Adam Smith's Principles of Taxation in the Early American Republic
Originally published in Interdisciplinary Studies of the Market Order
This chapter examines the logic behind Adam Smith's principles of taxation and their application in the Early American Republic. It argues that early-American policymakers applied theories proposed by Smith and others because these fiscal strategies proved less distortionary to the market process than other forms of taxation. The first section of this chapter outlines Adam Smith's principles of taxation and investigates their relationship with other political theorists in the late-eighteenth century. Although Smith provided the clearest explication of his tax theories, iterations of his proposals circulated widely in the half century following the publication of Wealth of Nations. The second half of the chapter examines Smith's reception in the Early American Republic. The founding generation read Smith avidly and incorporated elements of his maxims into their tax systems when they installed new tax administration after the American Revolution. The combined system of federal and state taxation owes almost as much to Adam Smith's principles as it does to Alexander Hamilton, who read Smith closely and proposed a grand vision for concurrent tax powers. Hamilton articulated the benefits of Constitutional limitations on taxing authority in the Federalist Papers. The Constitution constrained the federal government's power to levy direct taxes but provided it with unlimited authority over indirect taxes. The combined federal and state system of taxation had the effect minimizing distortions in the market process by limiting the burden of taxation on average Americans. This chapter concludes by briefly exploring Smith's legacy in American tax policy.