The revenue that a nation needs to meet its many expenses may come from one of two possible sources – from the funds belonging
to the sovereign / state, or from the people (in the form of taxes).
Like any other individual, the sovereign / state may also own land and capital, and generate revenues from them in the form of rent and profit. The profits of a public bank are the source of revenue to many sovereigns. The post office is another commercial enterprise undertaken by most sovereigns. And like any other individual, the sovereign / state may also earn interest from money; either by lending it to foreign governments or to its own citizens. The sovereign, being a prominent landowner, derives a significant part of its revenue from the sale or rent of public lands.
However, the author cautions us that the sovereign / state makes a poor tradesman. According to the author, the professions of sovereign and trader are inconsistent with each other. In his experience, one may either be a good sovereign and a poor businessman or vice-versa, but never both at the same time! The reason, says the author, are that those who manage the sovereign’s funds are careless about the wealth of their master (as it is not their own) and frequently become wealthy at his expense.
As the public lands and capital of the sovereign / state are usually insufficient to meet all the expenses, the shortfall must be met by way of taxes upon the public.
The author says that there are four basic principles to be followed while raising taxes:
Equality – The citizens of any state should contribute towards paying taxes in accordance with their ability to pay those taxes.
Certainty – The tax which each individual has to pay should be certain, and not arbitrary. The time, manner and quantity to be paid should be clear to everybody, and not subject to the discretion of the tax-collector. In fact, this is essential if corruption is to be prevented. It is the author’s contention that there is no evil as great as uncertainty in the payment of taxes.
Convenience – The tax should be paid at the time, and in the manner, that it is convenient for the tax-payer to pay it.
Overheads – The tax that is collected – or as large a part of it as is feasible – should go straight into the treasury of the state; and not be used to meet sundry overheads such as paying the tax-collector’s inflated salaries.
The author says that the levying of taxes should be as little burdensome as possible as it may otherwise discourage the natural industry of the people. A burdensome tax may also give rise to widespread tax evasion and smuggling.
The author says that (unlike the rent on land) the interest earned on money is not suitable for taxation purposes, as the capital owned by any person cannot be easily or exactly determined at any point of time. To attempt to do so would be to subject the individual to unnecessary and uncalled for harassment. The other difference between land and capital is that land is a fixed asset whereas capital can be moved to any part of the world. If an individual found the tax to be too burdensome, he could move his capital and carry on his business elsewhere - where the direct tax burden was less oppressive. In fact, this would only be a loss to the nation concerned. Another point that the author makes is that the tax should not be a tax on the capital – but only a tax upon the interest earned.
Unlike direct taxes (which are taxes on revenue earned), indirect taxes are taxes upon consumption. These indirect taxes are less burdensome to the individual as the consumer pays the tax only to the extent of what he consumes. These indirect taxes commonly take the form of excise duties, customs tax and transit (toll) tax. The basic thrust of the author’s arguments is that higher taxes – by reducing the consumption of the taxed goods and by encouraging smuggling – provide lesser revenue to the government than more moderate taxes might have done. Thus, these taxes bring into the public treasury less than they keep out of the pocket of the taxpayer.
On a philosophical note, the author says that payment of taxes is not a sign of slavery - but of liberty. On the one hand, he acknowledges the authority of the state; but on the other hand the state recognizes that he is the master of property – and not the property of any other…In other words, by paying taxes (to the state) he earns the recognition of the state with regards to his individuality.