48 pages • 1 hour read
Adam SmithThe Wealth of Nations. The Theory of Moral Sentiments
Nonfiction | Book | Adult | Published in 1776A modern alternative to SparkNotes and CliffsNotes, SuperSummary offers high-quality Study Guides with detailed chapter summaries and analysis of major themes, characters, and more.
Book 5Chapter Summaries & Analyses
Book 5: “Of the Revenue of the Sovereign or Commonwealth”
Book 5, Chapter 1 Summary: “Of the Expenses of the Sovereign or Commonwealth”
Smith states:
The first duty of the sovereign, that of protecting the society from the violence and invasion of other independent societies, can be performed only by means of a military force. But the expense both of preparing this military force in time of peace, and of employing it in time of war is very different in the different states of society, in the different periods of improvement (221).
Therefore, Smith believes the primary expenditure of government is that of military defense. Smith explains that in the manufacturing age, standing armies must be maintained so workers and capitalists can conduct their trades and ensure the nation’s continual economic prosperity. Such standing armies produce no economic value and therefore must be maintained by the state through taxation.
Smith states that the second duty of the sovereign is to protect its citizens from each other and from oppression, and to administer justice. Smith explains that as the state has a duty to protect its inhabitants from foreign enemies, it also has a duty to protect them from domestic enemies. Smith believes the cost of justice can frequently be paid by court fees, but cautions against structuring court fees in a manner that leaves judges susceptible to bribery.
Smith states that the third duty of the sovereign is to maintain public institutions and public works, which are advantageous to society, but of a nature that their required capital could not be repaid from profits. In this, Smith describes the duty of the state to fund public institutions necessary to society, that cannot yield a profit to individuals, such as infrastructure projects that benefit all of society. For these projects, Smith advocates a tax only on those who use the bridges, roads, etc., such as a toll maintained locally.
Smith also proposes that public education should be funded by the government through taxation. Smith recognizes that specialization can have negative effects on the intelligence, creativity, and innovation of workers, and proposes investment in education to prevent that class from descending into ignorance. He proposes this not as a way of aiding the poor classes, but as a way of ensuring a more prosperous society. Regarding higher education, Smith argues that publicly-endowed universities are as corrupted as merchant monopolies and trade guilds, stating that because their pay is independent from their performance, they are not motivated to excel. Smith prefers private teachers because they have more incentive to excel. The distinction between Smith’s views on elementary public education and higher education rests in his differing objectives for the two. With public elementary education, Smith’s goal is social stability. In higher education, Smith is addressing a more advanced need for quality education.
This chapter offers little guidance on offsetting public expenses, but is rather a summary of the expenses that Smith believes are worth supporting through taxation. Smith concludes that several expenses must be funded through taxation: national defense, the administration of justice, local or provincial expenses such as police, infrastructure maintenance, certain educational and religious institutions, and other institutions beneficial to the whole society that cannot be maintained in any other way but the general revenue of society.
Book 5, Chapter 2 Summary: “Of the Sources of the General or Public Revenue of the Society”
Smith explains that revenue not drawn from the profits of capital stock must come from one of two sources: a sovereign fund or the revenue of the people. Sovereigns can derive revenue from their funds either by lending it for interest or employing it for profit. The other method Smith mentions for raising revenue is taxation. Smith describes four principles of taxation: (1) citizens should be taxed in proportion to their income; (2) taxes should be well defined, not arbitrary, and it should be clearly stated the time and manner of payment; (3) taxes should be levied at a time convenient for the payor; (4) taxes should be not assessed at a level higher than necessary to fund the required institutions, so as not to encourage evasion or the destruction of capital.
Smith progresses with an assessment of certain taxes. Taxes on the rent of land require a strong bureaucracy and periodic reassessment. Taxes on the produce of land are unfair and discourage improvement of land. Smith is a proponent of taxes on house rents because their burden is placed more heavily on the rich. Smith disfavors taxes on profits because the effect would be for employers to increase profit margins, which would also raise wages and make products more expensive for consumers. Interest, on the other hand, is difficult to tax because payments can be easily concealed and capital can be moved abroad to evade taxation. Smith notes that taxes on merchants and license fees are always paid by consumers rather than the merchants, who raise their prices to compensate for the tax. Smith reasons that just as taxes on profits and merchants are ultimately paid by consumers, so are taxes on wages, which are paid by employers, who raise prices to compensate for the tax. Smith states that wealth taxes are arbitrary and unfair because wealth fluctuates, and that taxes on luxuries are expensive to collect and discourage trade in certain industries.
It appears there is no system of taxation Smith believes is fair or ideal, but he maintains that revenue must be raised. Smith does not find any one system of taxation to be the best, or even worth pursuing. All are flawed, but some system is necessary to raise money for the expenses he outlines in the previous chapter.
Book 5, Chapter 3 Summary: “Of Public Debts”
Smith believes Britain’s national debt is too high and it is imperative to repay it, or else face ruin. Smith reasons that debt financing of the public sector consumes the country’s capital and redirects private capital intended for productive labor to support unproductive labor. However, borrowing alleviates the need for taxation, of which Smith is not a fan. Smith reasons that this is only advantageous for lengthy and costly expenditures of national importance or with the potential to reap some large financial reward. Smith laments, however, that government borrowing has become excessive, and that taxes have not decreased alongside it. Debt transfers capital from productive to unproductive hands, and with that the national economy declines. Smith concludes that if Britain’s debt cannot be paid down via taxation, then Britain should abandon its colonies, as they cost the nation a considerable expense, financed through debt, that is not repaid and will not ever be repaid.
