.

  • The tax system should not attempt "social engineering." The only proper role of a tax system is to raise revenue to run the government. It should not explicitly attempt to encourage or discourage certain types of behavior.

  • The tax system should not encourage political corruption by creating incentives for special interest to buy tax favors from legislatures.

The bottom line is we want a system that doesn’t try to pick winners and losers, and that promotes economic efficiency, innovation, productivity, and incentives to work and invest.


Jack McHugh, legislative analyst for the Mackinac Center for Public Policy, discussed these principles on a televised tax policy roundtable on the "Street Beat with Tara Wall" show on April 10 and 11, 2004. Eight minutes of the edited program, broadcast on Detroit stations WWJ and WKBD, can be viewed here.