Tax theory has its roots in eighteenth-century economics. It was then that tax neutrality was in the focus of attention of the prominent English scientist Smith, as well as the economist Ricardo. At the same time, it must be recognized that the foundations of the theory of taxes were laid much earlier, as far back as the seventeenth century, in a treatise on taxes and taxes, written by an outstanding scientist Petty. It was in his work that those ideas and provisions were voiced, which then formed the basis for a full-fledged economic discipline.
Historical aspects
The classical theory of taxes is based on studies that have examined the relationship between costs and labor prices. This is what the English economist Smith did, justifying the basing of prices not only on labor costs, but also on land rent, percent of capital, and profits. It was then that for the first time drew attention to the fact that the price should take into account all production costs inherent in the enterprise.
Labor was not the only factor that attracted the attention of British scientists. Then it was found out that capital, from which the amount of profit follows, and land, which gives an inflow of money from rent, will be an important factor. Consequently, taxes should not be assigned to a strictly defined social class (such a point of view existed among physiocrats), but to factors that provoke profit. At the same time, the theory of taxes and taxation implies equal levy of “tribute” to capital, labor and land.
British scientists have proven that ...
In his works on tax theory, Smith cited an extensive evidence base for economic liberalism, with particular emphasis on the laws of market building. It was he who drew the attention of the scientific community to the fact that a correctly formulated legislative framework allows for the effective development of the economy, while private tax theories, the individual interests of individual individuals, cannot fully reflect, evaluate and embrace the trends inherent in society. At the same time, the market situation should be for the benefit of each participant in the relationship, since it is human nature to take care of his own benefit in the first place. As follows from the basic theory of taxes, with the right approach, the desire to secure for themselves the greatest profit brings benefit to society as a whole.
In his work, Smith opposed state control over the economic sector, in particular the market. According to this prominent analyst, the main role of the government of the country is the “night watchman”, which protects the country from the outside and from internal factors, ensures the justice of the court, and is engaged in public and social institutions. The state should receive funding for all its tasks from various sources. This statement subsequently found a certain response in works on the theory of taxes of Turgenev.
Taxes and taxation
According to the theory of taxes, the funds that the treasury receives in this way should be spent primarily on providing the opportunity to defend themselves from external threats. This is precisely what is said in Smith's economic work published in 1776. He set himself the task of exploring the possibility of spending public funds on various public issues and came to the conclusion in his theory of tax law that the money collected in this way should be spent on maintaining the dignity of the country's authorities, as well as on public protection. Then it was formulated that only a fiscal function is available to taxes.
As general tax theories say , financial opportunities to meet other state needs must be paid by resorting to other duties and fees. These funds must be paid by those who use the benefits, services sold through state functions. Smith's work also addressed issues of providing means of religious education, and emphasized the need to introduce special fees to provide this sphere with resources. However, both in the work of Smith and in the subsequent supporting private theories of taxes, it is mentioned that in case of insufficient targeted funding, it is allowed to turn to the taxation system for help.
Not to be confused!
As can be understood from the above, classical tax theories force a strict distinction between tax payments and others. The main factor for dividing into groups is the purpose of the money, that is, the direction where they spend it. Nowadays, many economists hold that such an approach to distribution is too superficial, artificial, but in the eighteenth century it was really popular.
From the classical tax theory it follows that labor can be divided into productive and unproductive. The first category includes one as a result of which the cost of the processed material increases, and the second includes services that disappear at the time of sale. Public services, for the implementation of which the company pays taxes, belong to the second group.
Argue or not?
As can be seen from the story, the general theory of taxes was initially fully consistent with the concept of the English economist Smith. Most of the specialists of that time, as well as of later periods, accepted the rules established by them in their works as not requiring additional evidence and applied unconditionally. At this moment, the attitude towards public services as unproductive appeared. As can be seen from the general theories of taxes, during this period, payments turned into an inevitable evil, everywhere causing a negative attitude.
In 1817, Ricardo in one of his economic works admits that taxes delay the growth of accumulations and interfere with production. He also argues that the effect of any tax is akin to the effect of a bad climate, poor soil quality or lack of workers, facilities and equipment to implement a successful enterprise. Similar sharp attacks in the experience of tax theory were encountered not only by Ricardo, but also by other well-known economists of his time. There was a belief that the tax that society had to pay fell on the shoulders of entrepreneurs, thereby reducing profits, and the production process was losing opportunities for development.
Consent and Controversy
From the works that have survived to this day, materials devoted to the experience of the theory of taxes, it is clear that Smith and Ricardo, having gone from the same concept initially, have diverged their views on the topic under study over time. The judgments inherent in the works of both analysts are largely similar, at the same time contradict each other in the sense of the conclusions. Duality was expressed through the attitude to public services as unproductive, distracting the financial resources of the state from real tasks and deeds. At the same time, both recognize that tax is a payment for services provided by the state, which is a fair reward.
Smith in his works writes that government spending on citizens of the country is akin to the administrative spending of the building owners. Of course, any property brings a certain income, but only if its owners maintain their property in good condition, which requires investment of effort, labor and money. This is fully applicable to the whole country, where the state is becoming a property, and residents paying taxes are becoming owners. However, at the same time, Smith says that taxes for society are a net minus. It is even surprising that none of the well-known economists of that time saw in these opinions a contradiction so obvious to a modern analyst.
