Adam Smith on Tax-Regime Uncertainty

As Congress and the President consider yet another set of “reforms” for the federal income tax code, taxpayers should encourage them to heed the words of one of the first and greatest economists. In Book V, Chapter II, Part II of The Wealth of Nations (Modern Library, Cannan ed., p. 778), Adam Smith wrote that:

The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person. Where it is otherwise, every person subject to the tax is put more or less in the power of the tax-gatherer, who can either aggravate the tax upon any obnoxious contributor, or extort, by the terror of such aggravation, some present or perquisite to himself. The uncertainty of taxation encourages the insolence and favours the corruption of an order of men who are naturally unpopular, even where they are neither insolent nor corrupt. The certainty of what each individual ought to pay is, in taxation, a matter of so great importance, that a very considerable degree of inequality [in tax burdens], it appears, I believe, from the experience of all nations, is not near so great an evil as a very small degree of uncertainty.

That lesson was by and large ignored last fall when lame-duckers in the House and Senate dithered about extending the so-called Bush tax cuts. Let us hope that more attention will be paid to it this year while new tax law provisions are on the table as well as two years hence, when reductions in tax rates enacted under President Bush are set to expire once again.