Economic Collapse (Prepping for Tomorrow Book 2)

by Bobby Akart

  When the crown lands had become private property, they would, in the course of a few years, become well-improved and well-cultivated... the revenue which the crown derives from the duties of customs and excise, would necessarily increase with the revenue and consumption of the people.

  The principles of taxation There are four principles that should guide legislators in the design of taxation. There is no art which one government sooner learns of another than that of draining money from the pockets of the people. First, people ought to contribute, as far as possible, in proportion to the income that they derive under the protection of the state.

  Second, taxes ought to be certain, and not arbitrary. The time and manner of payment should be clear to everyone. Otherwise, it gives excessive and arbitrary power to tax gatherers, and can lead to corruption and intimidation.

  Third, taxes should be levied at a convenient time. Taxes on rents or houses, for example, should be payable when rents are paid. Taxes on consumable goods are convenient too, because they are paid little by little, as goods are bought.

  Fourth, taxes should cost no more than necessary. They should not require a great number of expensive officers to collect. They should not discourage industry nor destroy capital. They should not encourage evasion (as high excise taxes encourage smuggling) nor should the penalties ruin those who are driven to evasion. And they should not require frequent, odious and vexatious visits from tax gatherers in order to collect them.

  These principles of taxation would seem entirely natural today. The fact that he has to state them indicates how arbitrary and unjust were the taxes of his day. However, there are inconsistencies in Smith's other tax proposals. He opposes taxes on consumption, but supports a tax on luxuries (including things that we would think rather basic today, like poultry). He says that people should pay tax in proportion to their income, but wants the rich to pay 'something more than in that proportion'.

  Taxes on land

  If taxes are levied on the rent of land, it requires periodic reassessment, since rents do vary from time to time, and the tax would otherwise become unequal and unfair. This of course requires a certain bureaucracy – rent agreements would have to be declared and registered (and indeed, policed) to prevent any fraudulent collusion between landlord and tenant to evade the tax.

  Taxes on the produce of land, such as tithes, are very unfair. They fall harder on those who own and farm less productive land. And they discourage landlords from improving their land, or farmers from investing in better cultivation, when the church or state shares none of the expense but takes part of the profit.

  House rents can be divided into building rent – the profit on the capital used to build the house – and ground rent – the rent derived from the ownership of the land it is built on. Taxes on house rents would fall most heavily on the rich, which is perhaps not unreasonable, and rents would be very easy to ascertain. Taxes on ground rent would have the advantage of being a tax on land ownership and not discouraging improvement and building, but then it is harder to ascertain what part of the total rent should be considered as ground rent.

  Such difficulties have led legislators to adopt easier ways of estimating the rent. Now, for example, taxes are levied in proportion to the number of windows in each house. Unfortunately, the low rent house of a poor family in the country can have more windows than the high-rent house of a rich family in town, and this tax is accordingly very unfair and unequal in its impact.

  Taxes on capital and profits

  There are two kinds of income generated by capital, namely interest and profit. Profit is not a good object of taxation, because it is the compensation for the risk and trouble of employing capital, and if it were taxed, employers would have to increase their profit margins (making their products dearer for consumers), or reduce the interest they pay to lenders (making those with savings worse off).

  Interest would appear to be as easily taxed as rents, but this is not so. First, loans and repayments are much easier to conceal than land and rents; monitoring them would require an intrusive bureaucracy. Second, capital is very mobile, and owners can avoid the tax (and the vexations of the tax-gatherers) simply by moving their capital abroad. And that robs domestic industry of the capital it needs to grow.

  The proprietor of stock is properly a citizen of the world, and is not necessarily attached to any particular country. He would be apt to abandon the country in which he was exposed to a vexatious inquisition, in order to be assessed to a burdensome tax, and would remove his stock to some other country where he could either carry on his business, or enjoy his fortune more at his ease.

  Some countries have taxed the profits of particular trades – such as hawkers and peddlers, and hackney coaches and sedan-chairs. The licence to sell alcohol is another form of taxation. However, such taxes always fall ultimately on the consumers, rather than the dealers, who simply raise their profit margins to compensate for the tax.

  Tax can also be levied when property is transferred – such as death duties or stamp taxes. But such taxes eat into the nation's capital. They transfer it into the current consumption of public expenditure, and leave less to be invested in productive enterprises.

  Taxes on wages, individuals and goods

  Just as producers, in order to maintain their margins, pass on taxes to consumers, so are taxes on wages ultimately paid by the employers – and therefore, once again, by the consumers.

  Absurd and destructive as such taxes are, they still occur in many countries. Wealth taxes are arbitrary and unfair, given that a person's wealth varies from moment to moment. Capitation taxes are unfair because they fall most heavily on the poor: like income taxes, they simply push up wages and therefore, ultimately, consumer prices.

