Theory of taxes and taxation

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

The theory of taxes has its roots in economic writings of the eighteenth century. It was then that tax neutrality was the focus of attention of the outstanding English scientist Smith, as well as the economist Ricardo. At the same time, it must be admitted that the foundations of the theory of taxes were laid much earlier, as early as the seventeenth century, in a treatise on fees and taxes written by the eminent scientist Petty. It was in his work that those ideas and provisions were voiced, which then formed the basis of a full-fledged economic discipline.

Historical aspects

The classical theory of taxes is based on studies that have studied the relationship between costs and labor prices. This is exactly what the English economist Smith did, justifying the basing of prices not only on labor costs, but also on land rent, interest on capital, and profits. It was then that attention was first paid to the fact that the price should take into account all the production costs inherent in the enterprise.

Labor was not the only factor that attracted the attention of British scientists. At the same time, they found out that an important factor would be capital, from which the amount of profit follows, and land, which gives an influx of money due to rent. Therefore, taxes should not be assigned to a strictly defined social class (such a point of viewexisted among the physiocrats), but on the factors provoking profit. At the same time, the theory of taxes and taxation assumes to equally collect "tribute" from capital, labor and land.

British scientists have proven that…

In his writings on the theory of taxes, Smith provided an extensive evidence base for economic liberalism, paying special attention to the laws of market construction. 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 interest of a single individual cannot fully reflect, evaluate and cover the trends inherent in society. At the same time, the market situation should develop for the benefit of each participant in the relationship, since it is natural for a person to take care of his own benefit first of all. As the basic theory of taxes suggests, when done right, the desire to secure the most profit for oneself benefits society as a whole.

In his writings, Smith spoke out against state control over the economic sector, in particular the market. According to this outstanding analyst, the main role of the country's government is the "night watchman", which protects the country from outside and from internal factors, ensures the justice of the court, and takes care of public and social institutions. The state should receive funding for all its tasks from different sources. This statement later found a certain response in works on the theory of taxes by Turgenev.

Taxes and taxation

As the theory of taxes says, the funds that the treasury receives in this way should be spent primarily on ensuring the ability to defend against external threats. This is exactly what Smith's economic work published in 1776 says. He set himself the task of investigating 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 reasonably directed to maintaining the dignity of the government of the country, as well as to public protection. At the same time, it was formulated that only a fiscal function is available to taxes.

As the general tax theories say, financial opportunities to meet other government needs must be paid for by resorting to other fees and charges. These funds should be paid by those who use the benefits, services realized through state functions. Smith's writings also touched upon the issues of providing funds for religious education and emphasized the need for special fees to provide this area with resources. However, both in Smith's work and in the private theories of taxes that later supported him, it is mentioned that in case of insufficient targeted financial support, 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 and other payments. ATthe main factor for dividing into groups is the purpose of money, that is, the direction in which they are spent. Today, many economists take the position that this approach to distribution is too superficial, artificial, but in the eighteenth century it was really popular.

It follows from the classical tax theory that labor can be divided into productive and unproductive. The first category includes such, as a result of which the cost of recycled material increases, and the second includes services that disappear at the time of sale. Public services, for the implementation of which the society pays taxes, belong to the second group.

Argue or not?

As can be seen from history, the general theories of taxes initially fully corresponded to the concept of the English economist Smith. Most of the experts of that time, as well as later periods, accepted the rules established by him in his writings as not requiring additional evidence and applied unconditionally. At this moment, the attitude towards public services as unproductive was born. As can be seen from the general theories of taxes, payments became a necessary evil during this period, causing widespread negative attitudes.

In 1817, Ricardo, in one of his economic works, admits that taxes delay the growth of savings, hinder 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 labor, capacity and equipment to implement a successfulenterprises. Such sharp attacks in the experience of the theory of taxes were met not only by Ricardo, but also by other well-known economists of his time. There was a belief that the tax that society is forced to pay falls on the shoulders of entrepreneurs, due to which profits are reduced, and the production process loses opportunities for development.

Agreement and Contradiction

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 initially started from the same concept, eventually diverged in their views on the topic under study. The judgments inherent in the work of both analysts are largely similar, but at the same time contradict each other in terms of the meaning of the conclusions. The duality found expression through the attitude towards public services as unproductive, diverting the financial resources of the state from real tasks and deeds. At the same time, both recognize that the tax is a payment for services provided by the state, which is a fair reward.

