The Wealth of Nations · Chapter
II: Of the Sources of the General or Public Revenue of the Society explained
This chapter examines the sources of public revenue, distinguishing between funds belonging to the sovereign or commonwealth (such as stock or land) and revenue drawn from the people.
What happens
This chapter examines the sources of public revenue, distinguishing between funds belonging to the sovereign or commonwealth (such as stock or land) and revenue drawn from the people. It discusses the limited success of sovereigns in mercantile projects, the role of the post office as a successful government enterprise, and the effects of various taxes—including stamp duties, taxes on wages, and taxes on necessaries versus luxuries—on different classes of society. Smith argues that taxes on necessaries ultimately burden landlords and rich consumers, while taxes on luxuries fall on consumers without raising other prices.
Themes in this chapter
Role of Government
Explores the limits of government involvement in mercantile projects and the management of public revenue.
Social Class and Inequality
Analyzes how taxes on necessaries and wages disproportionately affect landlords and rich consumers versus the poor.
Wealth and Money
Discusses the use of stock, land, and mercantile projects as sources of public revenue.
Characters to notice
- Great Britain
Discussed as a potential manager of a public bank, with skepticism about its fiscal prudence.
- Sir Matthew Decker
Quoted on the repeated accumulation of taxes on necessaries in the price of goods.
- The Romans
Mentioned as having taxed salt in ancient times.
Key passages
“The post office is properly a mercantile project. The government advances the expense of establishing the different offices, and of buying or hiring the necessary horses or carriages, and is repaid with a large profit by the duties upon what is carried.”
The post office operates like a business: the government invests in infrastructure and transportation, and recoups its costs plus profit through postage fees.
Smith highlights the post office as a rare example of successful government-run commerce.
“A direct tax upon the wages of labour, therefore, though the labourer might perhaps pay it out of his hand, could not properly be said to be even advanced by him; at least if the demand for labour and the average price of provisions remained the same after the tax as before it.”
A direct tax on wages is not truly paid by the worker, because wages will rise to compensate, shifting the burden to employers and ultimately to consumers or landlords.
Smith explains the economic incidence of wage taxes, showing they are passed on rather than borne by laborers.
“Taxes upon luxuries have no tendency to raise the price of any other commodities except that of the commodities taxed. Taxes upon necessaries, by raising the wages of labour, necessarily tend to raise the price of all manufactures, and consequently to diminish the extent of their sale and consumption.”
Luxury taxes only affect the price of the taxed item, while taxes on necessities increase labor costs, raising prices across all manufactured goods and reducing their market.
Smith contrasts the economic effects of taxing luxuries versus necessities, favoring the former.