Having received the letter from Speaker Jay Lucas appointing me to the SC House Tax Policy Review Committee that he formed back in 2016 (an appointment I have managed to avoid until now), I decided to brush up on the foundational canons of modern tax systems.
The first canon comes from Jean-Baptiste Colbert, the 17thcentury economic czar of Louis XIV. He observed, “the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest amount of hissing.” The goose finally noticed that she was plucked and the French monarchy was overthrown in 1792. In modern parlance that means Louis XVI, like George H. W. Bush, lost his job over his tax policy decisions.
The remaining canons come from Adam Smith, the 18thcentury Scottish economic philosopher who theorized “the invisible hand” that brings equilibrium to a free market economy. He issued four canons of taxation:
- Taxes should be equitable (i.e. progressive). He did not advocate a flat tax.
- Taxes should be certain or known beforehand for both the taxpayer and the taxing authority. It should not be arbitrarily set at the moment.
- Taxes should be paid in the most convenient method for the taxpayer.
- Taxes should be as small as possible to pay for government functions.
Economists since Smith have added other canons such as:
- Taxes should be sufficient. Revenue should cover the cost of government without resorting to deficit financing.
- Taxes should be elastic. Revenue should rise and fall as needed.
- Taxes should be flexible. The tax structure should be easily changed.
- Taxes should be simple. The tax system should not be complicated.
- Taxes should be diverse. Revenue should be collected from different sources.
I would add that taxes should be as directly related to a specific need or purpose as possible.
Smith left it to us to define terms or even reject them. What constitutes a government function, a convenient method of payment, or a progressive tax? Do tax exemptions violate his equitable rule? Can a progressive tax rate be fair?
Speaking of government function, I noticed in today’s Wall Street Journal that Atlanta has three proposals to build public green space parks on top of various interstates that run through the city. The parks would connect to future parks to be built on the top of surrounding buildings. Of course, these projects would be financed by tax revenue. The proposals sound idyllic but having a park on top of I85 in downtown Atlanta seems a nightmare for drivers. Are the construction of such parks a proper function of government or would tax revenue be better used to repair Atlanta’s streets? That’s a Georgia problem but the example shows how creative politicians can be when spending tax revenue.
Regardless of political party, each legislator has his own idea of tax policy formed by his constituents and the businesses within his district. I keep this difficult fact in mind when considering how to achieve viable tax reform. I also keep in mind that the legislature has the power to change tax policy. To broadly paraphrase Cormac McCarthy, A legislature can do anything. Make a tax. And a tax system to collect the tax. An evil that can run itself a thousand years, no need to tend it.
Well, South Carolina’s tax system badly needs tending.