Smith writes in his writings that government spending on a country's citizens is akin to managerial spending on building owners. Of course, any property brings a certain income, but only if its owners maintain their property in good condition, which requires the investment of effort, labor and money. This is fully applicable on the scale of the whole country, where the state turns into possession, and the inhabitants who pay taxes - into owners. However, at the same time, Smith says that taxes for society arenet 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 base

Many modern economists agree that the inconsistency of Smith's conclusions and evidence base is due to the lack of theoretical possibilities at that time. Economics as a science did not yet exist in the form in which we know it now, there was no group of concepts with which taxes and taxation are associated. In fact, one cannot even find a definition of the term "tax" in Smith's writings.

If you carefully, in detail read the postulates that Smith formulates in his writings, you can see that he promoted the principles of enjoyment, equivalence. Ricardo, who then joined Smith in laying the foundation for economics as a science, also took the position of equivalent. Many scholars agree that Smith was very successful in articulating the fundamental principles on which the modern science of taxation rests. This is justice and certainty, economy, comfort. In the future, all this was called the rights of the taxpayer 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 capacity

Analysts, economists who followed Smith's theory and undertook its development, in their research could not get closer to the economic essence of the tax. Modern scholars find certain accurate grains close to the truth in the works and inventions of some of the founders of the theory of economics - although they did not come to real success, they nevertheless put forward some reasonable ideas for general discussion. A classic example is the work of the Frenchman Say. This scientist was a follower of the classical theory of taxes, but he contradicted the physiocrats, who were convinced that productivity was characteristic only of agriculture. At the same time, Sei was ready to confront Smith, who believed that only material production can be considered productive.

Say formulated a different approach to the criterion of utility. He proposed to consider production as a human activity, the purpose of which is to create something useful. Consequently, it is not the material result of the process that matters, but the result of production activity. If we consider public services, then they are characterized by non-material benefits, but still they exist - no one was ready to argue with this fact even at that time. This means that the people involved in the creation of benefits are engaged in productive labor, and this is paid. This is where taxes come to the rescue as a financial real opportunity to thank those who work for the good of society. However, Say, despite certain successes, did not go far in his fabrications, and could not develop rational prerequisites. This outstanding French economist was a figure of his time, therefore, despite the originality of thinking, he believed that the tax is evil, and the optimal financial plan involvesspending cuts, which makes it possible to say that the best tax is the one that is the least of all the others.

Opinions differ

When it comes to the classical theory of taxation, opinions on the usefulness of eighteenth century research for the modern economy vary quite a lot. Some are convinced that this was a waste of time, turning the most prominent minds of the European powers in the wrong direction for a long period. Others are convinced that it was then that the foundations on which the modern economic system is based were laid, so they cannot be underestimated, despite the relatively low productivity of the impressive volumes of economic and analytical research of that time.

The most correct seems to be a compromise estimate that allows taking 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 an economic point of view was not revealed at that time, but it was possible to formulate principles that turned out to be really useful for analysts - those who were able to understand the essence of the tax. The concept of justice deserves special attention, since it was closely connected with taxes and fees levied by the state from society even in the period of the formation of the science of a market economy.

Classic understanding of tax

If we systematize all the provisions formulated by adherents of the classical theory of taxes, we can formulate the following definition of the term "tax": an individual payment tostate, paid on a mandatory basis, equivalent, spent on defense and maintaining power. The tax must be levied fairly, economically, definitely.

Modern approach

Currently, the theory of tax pays quite a lot of attention to the terminology. Under tax relations, in particular, they understand such financial relationships within which resources are redistributed. These relations belong to the budgetary category and differ from others, whose task is also the redistribution of resources, irrevocable, unilateral order and gratuitousness.

Tax - the payment is strictly individual. It is paid by individuals and legal entities. In fact, there is an alienation of money from those who have some property, and also manage something quickly or on the right of economic management. Payment of tax for all legal entities, individuals of the state is mandatory.

Tax functions

The modern approach to the theory of taxes involves the assignment of a distributive, regulatory, fiscal function to them. 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 resources accumulated by the budget and spent on the needs of society. This implies a distributive tax function, which involves talking about such a category of finance, through which a single fund is formed. Already from it, as needed, some funds are allocated for thoseor other purposes. Regulation through taxes involves the impact on the subjects in the economic space, the economic processes taking place in society. This implies 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 social, financial, and tax policies of the country.

Summing up

Classical tax theory is an important aspect of the history of market research, a must for every self-respecting economist. At the same time, it must be understood that modern theories, although based on a number of ideas, postulates formulated back in the eighteenth century, differ significantly from the approach used at that time. Thus, the study of classical theory, although it provides useful information, but it must be used wisely, without applying the conclusions of those times as relevant to the modern market community.