Lack of theoretical basis
Many modern economists agree that the inconsistency of Smith's conclusions and evidence base is due to a lack of theoretical capabilities for that period of time. Economics as a science did not yet exist in the form in which we now know it; there was no group of concepts with which taxes and taxation are associated. In fact, Smith’s writings cannot even find definitions of the term “tax”.
If you carefully, thoroughly familiarize yourself with the postulates that Smith formulates in his writings, you will notice that he promoted the principles of pleasure, equivalence. Ricardo, who later joined Smith in laying the foundation for economics as a science, also held the equivalent position. Many scholars agree that Smith was able to very successfully formulate the fundamental principles on which the modern science of taxation is based. This is justice and certainty, economy, comfort. In the future, this was all called taxpayer rights and declared in official documentation. But before Smith, no one thought about anything like that; in fact, he became a pioneer in this area.
Development requires opportunity
Analysts, economists who followed Smith's theory and took up its development, in their research could not come close to the economic essence of the tax. Modern scientists find certain exact, close to the truth grain, grains in the works and fabrications of some of the founders of the theory of economics - even though they did not come to real success, but some reasonable ideas were put forward for general discussion. A classic example is the work of Frenchman Say. This scientist was a follower of the classical theory of taxes, but contradicted the physiocrats, who were convinced that productivity was peculiar only to agriculture. At the same time, Sei was ready to enter into confrontation with Smith, who believed that only material production can be considered productive.
Say formulated a different approach to the criterion of benefit. He proposed to consider production as human activity, the purpose of which is to create something useful. Therefore, it is not the material outcome of the process that matters, but the result of production activity. If we consider public services, then the benefits are intangible, but nevertheless they are - no one was ready to argue with this fact even at that time. This means that the people involved in creating the good are engaged in productive labor, and such is the payment. Here taxes come to the rescue as a financial real opportunity to thank those who work for the good of society. However, Say, in spite of certain successes, did not go far in his fabrications, and could not develop rational preconditions. This outstanding French economist was a figure of his time, therefore, despite the originality of thinking, he believed that tax is evil, and the optimal financial plan involves reducing costs, which suggests that the best tax is the one that is less than all the others.
Opinions differ
When it comes to the classical theory of taxation, opinions about the benefits of eighteenth-century surveys for the modern economy vary widely. Some are convinced that this was a waste of time, for a long period of time turning the most outstanding minds of the European powers in the wrong direction. Others are convinced that it was then that the foundations were laid on which the modern economic system was based, therefore they should not be underestimated, despite the relatively small productivity of the impressive volumes of economic and analytical studies of that time.
The most correct compromise assessment allows one to take into account both the positive aspects and the negative aspects of the theory of taxes and taxation laid down in previous centuries. The nature of the tax from the point of view of the economy at that time was not disclosed, but it was possible to formulate principles that turned out to be really useful for analysts - those who could understand the essence of the tax. Of particular note is the concept of justice, which was closely linked even during the formation of the science of a market economy with taxes and fees levied by the state on society.
Classic Tax Understanding
If we systematize all the provisions formulated by the adherents of the classical theory of taxes, we can formulate the following definition of the term “tax”: an individual payment to the state, paid without fail, equivalent, spent on defense and maintaining power. The tax should be levied fairly, economically, definitely.
Modern approach
Currently, the theory of tax gives terminology quite a lot of importance. Under tax relations, in particular, understand such financial relationships within which resources are redistributed. These relations belong to the budget category and are distinguished from others, whose task is also the redistribution of resources, irrevocability, unilateral order and gratuitousness.
Tax - payment is strictly individual. It is paid by individuals, legal entities. In fact, there is an alienation of money from those who have some property, and also manage something quickly or on the basis of economic management. Payment of tax for all legal entities and individuals of the state is required.
Tax Functions
The modern approach to the theory of taxes involves the laying on them of a distribution, regulatory, fiscal function. At the same time, taxes are responsible for control and are a means of stimulating the country's economic development.
It is thanks to taxation that the state has the resources accumulated by the budget and spent on the needs of society. From here follows the distribution tax function, which involves talking about this category of finance, through which a single fund is formed. Already from it, as necessary, allocate some funds for certain purposes. Regulation through taxes involves the impact on subjects in the economic space, economic processes in society. From here follows the essence of the stimulating function of taxation - a preferential system that allows you to create the most pleasant climate for a particular industry in order to promote it. Finally, the control function of taxes involves evaluating existing collection mechanisms in terms of performance. At the same time, conclusions can be drawn about the need to adjust the current taxation scheme or the country's social, financial, tax policy.
To summarize
The classical theory of taxes is an important aspect of the history of market research, a must for study for every self-respecting economist. At the same time, one must understand that modern theories, although based on a number of ideas, postulates formulated as early as the eighteenth century, are significantly different from the approach used at that time. Thus, the study of classical theory, although it provides useful information, but you need to use it wisely, without applying the conclusions of those times as relevant to the modern market community.