  Taxes on the necessities of life (such as salt, leather, soap and candles) do the same. Taxes on luxuries raise only the price of those luxuries, but like customs duties, they are very expensive to collect. They discourage particular industries, and heavy taxes of this sort prompt people into evading them, requiring an intrusive bureaucracy to police them.

  Public debts

  When the costs of running the public sector are financed through borrowing, it consumes some of the capital that has been built up within the country. Private capital that is intended for the maintenance of productive labour is diverted into the support of unproductive labour.

  Smith is not exactly arguing that public servants are 'unproductive' in the sense we would understand the word today (though he does think that public services tend to be less efficient and well-managed than private businesses): rather, he is saying that most public services are a form of consumption. If they are financed by debt, this amounts to consuming the capital of the nation.

  On the other hand, the more that is borrowed, the less has to be raised in taxation, and borrowing can be a rational way to finance a large, lengthy and costly expenditure, such as a war. Private capitals would certainly suffer greatly if all the costs of a war had to be raised through tax rises at the time (though it might make wars

  shorter, less popular, and less likely to happen).

  And yet, when the principle of government borrowing has become entrenched, the number of taxes that come with it still put a burden on the public that makes it hard for them to maintain their capitals. As a result of the debt, Britain's peacetime public budget is now more than £10m – which would be enough to fight a war, under conventional tax-based financing.

  People argue that the public debt is simply a transfer from one set of pockets to another; no money goes abroad, and the country is not a farthing poorer. But this is not true. The Dutch, for example, own a very large part of our public debt. Furthermore, the debt diverts capital from landowners and employers, towards the government's creditors. With less capital, land is less improved, and agriculture declines; the same is true of manufactures. They face the further vexation and cost of the necessary visits from the tax gatherers. So capital is being transferred from people who have a
keen interest in using it productively to those, mere creditors, who have no interest in the condition of land or the good management of the capital stock at all.

  Borrowing has enfeebled every state that has done it. Genoa and Venice are the only Italian republics that remain independent. Spain seems to have learnt the practice from Italy, and was deeply in debt by the end of the sixteenth century, before England owed a shilling.

  France too suffers a large debt burden. It may be that England's military expenditure, and tax burden, have been light enough that private capital has been strong enough to repair all the breaches which the waste and extravagance of government has made in it, but another war may yet compromise it.

  And we should remember than when public debts have been run up, there is scarcely any example of their being fairly and completely repaid.

  The cost to Britain of maintaining its colonies has been large. The last war cost upwards of £90m. The Spanish war of 1739, undertaken mainly on account of the colonies, cost above £40m.

  Had it not been for these wars, the public debt might well have been completely extinguished by now. It is argued that the colonies must be protected, as they are

  provinces of the British empire. But they contribute neither revenue nor military force to the empire, they are merely showy appendages of the empire. And if the empire can no longer support the expense of maintaining these appendages, it should let them go, save the expense, and live within its modest means.

  Chapter 3 The Incredibly Condensed Theory of Moral Sentiments

  Natural empathy as the basis of virtue

  Human beings all have a natural feeling for others. Even the worst of us feels some pity when others suffer. We flinch when we see someone about to be struck, and writhe when we watch the slackrope artist. And we share the happiness of others too. Let us call it sympathy.

  How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it.

  Yet there are limits. We sympathise only when the actions and emotions of others seem appropriate to their circumstance. When we see someone consumed with grief, we want to know what has befallen them: it is not their emotions that excite our sympathy, so Smith says sympathy, so we will stick with that, but empathy might be a more accurately descriptive word today.

  On the other hand, we do feel a genuine pleasure when someone else exactly shares our emotions and opinions. We unburden ourselves onto friends, and their sympathy makes us feel better. We consider the views of those who agree with us as just, proper and appropriate. But when we do not share the emotions of others, or disapprove of their actions and opinions, we think them at fault, and it distresses both of us.

  Even so, as mere spectators, we cannot really share the full ferocity of another person's emotions – the fierce anger of someone who has been wronged, say, or the profound grief of someone recently bereaved. Our sympathetic feelings, though genuine, are inevitably weaker.

  But these other people are spectators of our emotions too. They will see that we feel less strongly than they. This discord will distress them, and prompt them to restrain their emotions in order to bring themselves more into line with our view of their predicament.

  Gradually we learn what emotions and actions seem proper to others. We try to temper them to the point where an impartial spectator would fully share our sentiments and regard them as appropriate. Indeed, we are prompted to go further and show real concern for others, because we know that an impartial spectator would approve, and we take pleasure from that.

  And hence it is, that to feel much for others and little for ourselves, that to restrain our selfish, and to indulge our benevolent affections, constitutes the perfection of human nature; and can alone produce among mankind that harmony of sentiments and passions in which consists their whole grace and propriety.

  Smith's explanation of the source of human morality is completely novel. Many philosophers, from the ancients such as Zeno to the moderns such as David Hume, had sought to explain moral action as something beneficial, either to the individual or to society. Smith makes the case that moral action is indeed beneficial, but it is not a matter of calculation. Rather, human beings have a natural empathy with each other, and we quickly learn what others will tolerate and what they will not.

  Passions such as pain, hunger or love are very specific to the individual. But there are social passions (such as fellow-feeling) and unsocial passions (such as hatred) too, and these are where sympathy has a key role.

  We are also more disposed to sympathise with a person's joy than with their sorrow. This explains why poor people conceal their poverty and rich people parade their wealth. Money does not really buy happiness, but we suppose that it does; and all our attention, sympathy and admiration is worth far more to the rich than the baubles and minor conveniences that money actually delivers.

  Reward, punishment and society

  Rewards are important for encouraging the social passions, and punishments for discouraging the unsocial. Hence it is the intention, more than the outcome, which excites our approval or disapproval. Only when a helpful action stems from a positive motive do we believe it merits reward; and only when a harmful action stems from a negative motive do we believe it merits punishment.

  Indeed, as social creatures, our very existence requires that unmerited and unprovoked malice should be restrained through punishment, and nature has given us strong instincts to guide us in this (though we may conceitedly put it down to our own reason). We cannot look into people's hearts, of course, so rather than punish everyone we suspect of having bad motives, we punish people only when their actions are intended to cause harm. Even robbers and murderers can live peacefully together, provided they restrain their urges to rob and murder each other. The rules we have to prevent people harming others, we call justice. Without justice, society could not possibly survive – which is why our instinct to preserve it is so strong.

  Conscience

  But nature has given us something far more effective for this purpose than our laws and punishments, namely conscience. We judge other people's actions, but we also judge our own too. That internal judge is a harsh critic. Never mind if others praise us: we need to feel worthy of that praise.

  Conscience has a powerful social function. It stops us from becoming too absorbed in ourselves and too forgetful of others. The loss of a little finger may be more immediate to us than an earthquake that consumes the whole of China. But conscience would never let us permit the loss of so many distant lives, if by sacrificing our little finger we knew we would prevent it. To nature, all people are important, and conscience gives us some of that perspective. It makes us unwilling to harm others merely for our personal gain.

  Another useful instinct is our disposition to make and follow rules. We see how our actions affect others and how theirs affect us, and gradually we develop ideas of what sorts or actions are appropriate or inappropriate. These moral rules give us a quick indication of how to behave, without having to think out each situation afresh.

  Different societies may have slightly different norms, but if each system did not promote social welfare, it would soon cease to exist. Even though we observe the rules only to spare ourselves a guilty conscience, we end up helping to promote the well-being of society.

  To Smith, morality is a matter of social psychology. Certain rules of action generate a well-functioning society. When they are followed, society prospers, and when they are not, it is destroyed. Smith was writing a century before Darwin, but he is trying to express an evolutionary view: nature has endowed us with conscience and morality because it helps us to survive.

  Morality and money

  The rich, too, benefit the rest of us without meaning to. They give employment to all those people who make the luxuries and status symbols they demand; it is a great equalizer. The supposed b
enefits of wealth may be a delusion, but the pursuit of riches drives people to enormous exertions, which improve not just manufactures, but science, the arts and intellectual life along the way. [The rich] are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among its inhabitants.

  Virtue and the good society

  A truly virtuous person has prudence, justice and beneficence. Prudence helps moderate the individual's excesses and therefore benefits society. The rules of justice prevent us harming others. Beneficence promotes the happiness of others, so helps society too. Self-command over our violent passions can be virtuous too: but it can be double-sided, turning into the cold steel of the zealot.

  Normally we are most concerned for ourselves, then our family, and only then for others. But since humanity is more important than the individual, self-sacrifice is sometimes needed. Nature does give some individuals the self-command to make such sacrifices, which we admire – insofar it is used for beneficial purposes rather than destructive ones.

  Affection for our country implies respect for its institutions, and is not the same as sympathy for other people. In times of turmoil, the institutions of a country can collide against the happiness of its citizens. Politicians then start proposing to overthrow existing institutions and replace them with 'rational' alternatives. But we should remember that old institutions may deliver real benefits that are not obvious to reformers, and that all individuals have motivations of their own that may submit so easily to the politicians' great plans. Freedom and human nature are a surer guide to the creation of a harmonious, functioning society than the supposed reason of visionaries, or fanatics.